To access the foreign exchange markets, you need a broker to act as the intermediary. There are many brokers to choose from, with much in common but many differences. This guide takes you through what a forex broker is, how one works, and how to choose the best broker for you.
Our List of the Best Forex Brokers
Choosing a forex broker isn’t easy because you don’t have time to try them all, so we have curated a list of the best brokers you could try this year.
What Is a Forex Broker?
A forex broker sits between the individual retail trader (that’s you) and the foreign exchange market. The broker takes trading orders from you and executes those orders in the shortest possible time at the best possible price, although the timeliness and pricing will differ between brokers. Brokers also differ in terms of the fees they charge for their brokerage services.
How Does a Forex Broker Work?
A forex broker displays the currency pairs (such as USD/GBP, JPY/USD, EUR/CAD) that are available for trading via its online platform. You can typically see a price chart for each pair and place immediate trades via a trade ticket or future orders via an order ticket.
The trade or order ticket displays two prices for the currency pair: the “ask” price at which you can buy the currency pair such as USD/EUR and the “bid” price at which you can sell the currency pair. There are two things to note here:
- A currency pair such as USD/EUR means you’re buying US dollars notionally using euros, so your investment will make money if the dollar value rises or the euro value falls.
- There is a “spread” between the bid and ask prices, so it will cost you more money to buy those dollars than you’ll get back if you immediately sell them back to the broker, which is one of the ways the broker makes money.
The trade or order ticket is where you specify how much you’ll stake per “pip” of price movement in the currency pair before pressing the “buy” or “sell” button to go long (bet on a rising price) or short (bet on a falling price).
When you submit your order, the broker sends it to a liquidity provider who wants to sell the currency you’re buying or buy the currency you’re selling. The liquidity provider could be another trader (who is matched with you), a market maker (who always has currencies on hand to buy or sell), or the brokerage house itself (which is taking the other side of your trade). If your trade ultimately pays off, it’s the liquidity provider that loses money, and the broker never loses money unless it has taken the other side of your trade.
The broker makes money from the bid-ask spread and from any flat-fee commissions it charges you to make trades.
Key Features to Look for in a Forex Broker
Picking up on the previous points, it’s clearly in your interests to find a broker that charges low fees (or zero fees) and applies narrow bid-ask spreads. Also, make sure your chosen broker is regulated in your region so that you can benefit from any protections such as negative balance protection.
There are lots of “nice to have” features to consider when choosing a forex broker: free market analysis or educational resources, social trading and copy trading facilities, automated trading with expert advisors, and more.
Pros & Cons of Using Forex Brokers
How to Choose the Best Forex Broker for Me?
You can choose the best broker by using our list of suggested brokers as a starting point. Then assess each one according to your preferences for tight spreads, low/no commission fees, and other factors such as educational resources.
The most important thing to consider is the broker’s regulation status so that you can ensure your trading funds are safe from fraud. This doesn’t mean you can’t lose money due to your own poor trading decisions, but you might get negative balance protection that means you can’t lose more money than you deposited into your account at the outset.
How to Safely Use a Forex Broker to Make Money Online Trading?“ All financial trading is risky and you can lose money just as easy as (if not easier than) making it. There are two main ways to deal with the downside. Firstly, practise sound money management by allocating no more than 1% of available funds to each separate trade, and never trade with money that you can’t genuinely afford to lose. Secondly, practise sound risk management by placing a protective stock order close (but not too close) to your entry price, to exit your trade at a small loss before it becomes a big loss. ”- Mircea Vasiu
As the conduit for trades between you and the market, your choice of broker could be pivotal to your trading success. In this guide, we’ve explained what a forex broker is, how it works, and which features to look out for in the best broker for you. We’ve also suggested some brokers to assist your search.
Frequently Asked Questions
Not all brokers are regulated, and it’s in your interests to choose one that is. If a broker claims to be regulated by a particular regulatory authority such as the UK’s Financial Conduct Authority (FCA), you can check the regular’s register which should be accessible via its website.
Many forex brokers also allow you to trade other assets such as stocks (equities), commodities, indices, and ETFs.
It typically takes minutes to fill out an online broker’s application form but it may take longer for your account to be fully activated if the broker asks for additional identification documentation.
There is no one-size-fits-all best broker that will suit every trader, which is why we have written this guide to help you.
Most brokers allow you to deposit trading funds by bank transfer or credit/debit card. Some brokers support additional payment methods such as PayPal.
Brokers will typically offer to return funds to the source you used originally to fund your account; e.g., your debit card. If the amount exceeds the total funds you ever deposited, you might have to withdraw any excess winnings to a bank account instead, in which case the broker might want to see a bank statement to check that the bank account really does belong to you.