Welcome to Forex Brokers Explained.
The aim of this course is to give you an insight into the mechanisms at play when trading forex or CFDs. Knowing these different areas of the market forces can help you to choose the right broker that suits your individual needs. As your trading style will suit different brokers.
For example, if you are a scalper making several trades for short periods then you will want tight spreads. Whereas if you are a longer term swing-trader perhaps holding positions overnight you need to know there are no hidden fees for overnight holding of trades.
By the end of this course you will be able to assess forex brokers and their strengths and have more confidence that you are choosing the right forex broker to suit your needs.
Also you will have an understanding of the terminology at play.
This course is aimed at anyone wishing to start forex trading. Like any business it is important to try and understand your stakeholders.
Forex brokers are an essential part of your trading as without them you cannot trade.
So understanding how they work will help your in your forex trading career.
Forex put simply are an intermediary between yourself and the exchange. You use their platform to place a trade and access the global Foreign Exchange (Forex) market.
When you make a trade, they leverage your money and open your contract for difference (CFD) for a small fee, usually in the form of the spread, which is the difference between the bid and the ask price.
So depending on the leverage the fee (usually in the form of a spread) is actually very modest for the amount of money you can trade.
PIP is short for ‘Percentage in Point’. It is essentially a unit of measurement which represents a change in price. It is the lowest a currency price can change.
For example, if GBP/USD moves from 1.3940 to 1.3941 that is a price move of 1 pip.
Understanding this can help you grasp how significant or insignificant brokerage spreads can be in the scheme of your trading. Some brokers offer spreads as low as 1 pip on the major pairs such as EURUSD, GBPUSD.
This is important as it keeps your costs low.
Other more exotic pairs can have wider spreads which on one hand increases your initial cost of trading. On the other gives you access to a wider range of potential pairs to trade.
CFD is short for Contract for difference.
A CFD is basically an agreement between a trader and a broker to exchange the difference in value on the given instrument between opening and closing a trade.
So when you trade say EURUSD, you never actually own the currencies, you are just speculating and opening a CFD based on the underlying asset.
You as the trader simply make money off the price change of that asset if you speculated the right direction.
For example, let’s say you go long (BUY) on EURUSD and the price moves up you make money. If it goes down you lose money.
If you go short (sell) EURUSD and the price moves down you make money. If the price goes up you lose money.
The bid ask is a difference between the highest price the seller will offer (the bid) and the lowest price the buyer will pay (the ask)
Example – You try to open a CFD for the price of Apples. Currently the price of an Apple is 100 (the bid) you will actually pay 101 (the ask). The difference between the bid and the ask which in this case is 1 is what is known as the spread.
This is the fee that the broker receives for being the intermediary.
So when choosing a CFD broker. It is important you choose one with low spreads. As like any business, it is good to keep your overheads low.
Below are three brokers we have handpicked that offer low spreads.
Insert brokers here
Leverage put simply is the borrowing of funds beyond what is available in cash alone.
So take your deposited cash in your brokerage account, this can be used essentially as a deposit or margin to trade with larger amounts. In essence you are putting down a percentage of the total value of your trade. This allows you to make more money from small price movements in the market.
For example, lets say you want to buy a CFD for 100,000 apples at £1 each. With zero leverage you would need £100,000. However with a brokerage account with a leverage of 100:1 you would only need £1000.
If you bought when apples were valued at £1 with a 100:1 leverage and the moved up to £1 and 10p you would have made £10,000.
Insert working out
Whereas without leverage you could only buy 1000 apples. So you would make £100.
Simply put leverage gives you the opportunity to make more money. Bear in mind however that it can increase your losses too.
Now you have a basic understanding of the terminology and how the CFD/Forex market operates you are better prepared to make an informed decision as to which one suits you best.
EXERCISE – WHAT TYPE OF TRADER ARE YOU?
Scalper – Hold positions anywhere from a few seconds to a few minutes
Day trader – Intraday trading with most or all positions closed by the end of the day to avoid rollover costs and potential news spikes
Swing Trader – You hold trades for longer than a day, sometimes up to weeks. This is a long-term approach
What is your experience level?
Beginner – Never traded before with little or no financial experience
Intermediate – Have traded occasionally and understand the basics
Experienced – Consistently traded and understand market dynamics
What will you mostly trade?
Stocks and ETFs
Options and futures
Fortunately for you we have already made a shortlist of the 3 best overall brokers we believe are out there at the moment.
We have based this on five key aspects;
• Good tight spreads
• Great Educational support
• Easy to use phone and web applications
• Highly regulated
• Good leverage available
Obviously you probably know by now, whatever your trading style, tight spreads equals low overheads which is welcomed.
Following our ethos of getting smarter.
We feel good continual educational support is a great resource to all forex traders, be it as a beginner or an experienced forex trader. Continuous support and learning is paramount to being a successful forex trader, an offering you we recommend you seek in any broker you choose to trade with.
Therefore the following recommended brokers all have elements of educational support along with webinars and other fantastic content.
As always we want our trading to be smooth and painless, so functional web and phone applications is an absolute must.
Regulation prevents us from unscrupulous brokers.
Our trading partners are highly regulated.
Leverage as explained in previous sections can help to increase potential profits as well as losses.