Simply put,forex broking is trading in various currencies. This trading is based on the speculation of whether acurrency will appreciate or lose value with respect to another. The rise and fall of the value in currency is similar sounding to the stock exchange,only the market size is immense and more complex. If you want to trade, you have to have to go through an intermediary such as a forex broker or a bank and have some understanding of the market.
The global forex market
The global forex market is immense with currencies over 170 countries to be traded. In 2019, the daily trading reached more than $ 6 trillion. To make a comparison, the biggest stock exchange recorded daily trading of about $200billion.
The forex market is also growing exponentially at a fast pace of 6%, due to globalization and the popularization of remote trading. But in these conditions, the brokers also can be put off-balance by the inevitable economic fluctuations and crises all around the globe.
The forex market isnot governed by the same regulations as other financial exchanges. There is also a lack of a centralized clearing mechanism in this market. The size and the lack of regulations make the foreign exchange market highly risky. This means you have to be more careful while choosing a broker and also pay attention to the trade and pricing yourself.
How does a forex broker earn?
A forex broker takes orders from the client to buy or sell currencies and executes these orders. To execute these orders, the broker charges a commission and this is how they make their money. Trading fees vary depending on the instruments (currency pairs), but on average, the broker’s fee is $5 per $100,000 of the trading volume.
Broker’s spread is the difference between the ‘ask price’ and ‘bid price’ for a trade. The ‘bid price’ is the selling price of a currency, while the ‘ask price’ is the buying price of the currency. Irrespective of the gains or losses sustained by individual traders, forex brokers make money on commissions and fees. Often a broker can charge both a commission and a spread on a trade. Some may offer commission-free trades but they probably widen the spread on trades and earn a commission on that.
Fixed and variable spread
In a variable spread, the spread varies or changes depending on the market. Any major event like an economic shakedown or a change in the interest rate will affect the spread. This change can either be favorable or unfavorable to you. Here the spread will vary, the spread will vary depending on how the market moves. If the market goes volatile then you might have to pay much more than you planned for. The forex broker also could have a different spread for buying and sellingthe samecurrency.
Forex broker vs retail currency exchanger
Forex brokers offer much tighter spreads than a retail currency exchanger like a bank. For example, if an exchanger buys 1 euro for 1.02 dollars and sells for 1.12 dollars, it means that its EUR/USD spread is 0.10. If you buy and immediately sell 1 lot ($100,000) from such an exchanger you will lose $10,000.
The brokers, on the other hand, can have spreads that are a fraction of a cent. For the same EUR/USD pair, a broker can offer a spread of $0.00005, i.e., 2000 times less than the bank. This is possible as they have access to liquidity and can operate with large volumes while paying small fees.
Can I make money in the forex trade?
Yes, you can but you have to understand that forex trading is like any other trade and requires patience and know-how. You have to know the market and the trade. Instead of blaming your broker for a bad deal, try to understand where it went wrong. The trader and broker have a symbiotic relation.
Forex brokers are actually partnering the traders. The brokers provide the knowledge and the technology required to initiate and execute a trade. The traders on the other hand are a broker’s assets as the broker will earn only when the trader initiates a trade.
You also need to proceed cautiously in the forex market. Avoid the lure of get-rich schemes. Enquire well before selecting your broker. It will also pay to be clear and transparent with your broker about trade and deals. Start with small deals but not with very small amounts. Most importantly – be patient! It is impossible to get rich overnight.