To be able to trade the forex market you have to deposit money with a broker. The broker executes your orders on your behalf and they generally get paid the spread between the buy and sell prices of whichever currency pair you trade. This can vary between 2 -10 pips depending upon the currency pair.
There are good and bad brokers and REALLY bad brokers.
Lets take a look at the different types.
- Bucket Shops.
- Properly Regulated Retail Brokers
- Institutional Market Maker.
- Fully Institutional Broker.
Bucket Shops
A bucket shop broker typically will not have a direct connection to the markets , do not execute trades into the market and will take the opposite side of your trades and trade against you .
You can identify them quite easily.
- They will not be regulated by a proper financial institution (EG in the US the CFTC or in the UK the FSA) .
- They will probably reside in some odd island type country.
- They may offer introductory deals , eg 20% extra money when you deposit a certain amount of money with them.
DO NOT give these cowboys you money. It is highly likely that even if you do make a profit with them you won’t be able to withdraw it anyway
Properly Regulated Retail Brokers
One of these brokers will be your best choice for your trading . They will be properly regulated , part of this regulation means that client funds have to be kept in a segregated account so that your money is safe even if they go belly up. Most have excellent client support channels available 24/5.
Institutional Market Maker
This type of broker are very closely connected with the Forex market. They have a more direct connection than most Retail Market Makers.They usually require large amounts of money for direct access to the interbank market so may not be suitable for a beginner trader.
Fully Institutional Broker
These guys are directly connected to the Forex market. This consists of a consortium of approximately 200 banks. It also represents nearly half of all Forex trading. Unless you are a bank you will not be able to use this type of broker.
In a nutshell stay away from unregulated bucket shops , use a properly regulated broker , and even if they state on their website that they are regulated double check that they actually are.
Always use due diligance before sending your prospective broker your money!