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Monday, 25 April 2016

Forex Brokers

In the 90's trading Forex came at a high cost to individuals who wish to venture into the market. However with the rapid increase of the internet it has brought Retail Forex to everyone's finger tips. With the increase in retail Forex trading, Brokers increased dramatically too. Some being legitimate while others are less than honest. Brokers essentially are intermediaries between a Forex Trader and the Various liquidity partners and central Banks that exists.

Types of Brokers

There are two major classification of Forex Brokers. They are either Dealing Desk Brokers or Non Dealing Desk Brokers. The difference between each category is laid out below.

Dealing Desk vs. No Dealing Desk Forex Brokers
(Image courtesy of

Dealing Desk Brokers

Dealing Desk Brokers also called market makers make their money from spreads in currency prices. The spread is the difference between the buying and selling prices of a specific currency pair. they also make money when a client loses a trade. If a client of a dealing desk broker opens a trader the broker will sometimes take the opposite side of the trade if it cannot be fulfilled by another client or the market immediately. These broker provides both buying and selling opportunities so taking the other side of the trades doesn't provide any conflict. Normally the Dealing Desk broker provide a fixed spread which is useful when doing risk management and profit margin calculations.

Dealing Desk Forex Broker
(Image courtesy of

Non Dealing Desk broker

A Non Dealing Desk broker does not take the opposite side of the clients trade. In fact they allow the trade orders to be filled by their liquidity partners who has direct access to the interbank market. There are two sub-categories to Non Dealing Desk Brokers, STP or Straight Through Processing and ECN or Electronic Communications Network

No Dealing Desk Forex Broker
(Image courtesy of

What is an STP broker?

STP brokers will make their money through an increased spread from the true market rate. essentially STP brokers will take the quote for the currency pair from their liquidity partners and use the lowest quote from these partner to present to their client. However they generally add 1 pip to the quote to present to their clients. This 1 pip difference would be their payment for locating the lowest quote for their clients.

What is an ECN broker?

An ECN broker connects you directly to the interbank market and as such you get the price directly from the source. ECN brokers make their money by charging each client a commission.

Non-Dealing Desk brokers are generally preferred by traders across the world. research your broker to see what they are. 

Choosing your Broker

Now that we have an idea of what type of brokers exist it is down to some specific criteria to choose an actual brokerage house to open your account and start making your profits.

First you want to ensure that your broker of choice is licensed by a regulatory body such ASIC in Australia, FCA in the UK, CFTC and NFA in the USA and other regulatory bodies in other territories such as Germany, Switzerland, France and Canada. By ensuring your broker is regulated it gives you a sense of security and somewhere to report to if you are having issues with your broker.

Secondly you will want to check transaction cost. You wouldn't to open an account with a broker that's gonna charge you an arm and a leg to open one order. You are trading to make a profit not pay out every dollar earned.

Select a broker that will provide you with efficient and effective withdrawal and deposit options without a high cost or fee to you. Also ensure that execution time for both withdrawal and deposits does not take forever or has a long execution time for each trade.

Two other important criteria to look out for is the trading platform the broker uses and whether or not the broker provides any form of customer service. You don't want to use a broker that provides a trading platform that you will have to spend a year learning to use or it isn't compatible with your computer. Brokers should provide a way for them to be reached by their clients in order to settle any issues or address any concerns.

Based on what you will be trading you can check if the broker offers commodities and indices, the leverage the broker provides and their minimum lot size. Low the lot size is better for beginning traders.

For additional reading and reference you can click here or here.

Look out for our next blog as we discuss Demo and live trading accounts.
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