Forex brokers: what you get for your money
Most forex brokers do not charge commissions. You are rewarded by the earnings from your activity as a forex trader, including earnings from buying, selling, interest on deposited funds, converting and holding currencies and rollover fees.
If you think forex brokers work for free because they don’t charge commissions, you should go back to forex school. Forex brokers make their money off you by selling you currency at a certain price and buying it back at a lower price. The difference between the prices is called the “spread” and can increase in a very short time. How can you determine a “spread”?
Understand the spread
You may have previously thought a “pip” was a fruit pit, and you were right. But in the 21st century, the “pip” is far more familiar as the smallest monetary increment, typically one-hundredth of a percent. In the forex market, currencies are priced to the fourth decimal place, and that fourth decimal place is the “pip”. It is also known as the “base point”.
Forex brokers make their living from pips. The number of pips they charge per trade is called the spread. Some forex brokers charge the same spread regardless of the type of trade, while other forex brokers charge a variable spread. While a floating spread can look temptingly small in a slow market, it becomes unavailable when the forex trade starts to fluctuate because the forex broker increases their spread.
You can get in touch with Forex brokers through major banks or securities firms. They are regulated by the Commodity Futures Trading Commission and are registered with the Futures Commission Merchant. However, the internet has led to the proliferation of online forex brokers that provide traders with the technology needed to trade. They have opened up the forex market to millions of retail investors who may not have the capital and understanding to thrive.
What to expect from your forex broker
When you deal with forex brokers, and you should, you have the right to expect their offices to be available 24/7. The forex market never sleeps, and even if you make a trade in the middle of the day, it can be in the middle of the night in the hemisphere where your forex broker’s office is located.
If you need to finish your trade in a hurry, you should be able to count on someone to be on the other end of the phone. By the way: always check with your forex broker that you can close a position over the phone. If it doesn’t, a power outage hitting your PC or a failed internet connection could spell disaster.
Before signing up with a forex broker, it’s a good idea to take the time to gather some background information. Not all forex brokers have the financial base to keep money in reserve when their trades go wrong and their clients want to liquidate their trading accounts. Your forex broker should be open about the financial position and history of their business and be able to back up their claims. If he can’t or won’t, you should take your business elsewhere.
And before you entrust any money to a forex broker, it’s a good idea to use the demo trading features to decide which programs work best for your trading style. It costs nothing and gives you the peace of mind that you can keep up in the fast-paced world of forex trading.