Forex trading is not simply the exchange of currencies. It is a much-complicated process that involves many technical terms and processes. Every forex trader should be well aware of how forex brokers make money and how they operate.
There are different types of forex brokers, and they all operate and work differently. For a successful trading career, it is essential to avoid bad brokers. And this is possible only if you know everything about the forex brokers.
So let’s start with how the forex brokers make their profit and then move to what to look for in a forex broker.
How Forex Brokers Make Money
Forex brokers make money in various ways. However, the most common way is through the spread. Knowing about how forex brokers earn money can help you select the right broker for your trading business. Let’s discuss these, one by one.
The major part of most forex brokers’ profit comes from the forex spread. Spread is the difference between the selling and buying price of the currency for the broker. A broker bids lower for a currency and then sells it at a higher price.
Some forex brokers have a fixed spread, and they keep their rates the same no matter the market condition. On the other hand, some brokers have variable spread that changes with the fluctuations in the market condition.
On normal days, the spread is usually very with the brokers. Most of the time, it is one pip for major pairs. However, the day’s traders experience the lowest spread at day times.
Commission of fess is a fixed price that a broker sets before you start the trade with him. It is a fixed price for every trade. Mostly, a commission system is shared amongst ECN brokers. However, the commission fee is often meagre due to the high competition between brokers.
Mostly, a broker sets a commission for a fixed lot size. For example, the commission may be decided 1$ for some specific lots.
Local brokers offer third-party trading platforms that lack the premium features of most trading platforms. However, if you want to trade professionally, try to look for a broker whose trading platform offers you multiple trading features.
Though most brokers charge an extra fee for these premium features, these features are worth it. Often the profit earned by using these features is often more than the service fee. However, beginner traders should look for more features in free-to-use trading platforms.
Some brokers earn profit by offering premium services to their traders. These features may include information about the market, trading signals, professional market research, and a large variety of tradable instruments.
What To Look For In A Forex Broker
Now, when you are familiar with how brokers earn their profit, you should also know how to select the right broker for trading. Selecting the right forex broker is the most crucial stage as it determines your rate of success in forex trading.
Let’s discuss some major points or features that a professional broker should possess and you should check for.
Regulation of the broker is the most essential thing that you should look for in your broker. Try to avoid non-regulated brokers as there is no guarantee of security of your funds and the investment you make.
Every country has a specified license and has a record of the authentic brokers. The country’s regulatory authority regulates such brokers, and there is less risk of damage to your money.
Moreover, the regulations ensure that the brokers stick to the standard business rules or not. Most regulated brokers mention their license on their website to gain the trust of the traders.
There are two major types of brokers; Dealing desk Brokers (DD brokers) and non Dealing Desk Brokers (NDD brokers). You must check the type of your broker to avoid misunderstandings and unpleasant surprises down the road.
As the competition is tight among the brokers, most brokers offer a very tight spread. So, you should look for a broker with a good spread and low commission or fee. Also, look for other points such as whether the spreads are fixed or not and any additional fee.
Look for a broker who offers multiple trading tools at a reasonable price.
Lastly, look for a broker who offers you world-class service. Brokers who are available 24/7 are the most trusted and preferable as you can consult them anytime you face an issue.
This was all about how forex brokers make money and how you should select the right broker. As the broker is the most crucial trading element, you should do thorough research on your broker before opening an account.
Only select the broker that meets your trading requirements. Don’t waste time on low-quality brokers who don’t have many features and services to offer. Best of Luck!