Forex brokers act as a conduit and counterparty for buying and selling currencies. As forex trading is an OTC (Over-The-Counter) market there is no central order book like the London Stock Exchange for share trading. So forex brokers connect traders to pools of currency liquidity and act as custodian for their positions.
When choosing a forex broker, there are several key points to look out for, but most importantly, you need to choose a broker that’s the right fit for you. The broker should match your trading knowledge, abilities, finances, and other requirements. For example, new traders are unlikely to benefit from opening an account with a broker that’s aimed at experienced algorithmic traders, and those traders won’t thrive in an environment designed for beginners.
What does a Forex Broker do?
You can find out more about their forex brokerage service in Good Money Guide’s exclusive video interview with Ryan O’Doherty from CMC Markets below:
What Are The Risks & Rewards Of Using A Forex Broker?
Forex brokers offer a higher risk form of trading, and currency trading is not suitable for everyone. Here is a round-up of the advantages and disadvantages of using a forex trading platform:
Forex Broker Pros
- Potential for quick profits: This tempts many new traders. However, whilst it is possible to make profits on short term price moves, if you call the markets wrong (and a high percentage of traders to) you can also lose money very quickly
- Highly liquid market: The currency market is one of the most actively traded financial markets in the world and unlike small-cap stocks, there will always be currency to buy and sell in size
- Forex market open 24/5: A constant news flow from countries around the world mean that there is always economic figures, data and sentiment that move currency prices and can be traded
Forex Broker Cons
- Leverage: Many retail accounts lose over time because of the overly high leverage. Minute, random price movements decimate accounts equity quickly if traders are caught on the wrong side. Small losses pile up, which can lead to early termination of the account
- Volatility: Forex prices can move rapidly. Volatile price moves can lead to a dry-up in liquidity. Traders will experience in a huge increase in bid-ask spreads during these volatile periods, especially when brokers themselves are under stress
- Counter-party risk: Occasionally, forex brokers can go bust, leaving customer accounts in limbo. Find out if your broker is regulated or not and if customers funds are segregated. Another risk comes from inappropriate trading strategies for the market
Different Types Of Forex Brokers
These are the main different types of forex trading:
- Spot – Where you buy and sell physical currency in full or on margin
- CFDs – ‘Contracts for difference’ is when you technically enter into a contract based on the opening and closing price of a trade. However, in reality it is similar to Spot trading
- Spread Betting – Placing a bet for an amount per pip a currency pair moves
- Futures – On exchange futures contracts are for set amounts and for certain dates in the futures, usually for more experienced traders
- Options – You can either trade on exchange or OTC currency options, through a options trading platform
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
To contact Richard, please ask a question in our financial discussion forum.
