Lesson 8: Choosing a Broker in Forex Trading

Are Forex Brokers Genuine?

Most of them are, but in every market there are…  Wrong answer. In every market there are bad apples.

As we have discussed elsewhere in this website, a forex trading broker benefits from the spread between the “ask” and “bid” prices. The ‘bid’ price is the market value of the base currency that you want to buy. On the other hand, the ‘ask’ price is the price of the base currency when you want to sell it.

When you want to buy a currency in the forex trading market, you are said to be going long. But there must be a ready seller on the other side. The person selling the order is said to be going short. But the ‘bid’ and ask prices are not the same.

Brokers will take the difference between your buying price and the other person’s selling price. This difference is called the spread, and is measured in terms of pips.

So, relax! Forex trading brokers are no beasts coming after your flesh. They want to do business with you. As long as you can break even, you are good to go. However, you may need to check all brokers to ensure that you are doing a good business that suits your needs.

Fixed Spread versus Variable Spread Brokers

Before choosing a forex broker, scrutinize various brokers to determine whether they offer fixed spreads or variable spreads.

Fixed spreads in forex trading are offered by brokers who act as market makers/dealing desk. They do not change despite changes in conditions of the market. On the other hand, variable spreads are offered by non-dealing desk brokers in the forex market. They are flexible because they fluctuate as the market conditions change.

Advantages of Fixed Spreads in Forex Trading

Fixed spreads require small amounts of capital, so they are important for forex traders with tight budgets, shallow pockets, and perhaps no wallets.

The fixed spreads also ensures predictability since the forex trader is able to determine in advance the prices they need to pay when opening a forex trade.

Disadvantages of Fixed Spreads in Forex Trading

A fixed spread comes with frequent re-quotes. Because forex markets are always volatile, the prices will change within fractions of a second. So you might be told to decide whether to accept new prices, which could be worse than the one you anticipated.

Slippage could also occur when the prices are moving too fast, making the broker to lose control of the fixed spread, and you get what you did not ask for.

Advantages of Variable Spreads

First, variable spreads minimize re-quotes in forex trading. The spreads change as market conditions change, so you do not need to take new quotes every now and then.

Secondly, variable spreads enhance transparency because it allows forex traders to access prices from different kinds of liquidity providers. Competition among such forex brokers often causes them to provide better pricing.

Disadvantages of Variable Spreads

Variable spreads lack predictability because the broker depends on changes in the market to fix prices, which could be different from the expectations of the forex trader.

Conclusion

So, will you prefer to choose a broker that uses a fixed spread or one that uses a variable spread? That depends on whether you love economy and predictability versus quality and transparency.

Lesson 9: Eight factors to consider when choosing a forex broker

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