Why Do You Need a Forex Broker to Trade the Forex Market?

Individual trades in the Forex market are experiencing unparalleled growth. Every day, more and more people are encouraged to try to generate profits by trading currencies. However, few know those “secrets” that will prevent their passage through the foreign exchange market from being short-lived. Among those secrets is the need for a Forex broker. He is an irreplaceable figure for your operations in this huge global market.

If you’ve ever used the internet to learn more about the Forex market, you may have noticed that your social media started to flood with ads for Forex brokers. Although they all work similarly, each one tries to differentiate itself from the rest with “exclusive” benefits. Here, it would help if you were very careful. You will entrust your investment capital to this company or entity. Then, you must have strong credentials to avoid scams or improvisations.

We have prepared this little guide for those interested in trading in the forex market. Here, you can learn about the functions of a Forex broker—the importance of choosing yours. In addition, we will go over the different types of brokers, their characteristics, and how to choose yours. If you are considering entering the Forex market, join us with this read.

What is a Forex broker?

The Forex (Foreign Exchange) market is where individuals, companies, governments, and financial institutions exchange currencies worldwide. It is the largest global market, moving around 7 billion dollars daily in exchange operations. The market is open and available 24 hours a day. To access it, you will need a Forex broker.

This entity or company is an intermediary between retail investors like you and the forex market. Trading in the Forex market is done using currency pairs. If you want to buy the EUR/USD pair, the broker will be the intermediary between your buying intent and someone selling the same pair.

The foreign exchange market does not have a physical space. All operations are carried out electronically. The seller may be on the other side when you buy a currency pair. The link between him and you will be the Forex broker.

On the other hand, the Forex broker will provide you with the means to make your trades. A trading platform. This is essential for all those who want to speculate on currency price changes (trading). It is clear that if you want to make a purchase of foreign currencies on an occasional basis, you will not need to open a Forex account. All you have to do is go to your trusted bank, and they will take care of the operation.

But we imagine you are here because you want to make currency trading a regular job and profit from it.

There are different types of Forex brokers. We will review the main characteristics of each of them.

Learn about the different types of Forex brokers.

One of the first challenges you will have will be to define which type of Forex broker is most suitable. That’s right, there are different types of brokers, and your choice will depend on your trader profile, the type of trades you want to make, and the capital allocated to trading.

Why are there different types of brokers?

There are different types of Forex brokers due to the diverse needs and preferences of traders, how these brokers handle the trades, and the services they offer. Here is a summary of the main reasons why there are different types of Forex brokers.

Diversity of Traders: Different types of traders have diverse strategies, capital volume, and objectives. Some are individual traders with little capital, while others are institutional investors with large capital. Different Forex brokers are designed to cater to these different categories of traders.

Business Models: Each type of Forex broker operates on a different business model. Some are Market Makers; they are on the other side of the counter to respond to every trade. Other brokers use the STP/ECN model. They route orders directly to the interbank market. These business models affect the way orders are executed and spread.

Regulation and Security: The activity of a Forex broker is regulated by the regulatory authorities of the country where they operate. They comply with laws and offer high levels of security to their customers. But, not all forex brokers are registered and regulated.

Differences in Spreads and Commissions: Spreads (the difference between the bid and ask price) and commissions can vary significantly between brokers. Some brokers offer fixed spreads, while others have variable spreads. The commission structure may also be different. This directly affects trading costs for traders.

Access to Financial Instruments: Some brokers may offer various currency pairs and other financial instruments, such as CFDs (Contracts for Difference) on stocks, indices, commodities, and more. This allows traders to diversify their portfolios and explore different investment opportunities.

What is a Forex Dealing Desk Broker?

A Dealing Desk broker, also known as a Market Maker in the context of Forex, is an intermediary acting as a counterparty in its clients’ trades. Unlike STP/ECN (Straight Through Processing/Electronic Communication Network) brokers, which route orders directly to the interbank market, Dealing Desk brokers take the other side of the trades, i.e. they take the opposite position to the client.

Here are some of the key features of a Dealing Desk broker:

Main characteristics of a Market Maker

Order Execution: A Dealing Desk broker executes orders internally instead of sending clients’ orders to the market. This means that the broker acts as the counterparty to all of its clients’ trades, making it possible to offer pricing and order execution more flexibly.

Provides Liquidity: A Forex Dealing Desk broker provides liquidity to the market. It implies that they can offer fixed spreads and ensure the execution of orders in high volatility conditions.

Market Making: Market Makers can create their market. They set the buy and sell prices for the currency pairs and other financial instruments they offer, allowing them to maintain a certain degree of control over spreads and liquidity.

Price Difference: These brokers can offer fixed or variable spreads and adjust them based on market volatility and other conditions.

Potential Conflict of Interest: Brokers may have a conflict of interest with traders due to their role as counterparties in clients’ trades. The trader’s success could mean a loss for the broker and vice versa.

Suitable for Retail Traders: Retail and beginner traders often choose Dealing desk brokers. These brokers often offer accounts with a lower minimum deposit, fixed spreads (making risk management easier), and easier order execution.

Offer Complementary Services: In addition to order execution, Dealing Desk brokers may offer additional services, such as market analysis, financial news, and education tools to help traders make informed decisions.

ECN Forex Broker

An ECN-type Forex broker is a foreign exchange broker that acts as an intermediary between traders, banks and financial institutions. It sends its clients ‘ market orders through an interconnected network (Electronic Communication Network). Unlike dealing desk brokers, ECNs do not act as counterparties to trades.

Features of an ECN broker

Access to the Interbank Market: Through an ECN broker, traders access the interbank market. Thus, they can trade with the real prices and liquidity of the market. This means traders can view bid and ask prices from multiple liquidity providers and engage in trades at those prices.

Variable Spreads: ECN brokers typically offer variable spreads, meaning spreads can change based on market conditions. In times of high liquidity, spreads tend to be very low, benefiting traders.

Transparent Commissions: ECN brokers charge commissions for each trade instead of earning income through spreads. These fees are transparent and are generally clearly displayed on the trading platform. Traders know exactly how much they are paying to execute a trade.

Direct Order Execution: These brokers route traders’ orders directly to the market without interference or intervention from the dealing desk, ensuring fast and accurate order execution.

Full Transparency: They offer high transparency regarding prices, market conditions, and order execution. Traders can view the buy and sell prices<span data-preserver-spaces=”true”> in real-time.

Fewer Conflicts of Interest: ECN brokers have fewer conflicts of interest with their clients because they do not act as counterparties to traders’ trades. Their profit comes mainly from commissions per trade.

Suitable for Experienced Traders: ECN brokers are popular with more experienced traders looking for fast and transparent order execution and access to advanced analysis tools and sophisticated trading strategies.

Forex No Dealing Desk (NDD) and Straight Through Processing (STP) Broker

These two types of Forex brokers share one characteristic in common. They are intermediaries between traders and the market. At no time do they act as counterparties to the trades, as is the case with market makers.

Let’s look at this in more detail:

NDD (No Dealing Desk) Broker

An NDD broker is an intermediary in the Forex market that operates without a dealing desk or dealing desk. Its main feature is that it does not act as a counterparty in its clients’ operations. Instead, NDD brokers route their clients’ orders directly to the interbank market or third-party liquidity providers. This means they do not take the other side of the trade, reducing conflicts of interest between the broker and the trader.

Key features of an NDD broker:

• Transparency in the execution of orders.
• Variable spreads that reflect market conditions.
• Transparent commissions.
• Access to the interbank market.
• Fewer conflicts of interest with operators.

STP (Straight Through Processing) Broker

An STP broker is also an intermediary in the Forex market that does not act as a counterparty in its clients’ trades. Like an NDD broker, it routes traders’ orders directly to the interbank market or third-party liquidity providers. The main difference between an STP broker and an NDD broker is usually in the way they handle commissions and spreads. STP brokers can offer variable spreads and charge commissions on trades.

Key features of an STP broker:

• Fast and transparent order execution.
• Access to the interbank market.
• Variable spreads that can be very low in times of high liquidity.
• Transparent commissions per trade.
• Fewer conflicts of interest with operators.

To sum up, both NDD and STP brokers share the characteristic of not acting as a counterparty in traders’ trades. An important difference from Dealing Desk brokers (Market Makers). Both types of Forex brokers offer transparency in order execution and access to the interbank market, but they can vary in how they handle spreads and commissions. The choice between an NDD and an STP broker depends on each trader’s preferences and trading goals.

Why Do You Need a Forex Broker to Trade?

You will need an account if you plan to make Forex trading a frequent activity. Forex accounts are opened with a Forex broker. You won’t be able to access the forex market without an account.

Now let’s see what other features brokers have that make your trading in the forex market easier:

Market Access: The forex market is decentralized and not traded on a central exchange. Forex brokers act as intermediaries, allowing you to access this market and trade, buy, and sell currencies.

Trading platform: Brokers provide an online platform for real-time trading. These platforms offer analysis tools, charts, technical indicators, and economic news channels.

Order Execution: Brokers execute your buy and sell orders in the market. This means that they can help you open and close positions as directed.

Leverage: Forex brokers offer the option to use leverage to trade positions larger than your initial capital could allow. This can amplify your gains and increase your losses, so it should be used cautiously.

Wide Variety of Currency Pairs: Brokers offer access to a wide range of currency pairs, including major, minor, and exotic currency pairs, allowing you to diversify your trades.

Tools and Resources: Forex brokers often provide additional tools and resources, such as market analysis, financial news, economic calendars, and training. These resources can help you improve your skills and make more informed decisions.

Regulation and Protection: Brokers regulated by financial authorities provide security and protection for your funds. They are subject to strict rules and regulations that ensure ethical business practices and the safety of your assets.

Liquidity: Brokers have access to market liquidity and can facilitate the execution of orders even during high volatility.

Costs of Trading with a Forex Broker

Trading with a Forex broker comes with several costs that traders need to consider. These costs may vary depending on the broker and specific account conditions, but here are the most common costs associated with trading in the forex market:

1. Spreads: The spread is the difference between the bid price and the asking price of a currency pair. It’s how a Forex broker makes money on every trade. Spreads can be fixed or variable; your pay depends on your position’s spread and size.
2. Commissions: Some brokers charge commissions for every trade you make. These fees are usually transparent and applied to ECN (Electronic Communication Network) accounts. They can be based on a percentage of the trade volume or a fixed fee per lot traded.
3. Swap or Interest on Overnight Positions: If you keep a position open overnight, you may be charged or paid a swap.

The Importance of a Regulated Broker in the Forex Market

We have repeatedly mentioned the need to choose a registered and regulated broker before trading in the Forex market. This is part of the risk management that every trader must perform when trading currencies.

Let’s take a look at the reasons why it is important to have a regulated Forex broker:

Government Oversight: A regulated broker is under the supervision and regulation of a specific government authority. Let’s look at some examples. The National Securities Market Commission (CNMV) in Spain. Commodity Futures Trading Commission (CFTC) in the United States. The Financial Conduct Authority (FCA) handles regulation in the UK.

Regulatory Compliance: The Forex broker must comply with the regulations the regulatory authority sets. These regulations may include minimum capital requirements, risk management procedures, and transparency in order execution.

Security of Client Funds: Regulated brokers must hold client funds from the company’s accounts in segregated accounts. This ensures that client funds are protected during the Forex broker’s insolvency.

Transparency: Regulated brokers must provide clients with transparent information about their trades, spreads, commissions, and any other costs associated with trading.

Client Protection: Regulations often include client protection measures, such as limits on leverage, risk disclosure, and prohibition of abusive trading practices.

Dispute Resolution: Regulatory authorities often offer mechanisms for resolving disputes between operators and regulated brokers, an avenue for resolving problems and complaints.

Ethical Compliance: Regulations seek to ensure that the broker acts ethically and in the best interest of its clients, avoiding deceptive or fraudulent practices.

Trading Platforms for Forex Trading

Forex brokers usually offer their clients their trading platforms. The broker acts as an intermediary between traders and the forex market and provides an online platform for traders to trade.

These trading platforms can be broker-specific and are designed to allow traders to access the Forex market. Through them, traders and investors can access the execution prices of the trade (buying and selling currency pairs). They can place their orders that the Forex broker will take care of conducting. In addition, they will have access to analysis, technical resources, news channels and a calendar of economic events.

However, most brokers are associated with the most popular trading platforms, such as MetaTrader 4 and 5 or NinjaTrader. Some brokers even allow the trader to select from multiple platform options.

Final Thoughts About Your Forex Broker

Becoming a professional foreign exchange trader requires an unavoidable step: having an account with a Forex broker. This account will give you access to the market and the ability to trade Forex.

It would help if you were very careful in choosing your broker. He will be in charge of processing your orders, but more importantly, he will handle the money in your Forex account. When selecting a broker, you should ensure that the competent authorities regulate it. Offer 24-hour customer service in your language. Check out what other users say about how reliably their broker operates. Finally, ensure you know the fees and commissions you must pay.