What is a Forex broker?
A Forex broker provides traders with access to the market for buying and selling currency pairs, also known as the foreign exchange market, or interbank market.
Forex brokers are one of several participants in this market, along with financial institutions and banks. Acting as an intermediary, they help bridge the gap between you and the market.
How do online Forex brokers work?
In the past, only large financial institutions and those with deep wallets were able to trade currencies. However, modern technology such as the internet has opened the doors to smaller traders and reduced barriers to entry.
Today, Forex traders from around the world are able to access the interbank market through retail brokers.
These brokers provide access to web-based trading platforms that can be used to trade currencies in smaller lots than those afforded to banks and financial institutions, reducing the amount of money you need to get started.
This allows you to start trading with as little, or as much, as you feel comfortable with.
Do I need a Forex broker?
The ultimate goal of many Forex traders is to profit from the small fluctuations in exchange rates, which means you'll need an online broker if you're planning to trade Forex on a regular basis.
Brokers are an integral part of the interbank trading system. Not only do they have direct access to this market, but they also have lines of credit from banks and access to liquidity that is outside the reach of retail traders.
Unless you have the time – and money – to set up your own brokerage, you need a broker in order to access the Forex market.
What are the advantages of Forex brokers?
Besides the fact it isn't possible to trade currencies without a foreign exchange broker, there are numerous reasons to use one:
Leverage allows you to trade in lot sizes much bigger than your initial deposit. Using leverage, you put down a fraction of the full value of a trade and the broker ‘lends' you the rest. The more leverage you have, the bigger positions you can take, and the bigger your potential profit – or losses.
One of the main benefits of trading with a Forex broker is access to trading platforms. Many brokers offer access to one or both of the MetaTrader trading platforms, which they license and provide access to free of charge.
They also provide you with a robust set of built-in technical analysis and charting tools, quick execution speeds and educational material.
Many also offer demo accounts, which are a great way to practice using virtual money, test out new strategies and get used to the platform. If you're a beginner, these demo accounts are an invaluable tool to help to cut your teeth in the world of Forex trading.
Some brokers also support social trading on their platforms, which allows you to trade with friends and copy the trades of some of the most successful traders in the world.
Most Forex trading companies and brokers are fully-regulated by leading financial authorities from around the world. Not only does this ensure a safe and secure trading environment, but it also protects your money via segregated client funds and, in the EU, negative balance protection. For this reason, it is important to find a trusted Forex broker that adheres to KYC and AML compliance.
With minimum deposits starting from as little as £10, you don't have to break the bank to get started.
How do Forex brokers make money?
In exchange for providing you with access to the financial market and executing your orders, some Forex brokers charge a commission per trade while others will charge a spread.
The ‘spread', or difference between the buying and selling price of a currency pair, is what you will have to pay the broker for buying a currency on your behalf. This is the most common and popular way of making money for brokers.
Some brokers will charge both a commission per trade and spread, although this is becoming increasingly less common as price competition increases. Many brokers that claim to offer ‘commission-free trading' typically end up making their commission by widening the spread on trades. Learn more about how brokers make money in our guide to brokerages fees.
Types of Forex Brokers
There are three different types of Forex brokers to be aware of:
- ECN Brokers
- Market Makers
- STP Brokers
ECN (Electronic Communications Network) brokers are widely favoured among Forex traders due to their transparency. An ECN broker provides direct access to the interbank market and automatically matches buy and sell orders at the best available price. These prices are gathered from a variety of sources that include banks, hedge funds and other major market players, resulting in tight spreads representing true market conditions.
Unlike STP and ECN brokers, those acting as ‘Market Makers' do not send the orders of traders to the interbank market. Instead, they create a market for clients by keeping orders in-house and setting the bid and ask prices themselves. Market makers are suitable for beginner forex traders as they provide guaranteed stop losses and fixed spreads during volatile trading hours.
STP Forex brokers are something of a hybrid, which means they can offer both ‘true' (ECN) and ‘manipulated' (Market Maker) market conditions. These brokers often analyse individual trading accounts to determine how successful traders are and see which bracket they fit into. Experienced traders who regularly make profits will typically be afforded the benefits of true market conditions, whereas unsuccessful traders will have the market made for them under manipulated market conditions.
How to choose the best Forex broker
Choosing the right broker to trade with can be a daunting task, especially if you don't know what you're looking for. However, there are certain qualities to be on the lookout for when comparing Forex brokers:
Regulation and security are often the first things many traders will look at. It's important to find a trusted Forex broker that is fully regulated by one or more of the leading regulatory agencies around the world. Regulators play a critical role in protecting traders' interests and maintaining an important system of checks and balances. All of the top Forex brokers will be regulated by at least one of these authorities, including:
- FCA, PRA (United Kingdom)
- NFA, CFTC (United States)
- ASIC (Australia)
- CySEC (Cyprus)
- DFSA (Dubai)
- FSCA (South Africa)
A wide variety of payment methods helps to make the overall trading experience as frictionless as possible. Many of the best Forex brokers offer a number of ways to fund your account including bank transfers and e-wallets such as PayPal, Neteller and Skrill.
While some brokers offer instant payment processing, others will take anywhere between 1 and 3 business days to process your request. There's no reason why a Forex broker should make you wait to get your hands on those hard-earned profits, and any good broker should make the withdrawal process as smooth and efficient as possible.
As we already know, most brokers make their money off the bid-ask spread. However, it's always a good idea to take a look at other trading-related fees including currency conversion and swap fees, which vary from broker to broker.
While many brokers are upfront about trading fees, non-trading fees can be a bit more difficult to find. Plenty of unscrupulous brokers bury these deep in their terms and conditions, causing many traders to get stung by unexpected charges such as account inactivity and account maintenance fees. It's always better to opt for a broker that is transparent about their fees and therefore less likely to cause you to stress down the line.
When looking at a broker, it's a good idea to check not only their own trading platform but also whether or not they support third-party platforms such as MetaTrader. Not every broker provides support for MT4 or MT5, so if you're someone who likes to use either platform then it's something worth bearing in mind.
Another thing to consider is each broker's own in-house platform. Some key questions to be asking yourself include:
- Does it offer technical analysis and charting tools?
- How easy is it to use?
- Is there a mobile app available for trading on-the-go?
- What useful features are available? (news feeds, economic calendars)
- Do they offer a demo account with no expiry date?
Like a well-fitted glove, the best Forex trading platform is the one that best fits your needs. Whereas some trading platforms are more basic than others and clearly geared more towards beginners, others provide a robust arsenal of trading tools and advanced features best suited for experienced traders.
Open 24/7, the Forex market is the market that never sleeps. Support should be available 24/5 at a minimum, while there should also be a variety of ways to get in touch with the customer service team. If English isn't your native or preferred language, any top Forex broker will offer support in a number of languages. Customer service levels vary across the industry, with some brokers offering award-winning after-sales support and others falling short once you've opened your account.