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What is a Spread in Forex Trading? Forex Broker Types, Forex Broker Scams and How to Open a Forex Trading Account?

What is a Spread in Forex Trading? Forex Broker Types, Forex Broker Scams and How to Open a Forex Trading Account?

When it comes to retail Forex Trading, a big round of applause should go to the internet which brought a major revolution into the retail forex trading. Initially, back in the 1990s, higher transaction costs forced the small traders to stay away from Retail Forex Trading and only financially sound individuals who could afford those costs would trade. Apart from the high transaction costs, the various government agencies which kept an eagle eye on forex market place with a lot of restrictions made retail trading difficult.

Retail traders should thank CFTC which created acts like the Commodity Futures Modernization Act and Commodity Exchange Act and opened the gates of Forex market to online brokers easing the retail forex trading process. With the advent of the internet and its rapid spread to each corner of the world, opening retail trading accounts with FX brokers became very easy. Enthusiastic

Forex brokers started emerging from every part of the world and with their numbers showing an upward trend, retail forex trading grew in leaps and bounds. And within a few months, the entire FX market got filled with brokers with a remarkable number of retail traders as their clients. The software of forex trading platforms has undergone many changes and now, these platforms are very convenient to use with their technical analysis and charting tools. Today, with the availability of various brokers over the internet, it just needs a single click to get in touch with them. This has also alarmed the normal folks to check before paying their hard earned money to those brokers as the market is filled with both good and evil brokers.

What is a Spread in Forex Trading?

What is a Spread in Forex Trading?Whenever a trader trades, his FX broker provides or quotes two different prices for the trader’s chosen currency pair. The first one is ‘Bid’ price, the price at which a trader wants to buy base currency and the second one is ‘Ask’ price, the price at which a trader wants to sell his base currency. Spread is the difference between these two prices. There are two ways of earning for the forex brokers, one through commissions and another through spreads with no commissions.

When spread brokers also known as no commission brokers offer their trading services to their clients, they do not charge them with any separate fees. They earn their money by including their charges in the ‘Bid’ and ‘Ask’ prices of the currency pair that the clients want to trade, thereby receiving their charges in the form of spreads.

This spread value is measured through ‘pips’, the smallest unit which shows the movement of a currency pair at the Forex market. If you are thinking about how does this spread gets calculated, then look at the following example:

Let the currency pair be USD/JPY. Here, USD is the base currency at an exchange rate of 1.1052 and JPY is the counter currency with an exchange value of 1.1056. Here, Spread will be 1.1056 – 1.1052 = 4 pips.

Spread is of two types and they are – Fixed Spread – This spread, mostly offered by ‘dealing desk brokers’, remains the same in any condition; it does not matter how the market or pips are moving. Variable Spread – Mostly offered by ‘no dealing desk brokers’, this spread changes as per the market trend and eliminates re-quotes.

Forex Broker Types: Dealing Desk and No Dealing Desk

Any wannabe forex trader must pick a broker based on factors like trading style to handle the forex transactions. The choice of forex broker can affect the transaction fees, dealing spreads and the quality of service.  Essentially there are two kinds of brokers at Forex and they are –

Dealing Desk Brokers –

Considered as ‘market makers’, DD brokers offer a two-sided market and make money through spreads which are fixed. Via these brokers, you can trade in nano lots making it possible for you to trade really small sizes. A DD broker accepts the trade from the client, offers quote based on the price of the underlying market and takes the opposite side of the client’s trade.

Non-Dealing Desk Brokers –

These are the ones who act as a bridge between traders and the Forex market and they don’t take the opposite side of their clients’ trade. They can either be an STP (Straight Through Processing) or ECN+STP (Electronic Communication Network + Straight through Processing). These NDD brokers make money through small commissions from their clients or increase the spread slightly. The STP brokers have a direct link or the ‘Straight Through Processing System’ which lets them forward their clients’ trades to significant liquidity providers within the interbank market. The ECN brokers operate by allowing their clients’ orders to communicate with other participants’ orders through the Electronic Communication Network. These brokers provide real scenarios and allow their clients to know the depth of the market.

Dealing Desk vs. No Dealing Desk Forex Brokers

Dealing Desk vs. No Dealing Desk Forex BrokersForex market place is filled with many types of brokers. These forex (FX) brokers are not like brokers from other trading markets who advertise themselves on ‘I ambetter than others’ philosophy’. At FX, every broker offers a particular type of service which broadly depends on what kind of trading a trader wants. The selection of a broker can be based on whether you are looking for a quicker and tighter spread with small commissions per trade or want to indulge in a long time run with broader spreads with no commissions. Day traders are most likely to pick a dealing desk broker with fixed spreads whereas position traders pick no dealing desk broker with variable spreads.

A dealing desk broker operates by taking the opposite side of the client’s trade while a no dealing desk broker operates by providing a bridge between the client and liquidity provider (with other participants too in case of STP+ECN). A DD broker executes the client’s orders on a discretionary basis whereas the client’s orders are executed automatically with no re-quotes by a no dealing desk broker. A misconception that is prevalent in the trading world is that every broker seeks to make a hole in your pocket.

Well, it is not true, except for some evil minds that exist to con people. Most of the Forex brokers want their customers to have a successful go at Forex to continue their business with them. Keeping all the above factors in mind and the style of trading you prefer, you should choose the broker to achieve your trading goals.

6 Crucial Things to Consider When Choosing a Forex Broker

Forex market place houses ‘n’ number of brokers who self claim to be the best. It becomes very difficult to choose a broker when you have so many options. Listed below are the factors to be considered for choosing a forex broker –

Safety – Or security of your money while handing over it to a broker is a factor you can’t ignore. Luckily, regulatory agencies ease your job of hiring a credible broker for you as these agencies have only trustworthy brokers as their members. Every country has its own regulatory agency and you should check if the broker is a member of that agency or not.

Commissions – Well, despite many promises and claims, it is a globally accepted fact that every broker charges fees for his services. Never consider a broker just because he advertises his firm as commission-free; rather select one who discloses all kinds of charges that will be levied on you for your transaction.

Transactions – While trading, a broker helps you in making money, but he does not have any right to hold your amount without your consent. A good broker will make your withdraws and deposits hassle free and smooth.

Platform – A trader’s FX business vastly depends upon the platform where he trades. Every broker deals through a particular FX platform, and you should go for the one who offers user-friendly, dynamic and resourceful platform.

Execution – A broker should always fill you at the prices which are best for your orders. So the broker must be very quick in executing your order as soon as you click on buy or sell.

Customer Support – Pick a broker who is attentive to your account related problems which can be technical too and resolves them without delay.

Beware of Forex Bucket Shops

Forex market is the most lucrative in terms of liquidity and profits. You know that for trading at FX, you should have a broker who provides you with a trading platform and executes the trades for you. Quite a number of brokers are ready to serve you to achieve your trading goals. However, among this lot, a staggering number of bad brokers can be found who operate their brokerage or trading firms as bucket shops with the sole aim of making money for themselves. Few of their traits are never disclosing the actual price and pip movement to their clients, never trading in favor of their clients as per the market movements, and manipulate the spread gaps for minting their clients’ money.

If you encounter any of these bucket shops, you can notice that they focus only on the money which you have to put in the market ignoring to discuss the current market trends and favorable practices for you. The term ‘Bucket Shops’ is coined from old FX days when brokers used to put their clients’ orders received via telephone on slips and throw those slips in a small bucket without executing them.

These bucket shops with their fraudulent methods have been earning loads of revenues for the past few decades, but with the introduction of some strict laws, their unethical practices are curbed to some extent. A trader can file a complaint at Brokers Forum and other legal agencies if he feels that he has been trapped in a Forex bucket scam. It is advised to follow the preventive measures which have been discussed in the article – 6 crucial things to consider when choosing a forex broker.

How to Protect Yourself against Forex Broker Scams

New and inexperienced traders are vulnerable to forex broker scams. They are the easy targets for the scammers. As long as the Forex market is in business, the Forex scammers too will be in business conning the gullible traders. A trader should have strong education of Forex trading along with the ability to identify reliable and credible brokers. Below are some tips which can prevent you from becoming a victim of Forex broker scams:

Journal of Transactions

Make it a practice to record each transaction of your trade without missing any details including the odd price feeds by your broker. When you feel you are being cheated, you can produce these journals as evidence against your broker.

Comparison

Never ever just go by the figures of the price feed supplied by your FX broker on your trading platform as your broker may present manipulated rates and widened spreads which you would never get to know unless you throw a glance at other trading platforms. Learning the trade prices on the other platforms enables you to cross-check the prices quoted by your broker and not get deceived.

Legal Action

If you are not able to resolve your disputes with your broker amicably, don’t hesitate to file a legal complaint against your bad broker. Legal agencies like Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) can be approached to initiate legal action against your unscrupulous broker. A trader should follow good trading habits and choose a well established broker with transparent fees and positive online reviews to not be scammed while Forex trading.

How to Open a Forex Trading Account

Opening a Forex trading account is a simple task, but before actually opening it, you are advised to spend considerable time at demo trading accounts. It is beneficial if a newbie trader has a test drive on at least 3-4 different types of Forex trading platforms. Once the trader gains confidence and is successful in earning profits consecutively on the demo platforms, the trader can open a live Forex trading account in 3 easy steps.

Type of Account –

This is a trader’s call. A trader can choose to have an individual or a corporate account based on his requirements. The Forex trading accounts are classified as standard, mini and micro accounts on the basis of the lot size of the trade. Brokers also offer managed accounts which allow the brokers to take trading decisions on your behalf.

Registration –

After choosing an account type, the would-be trader has to do paperwork for registering on FX. These papers vary from one broker to another and one should read each clause including details about the commission, charges, and bank wire transfer costs. Though these charges may seem tiny percentages, when applied practically, they turn into high amounts eating into your capital. These documents are generally provided to you in PDF format.

Account Activation –

As soon as your broker receives all the forms required to activate a trading account, he will initiate the process and will update you through email. The email will have instructions for you to execute some final steps to activate your account. With the execution of those steps, you will receive a final email with your FX account credentials and password. Yes, it’s done.

6 Comments

  1. Akashdeep Singh on August 20, 2019 at 7:48 AM

    .

  2. Vinkal kumar Kumar on December 19, 2019 at 8:55 AM

    ?

  3. Ranjit Bohara on January 14, 2020 at 1:35 AM

    nice.

  4. 11800090 on January 15, 2020 at 4:42 AM

    Nice.

  5. faith jelimo on January 15, 2020 at 6:36 AM

    nice.

  6. JEEVAN GAUTAM on August 4, 2020 at 10:29 AM

    very good.

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Top Forex Brokers Review
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