The Piggy Bank

There’s a extremely wide choice of currency broker firms online and when you’re starting out in forex trading it can be hard to find the best. We tend to be attracted by advertising, presuming they’re all working in the same way. In reality this is not true. Currency exchange brokers have extremely different business models which affect the way that they operate. In a few cases, you could be stunned to hear that they may be working against their customers rather than for them.  

Naturally traditionally a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with telephone orders and simply placed the order for the best price that they could get thru their dealing desk. Nowadays, everything is done online so that clients put in their orders for a certain cost. You do still need a broker who will connect to the market thru their software platform.

Many brokers still work in the old way, placing orders for clients as they are instructed. These are commonly the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the internet has opened up forex trading to folks with significantly lower investment funds. More lately, companies have come on the scene to cater for these smaller backers and they do not always follow the pattern of conventional brokers. To cut costs, they customarily do not have their own dealing desks and they may operate in some totally different ways. This may have significant results for your funds and how they’re managed.

So let’s have a look at the types of business model that you may come across in your hunt for a currency broker.

No Dealing Desk (NDD) Currency Brokers

NDD brokers work in an identical way to brokers with dealing desks, but they use a selection of liquidity providers to essentially match their clients’ orders in the market. Competition between liquidity providers keeps the spread low, although the broker sometimes increases the spread to cover their own costs and make some cash.

Electronic Communications Network (ECN)

Foreign exchange brokers who use the ECN can access an internet network where trades are filled. Many market makers work this way, as well as some brokers, banks and other massive currency traders. Spread is mostly low but you may be invoiced per trade.

Market Makers

Market makers are not brokers in the true sense because instead of placing your order in the market they will match it themselves and then cover themselves against any loss by taking a position in the ECN or market that offsets their dedication to you either partially or completely. Market makers set their own prices, although naturally these will be related to market prices. They often don’t like clients to use scalping strategies because the very short term nature of these trades makes it tough for them to offset their risk. Some traders are happy to use market makers but others consider that they have got a conflict of interest which may work against you as a trader.

Bucket Shops

Foreign exchange bucket shops are like bet takers in that they match your trade without always taking any position in the market. They may not even have any connection into the real forex market. They win if you lose, so if you’re successful they will probably close your account and return your funds. There’s truly no point in getting involved with a bucket shop unless you just want experience at awfully low levels of investment, and plan to lose money. They are not legal in some jurisdictions, and don’t should be described as a currency broker.

Forex and stock comparisons all over the web are going to show the advantages of selecting to trade in forex. Of course if you are searching for long term investment then that’s another matter, but for hopeful traders the currency exchange has many special features that make it particularly attractive. Here are the top 5 reasons for choosing currency trading over stock trading.  

1. 24 Hour Market

One practical benefit of the forex market is that it is open for trading twenty-four hours a day Monday through Fri.. This is because of the worldwide nature of the market and the undeniable fact that it is always business hours somewhere in the world, excluding weekends and vacations. So a forex trader can work a real job and trade in the evenings or early mornings.

2. Liquidity

Currency is liquid obviously, if liquidity measures the ease of changing an asset into cash. More often it is taken as the amount of money in a market. On this, too, currency scores very high.

Turnover in the currency market was nearly $4 trillion per day about according to a survey by the Bank For world Settlements in December of 2007. It has likely surpassed that now.

This is considerably more than is traded on all the markets in the world added together. In currency exchange you are not restricted to trading in your own country or on your own nation’s currency, so the benefit to this trader of being part of this great market is clear. You have a much better likelihood of getting the price that you see or the price that you need.

3. Openness

another advantage deriving from the sheer sum of money in this market and its high trading volume, is the openness of the market. There is very small opportunity for illegal trading in a market which deals with the industrial performance of entire nations and involves each major finance institution in the world. This means that the retail trader isn’t off balance to the extent that might be true in the stock market and lends more weight to our forex stock discussion.

4. Leverage

Leverage is the trader’s most essential tool in that it allows a tiny fund to manipulate a giant position size, leading to a massive proportionate investment return, assuming that you are profitable. The leverage offered by foreign exchange brokers is higher than in stock trading.

In currency exchange, 100 times leverage is seen as standard or low, 200 times is common and 400 is possible in some circumstances. Naturally this makes forex trading extremely risky but for a successful trader it is a significant advantage as it means more money can be made of less.

5. Trade Both Directions

When you trade forex, you’re frequently dealing with a currency pair, exchanging one currency for another. This means that you can trade in both directions. For example if you are trading EUR/USD, you can start by investing in either Euro Bucks or US bucks depending on which one you suspect will rise. So you can sell or buy the pair ( go long or go short ).

In a sense this is like trading stock options or futures, but with more flexibility. The flexibleness comes from the proven fact that currency values are relative to one another. They can not all fall at the same time, as stocks can. So this is another point for currency exchange in the forex stock comparison.