Explanation of a Foreign Exchange Broker

Usually a Foreign exchange broker will offer you a rate from the banks of which they have lines of credit scores and also accessibility to foreign exchange liquidity.

You'' ll see it shown in quote type as EUR/USD 1.3600/ 1.3605, for instance, where the initial number is what the broker will certainly provide you if you desire to market the money pair, as well as the second number shows what the broker will certainly charge if you desire to buy the set.

Opening a Forex Trading Account

To battle the lack of knowledge that numerous have due to the uniqueness of the foreign exchange market, many brokers have set up departments dedicated to education and research to help investors get up to speed as well as educated on an everyday basis.

However, if you're just looking to test the waters, forex brokers offer demo accounts for which you only need to provide minimal information to open. A demo or practice account allows you to get set up and get some practice trading until you're ready to get started trading with real money.

Forex Brokers Offer You Leverage

The ability to use forex leverage comes with every account, and it varies in an amount anywhere from 10:1 to 100:1. A 10:1 leverage means that for every $1 in your account, you have $10 to trade.

Leverage is both good and bad as you can make exponential profits, but you can also suffer from mounting losses. The law requires forex brokers to disclose this, and they typically do in fine print. New traders usually get excited and blow their accounts out quickly if they jump in too fast.

You’ll Have Two Balances

When you're working and trading with a forex broker, there are two balances shown for your account. One balance is your actual balance, not including your open trades. Your other balance is the balance that you would have if you closed all your trades. The second balance is called your net balance.

The Bid-Ask Spread

When you open a forex trade with a broker, they pass it through to the market for you. In the process of this, they offer you a price for the currency pair that is slightly different than the price they can get.

You'll see it shown in quote form as EUR/USD 1.3600/1.3605, for example, where the first number is what the broker will give you if you want to sell the currency pair, and the second number shows what the broker will charge if you want to buy the pair. The difference of .0005, or 5 pips, is the broker's commission. The spread may widen or narrow depending on trading supply and demand.

The bid/ask difference charge is called collecting the spread. The spread or commission of sorts is mostly transparent to trading from the trader's point of view. However, you always have to keep in mind that the beauty of the spread from the broker's point of view is that it's taken from your leveraged trade size, not your account balance size.

Education to Learn Forex Trading

Forex is a relatively new arena for many investors. News that affects a stock price may have a radically different effect on the price of a currency. Also, learning how to price currencies and invest in them in a relative environment is often uncomfortable territory when a prospective investor first comes into forex.

To battle the lack of knowledge that many have due to the uniqueness of the forex market, many brokers have set up divisions dedicated to education and research to help traders get up to speed and informed on a day-to-day basis. A popular destination for many traders is the website DailyFX.

Verifying a Broker’s Reputation

Forex brokers exist to make it easier for you to connect with the banks out there that are buying and selling currencies. They have a set of rules that they have to follow and certain processes that are required.

However, for many years, the forex industry was not regulated, and although it's improved dramatically, you may still run into some forex brokerages that are less-than-reputable. The National Futures Association (NFA.futures.org) follows forex brokers and can help you verify a broker's reputation.

When choosing a broker to work with, check first to see if they're regulated by a U.S. authority. Regulated brokers will disclose this information on their website.

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.