What Is a Forex Broker?
The foreign exchange (Forex) market is the largest financial market, and it involves traders and participants from all over the world. Some of the major players in the Forex market are the brokers who make trading possible for the majority of traders. Forex brokers allow the average trader to buy and sell currencies.
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Forex Brokers
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In the Forex market, participants work with currency pairs when placing a trade. A trader buys one currency and sells another, hoping the currency he sells will appreciate in value compared with the other one. For a trader to gain access to the market, he has to open an account with a Forex broker. A Forex broker has access to large liquidity providers who can find a counter party for a trader to trade against.
Market Maker
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The majority of Forex brokers in the market in 2011 are market makers. Market makers are a type of broker that quotes both a bid and an ask price for a currency pair at all times. When a trader places a trade with this type of broker, the broker is the counter party to the trade. This means you are trading against your broker every time you trade, and your order does not actually go out into the market. Any money you earn is paid directly by your broker.
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ECN Brokers
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Another type of Forex broker is an electronic communications network (ECN) broker. With this type of Forex broker, you do not trade against it with each trade that you place. Instead, when you place a trade, your order is automatically placed into the market through an electronic network. The electronic communications network finds a counter party for you to trade against. In exchange for this service, the broker typically receives a small commission. By comparison, market makers are usually compensated with the difference between the bid and ask price on a trade.
What to Look For
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If you are interested in opening an account with a Forex broker, several factors must be considered. You should make sure the broker is located in an area regulated by a regulating agency. This helps make the broker accountable for your money. You also should determine the type of leverage you can obtain with the broker. Trading in the Forex market typically requires leverage because of the large lot sizes required to trade.
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