What is a Forex Broker?
A forex broker is an intermediary between the trader and the interbank.
Interbank refers to networks of banks that trade with each other.
Usually, a forex broker will offer you the best price from the banks network plus the spread.
The spread, is the difference between ask and bid and it is how the broker earns money.
There are some interbank networks, so sometimes different brokers are offering different prices for the same market and of course different spreads.
Many forex brokers use multiple banks for pricing and they offer you the best one available.
What is a Forex Broker: more info
What is Forex Interbank?
The forex interbank is a network of banks that trade currencies with each other. In forex, the interbank deals decide the current ask and bid price of currencies. Ask and Bid prices are usually very close maintaining a tight spread that sometimes can be 0 pips. You can have direct access to the interbank prices if you are trading through an ECN broker using direct-access trading technology.
What is Forex Interbank: more info
What is the spread?
Market makers brokers offer ask and bid prices, the difference between both prices is called the spread. The market maker broker increases the spread received from the interbank liquidity market and earns the difference. The spread is very important for the traders because low spreads means buying cheaper and selling higher. That’s the reason why the spread is one of the keys to success in forex.
What is the spread: more info
What is a market maker broker?
A market maker broker is a company who offers a buy and sell price for a financial instrument and expects to make a profit on the bid-ask spread. The market maker can be the counterparty of the trader becoming your trading enemy. Generally, Market makers accept accounts funded with less than 100$ and it’s a good way to start practicing forex. The execution system is always very easy and perfect for beginners. Normally, consists in two buttons, buy and sell.
What is a market maker broker: more info
What is an ECN broker?
An ECN broker (Electronic Communication Network) uses the direct-access trading technology to connect you with the interbank forex market liquidity. The ECN broker executes the orders faster; it only requires a fraction of a second. The spread of ECN brokers is as low as 0 pips, but they always charge a fee for the services to you. It is common to see different commission prices for different trading volumes. For bigger trading volume, less trading fees and vice versa.
What is an ECN broker: more info
ECN or market maker broker?
If you are a forex beginner you should use a market maker because the minimum deposit is lower and it is normally easier to buy and sell with the trading platform.
If you are an experienced or a well-capitalized investor you should use ECN broker because you will have low spreads, faster execution and a very big pool of interbank liquidity.
ECN or market maker broker: more info
What is a STP broker?
A STP or a Straight-Through Processing forex broker has no dealing desk. The trader has direct access to the broker liquidity providers like banks, hedge funds, investment corporations or other brokers. STP brokers have a very fast execution due to the no dealing desk execution and furthermore will not send re-quotes to its clients something that most investors will regard as an advantage. Traders are allowed to trade during the release of financial news without restrictions and with the real market spread.
What is a STP broker: more info
What is a Dealing Desk broker?
A dealing desk broker usually is your counterparty; when you want to buy the dealing desk broker sell the financial instrument to you. It can be dangerous because sometimes you can have a significant conflict of interest with your broker because it wants you to lose the trade. Dealing desk brokers have huge execution times because they need to approve all the trades manually and normally use re-quotes to give you a worse price than expected.
What is a Dealing Desk broker: more info
What is a No Dealing Desk broker?
A No Dealing Desk (NDD) broker means that all your orders are filled automatically without manually execution. A No Dealing Desk broker is not necessarily an ECN broker because it can be your counterparty but it will trigger your trade fast and automatically. Actually, most brokers are NDD because the traders are asking for fast and fair executions.
What is a No Dealing Desk broker: more info
What is a Micro Account?
A Micro Account is the smallest forex account available. You can buy micro lots, 1.000 units of currency. Remember that a lot is 100.000 units of currency and mini lot is 10.000 units. Micro Accounts are usually a good choice for beginners because the initial required capital is low. Generally, the leverage is high to obtain big benefits.
What is a Micro Account: more info
What is a Lot?
Lot is the standard unit to buy currencies, 1 lot is 100.000 units of the currency. Lots can be divided into Mini Lots (10.000 units) and Micro Lots (1.000 units).
What is a Lot: more info
What is an authorized forex dealer?
It is a financial institution that has received authorization from a relevant regulator to act as a forex dealer. Traders who deal with authorized forex dealers are sure that they transactions are done in a legal and fair way.
What is an authorized forex dealer: more info
What is the forex market?
The Foreign exchange market is where people can buy and sell currencies. If you are travelling to Japan and you change your euros for yens, you are participating in forex. Most people think that NYSE is the market with more trading volume, and that is more or less true. NYSE is the stock exchange with more trading volume. But there is another market which is bigger, the forex market. The foreign exchange market trades $5 trillion every day, as you can see in the chart below it is around 200 times the NYSE trading volume.
You should notice that $5 trillion is the entire global trading volume, but the retail spot market (where we trade) it is about $1.5 trillion, so it is not as big as media says.
What is the forex market: more info
What are the advantages of forex?
Forex has some advantages in front of stock exchange; here you can see some reasons that explain why people are choosing fx to trade:
Generally, retail forex brokers earn money through bid-ask spread. You don’t have to pay clearing fees, exchange fees, government fees, brokerage fees or other commissions.
No fixed lot size
In spot forex, you choose your own position size or lots. You can participate in the forex market with accounts as little as 10$. By contrast, stock exchange markets and futures markets have the contract size determined by the exchanges.
24 hours market
The forex market opens from Monday (Australia) to Friday (New York). The foreign exchange market never sleeps so you can never be surprised by overnight gaps, except for weekend gaps. Forex is perfect for people who have only few hours to trade, you can trade: morning, noon, night or even while you sleep.
No price manipulation
The large trading volume is huge enough to be sure that no one can corner the market or manipulate it.
You can trade directly with the spot forex market, you don’t need middlemen. You can have access directly to the interbank liquidity pool.
Low transaction costs
The forex broker transaction cost is between 0.05% and 0.1%, but if you use an ECN broker you can have even better spreads.
Leverage allows the trader to make nice profits and simultaneously keep the risk management safe. A small deposit can control a very large contract value due to low volatility.
Some forex brokers offer 1:100 leverages, which mean that a $100 account can manage $10.000 worth of currencies. Be careful, the leverage can be a double-edged sword. Without the right risk management, leverage can lead to huge losses or gains.
As said before, forex market is enormous. The huge trading volume converts forex in a high liquidity market. This means that under normal market conditions, with a simple click you can instantaneously buy and sell because there will usually be someone in the market willing to take the other side of your trade. You are never stuck in a trade, you always have counterparty. You can use limit orders and stop loss orders to close your positions immediately even if you are away or sleeping.
Easy forex education
You can find easily a lot of information about forex. You can search for trading strategies, expert advisors, auto-trading, technical analysis, fundamental analysis and a large amount of knowledge shared via internet.
What are the advantages of forex: more info
What is Forex?
The foreign exchange market (Forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
How big is the Foreign Exchange Market?
The foreign exchange market is the most liquid financial market in the world. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs. $1.7 trillion in 1998). Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.
Where is the Foreign Exchange Market based?
There is no unified or centrally cleared market for the majority of trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is located.
Who participates in the market?
Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. The top-tier interbank market accounts for 53% of all transactions. From there, transactions take place from smaller banks, followed by large multi-national corporations, large hedge funds, and even some of the retail market makers. However, the share of other market participants like brokers, multinational corporations, registered dealers, as well as private investors is rapidly increasing.
What is a Pip / Tick?
A Pip (or Tick) is the smallest price increment a currency can make. It is the fourth digit in all currency pairs with the exception of the Japanese Yen (JPY) where it is the second digit (For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.)
How do I calculate the value of 1 Pip?
To express the value in the terms currency, multiply 1 pip with the lot size.
EUR/USD pip = 0.0001 X 100,000 = $10.00 (for standard lots)
EUR/USD pip = 0.0001 X 10,000 = $1.00 (for mini lots)
EUR/USD pip = 0.0001 X 1,000 = $0.1 (for micro lots)
GBP/JPY pip = 0.01 X 100,000 = 1000 ¥ (for standard lots)
To convert to the base currency divide by the exchange rate:
Say EUR/USD exchange rate = 1.4750, then $10.00 / 1.4750 = 6.78€
To convert to an account’s currency (e.g. USD) divide by the exchange rate $/¥:
If $/¥ = 82.12 then 1000 ¥ / 82.12 = 12.17$
What are the seven Major Currency Pairs?
The seven most liquid pairs are traded against the US dollar with the first four pairs being the majors, followed by three commodity pairs. Other currency pairs are better known as the currency crosses, the most popular crosses being those that include the Euro: EUR/JPY, EUR/GBP and EUR/CHF.
The major currency pairs are:
The commodity currency pairs are:
What is Leverage?
Forex Leverage or Leverage simply means the % amount of money you are allowed to borrow from the broker when you open a position. Leverage determines the percentage of a trade’s nominal value that is required as margin. In simple terms, you can think Leverage as a loan that fronts you to buy currencies.
What is Margin?
Typically, in order for the Leverage to be released, Brokers will request a certain amount of the account’s actual funds to be allocated per each position (lot) traded. So, margin is the minimum amount which is escrowed in order to open a position. Margin depends on the account’s leverage; for example, if the leverage is 1:100 then you are able to trade a position a hundred times larger than the escrow amount. In simple terms, you can think of Margin as a good faith deposit required to release the loan (leverage).
For example, having a leverage of 100:1 (or 1% of the position required) allows you to trade a position worth $100,000 with an equity of just $5,000. This would be possible as the broker would set aside $1,000 as down payment, or “margin”, and let you “borrow” the rest. Of course, any losses or gains will be deducted from or added to the remaining cash balance of your account.
|Position Amount||Leverage||→||Required Margin|
|$100,000||200:1||100,000 / 200||$500|
|$100,000||100:1||100,000 / 100||$1000|
|$100,000||50:1||100,000 / 50||>$2000|
How to calculate profit / loss?
When the value of a currency that you have bought rises, then profit is created; you can secure the profit of this transaction by selling the currency back and thus closing the position. Let’s see that with an example where we buy U.S. dollars and sell Swiss francs.
1. The rate you are quoted is 1.2755 / 1.2760. Because you are buying U.S. dollars you will be working on the “ask” price of 1.2760, or the rate at which traders are prepared to sell.
2. Let’s assume you buy 1 standard lot (100,000 units) at 1.2760.
3. A few hours later, the price moves to 1.2780 and you decide to close your trade.
4. The new quote for USD/CHF is 1.2780 / 1.2785. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “bid” price of 1.2780, or the rate at which traders are prepared to buy.
5. The difference between 1.2760 and 1.2780 is .0020 or 20 pips.
6. Using the pip calculation formula, we now have (.0001/1.2780) x 100,000 = $7.82 per pip x 20 pips = $156.49
Keep in mind that when you enter or exit a trade you are subject to the spread of the bid/offer quote.
When you buy a currency, you will use the offer or ask price and when you sell, you will use the bid price.
Forex Market Schedule
Market opens on Sunday 22:00 UTC and closes on Friday 22:00 UTC.
When Eastern time is in daylight saving, market opens on Sunday 21:00 UTC and closes on Friday 21:00 UTC.