Forex Broker Regulation

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admin Forex Brokers

In the UK, all Forex brokers are regulated by the Financial Services Authority (FSA). The FSA is an independent body that regulates all financial service institutions and correspondingly protects all UK investors.

In order to obtain a licence from the FSA, Forex brokers and the Forex trading platforms they operate are required to comply with the FSAs rules and regulations:

  • The bank or financial institution where monies are held must comply with the FSA’s standards. So effectively, the broker is backed by an institution which has already been authorised by the FSA.
  • Client funds must be separate from the company’s funds. This means that your deposits are safe from any fluctuations in the fortunes of the institution or broker.
  • Companies must present financial reports to the FSA on a regular agreed basis. In addition, all regulated institutions must submit to an annual audit by an authorised auditor according to FSA regulations.

    • The most important rule for you as a client is to make sure you choose a Forex trading platform backed by a broker who is regulated by the Financial Services Authority to protect your funds. Under FSA rules, the money that you invest belongs to you as the client, rather than to the institution. That means that if either your broker or the financial institution providing the funds fail, your investment is protected and they are not allowed to draw on your funds to pay off their creditors. The FSA lists their members on their website.

    Currency Pairs

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    admin     Forex Basics

    When trading in Forex, currencies are traded in pairs. The numerator is known as the base currency and the denominator is known as the ‘quote’ or ‘counter’ currency. Each currency has a three letter acronym (rather like an airport code) and currency pairs are expressed like this: base currency/counter currency. So for example, USD/EUR is a trade in which US dollars are the base currency and Euros the counter.

    It is possible for Forex traders to trade in any combination of currencies they wish but in practice most of them stick to a small number of currencies which are considered to be low risk i.e. they are both economically and politically stable. That has been slightly more difficult to predict of late, given the global recession but, on the whole, the currencies have remained fairly stable despite the fluctuations in individual countries’ economic prosperity.

    The eight most commonly traded currencies are the Euro (EUR), British Pound (GBP), US Dollar (USD), Swiss Franc (CHF), Japanese Yen (JPY), Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD).

    Theoretically, a Forex trading platform will see any combination of these currencies being traded but in practice, there are some trades that are more frequent than others. This makes these currency pairs more liquid and therefore easier to trade. The beginner to Forex trading is probably better off sticking to some very common currency pairing such as EUR/USD or GBP/USD to minimise risk and gain an understanding of how Forex trading platforms work.

    Choosing a Forex Trading Platform

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    admin     Forex Basics

    New traders must choose a broker who has the right type of Forex trading platform to suit their needs and it can be a bit overwhelming when there are so many to choose from.

    To make this task a little easier, new traders can start with finding a broker who uses the most common platform for Forex trading which is called MetaTrader 4. This system is easy to use and has very good charting capability and analysis tools. These include Stochastic analysis and moving averages. MetaTrader 4 is unusual in that it allows users to create custom indicators as well as the standard ones.

    MetaTrader 4 also includes automated scripts to open and close positions automatically once the user has selected what variables they wish to use. These expert adviser scripts require very little input once they have been set up.

    Those traders who do not use MetaTrader 4 will have designed their own bespoke trading platform and there are a number of alternatives around. You may find some of these more user-friendly than the industry standard, or you may find that you prefer the layout or the range of tools on offer. The only way to identify which trading platform is right for you is to have a list of essential criteria before you start and then try out a range of different ones to see which system you prefer.

    Broker fees

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    admin     Forex Brokers

    Brokers do not charge commission on your trading but they do need to make an income from hosting trades and there are number of ways in which they make money from their clients. The type of trades you are likely to do may make a difference to what type of broker is right for you. The market is hugely competitive so fees do not vary enormously but all brokers are slightly different so it is worth looking around to find one that will give you a decent deal.

    Spread

    This is the difference between how much the broker sells the currency and how much they buy it for. Most brokers have a spread of between 2-4 pips for the most commonly traded currency pairs.

    Margin provided

    The deposit you need to provide to start trading.

    Funds required to start an account

    These vary enormously so make sure you choose a broker with a minimum that you are happy with.

    Fees for small trades

    Some brokers charge for small trades, some don’t. If you are likely to begin trading with small amounts, check what fees could apply.

    Rollover fees

    Most brokers charge a fee for holding positions overnight. This is usually very small but again it makes sense to check before signing up.

    You also need to make sure that your broker has a Forex trading platform that you are comfortable with and find easy to understand. Most brokers will allow you to download a free demo of their Forex trading platform so that you can try it out before signing up.

    Choosing a broker – Part two

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    admin     Forex Brokers

    Find a broker with the right tools

    There is a huge number of Forex brokers who operate using a range of different Forex trading platforms so it is important to find one who has the tools and the interface to enable you to do what you want to do. Many brokers offer free trials so that you can assess their functionality and support before you commit to spending any money. Generally, you should be looking for a broker who offers real-time currency movement charts, analysis tools and currency updates as a minimum. Many brokers offer much more sophistication in their Forex trading platform but make sure that you are not paying for bells and whistles you don’t need, or worse, don’t understand.

    Make sure you have the right account

    Once you have decided on your broker, you need to make sure you have the right account. There are very different types of Forex account and most brokers offer a variety. Generally, the lower amount of capital you have available to invest limits your choice of account. If you have a limited amount (say, under £200) to invest, you will be limited in the number of brokers you can choose from. Traders who are willing to invest larger sums are able to command much greater control over their trading and are often able to access more sophisticated facilities from their broker and Forex trading platform.

    Choosing a broker – Part one

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    admin     Forex Brokers

    Forex trading cannot be carried out by an individual. Instead, anyone who wants to trade on foreign exchange markets must use a broker who places trades on their behalf through a Forex Trading Platform. There are a number of different things to look out for when choosing which broker you use to carry out Forex trading on your behalf.

    Make sure they are regulated

    There are enormous numbers of Forex traders online and it can be confusing to determine which one is right for you. If you are in the UK, check that your chosen broker is registered with the Financial Services Authority (FSA). The FSA give best protection to UK based individuals if there are any problems with your broker.

    Broker backing

    Most Forex brokers are backed by banks or lenders because they need access to a huge amount of funds to be able to provide the necessary leverage for their clients. Check that your broker is part of an institution you know and trust before parting with your cash. You can find this information by looking in the ‘about’ section of a broker’s website.

    Spread level

    Forex brokers do not charge commission but instead make their money in spreads which is the difference between the price at which one currency can be bought at and how much it can be sold at. This can make the difference between you making a lot of money on trades and your broker making it so choose a broker which offers low spreads or all your profit could be eaten up by theirs.

    Why You Need a Forex Broker

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    admin     Forex Brokers

    The internet has allowed many small individual investors to trade in the Forex market but they must trade via a broker who acts as a middleman between the market and the individual. Rather than thinking of them as an overhead, if you choose your Forex broker wisely, they can be a valuable source of advice and expertise. After all, it is to their benefit as well as yours if you make a success of trading so think of it as more of a symbiotic relationship than anything else.

    The broker should be available when you need them to be, allowing you to trade at times convenient to you. Many online brokerage firms operate as the Forex market does – 24 hours a day, 7 days a week so if you are in a different time zone or prefer to carry out trades in the evenings, this can be a very useful facility.

    One of the most important things a decent broker will provide is a stable and secure Forex trading platform. The trading platform is where you will carry out all your trades so it needs to be reliable and free from glitches. Even if it has excellent functionality, a platform which crashes if you are trying to make a trade is worse than useless.

    A good broker should also protect you from losses in the form of stop-loss orders which exit the market on your behalf if the currency falls below a certain level. Look for one who guarantees no negative balances.

    Why Get Involved in Forex Trading?

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    admin     Forex Basics

    The reason most people get involved in Forex trading is that it is possible to make big returns for a small outlay. The leverage ratio (i.e. the amount of money required to invest versus the potential returns) is very high in Forex trading compared to other types of trading so it is a very attractive option.

    As you might expect, there is also the potential to make huge losses so make sure that you are comfortable with the amounts you are trading. Costs are relatively low compared to many other markets. Different Forex trading platforms have different minimum deposits which vary enormously from a pound up to several thousand pounds.

    The market is also highly liquid compared to other markets. This means that you can start and stop trading more or less whenever you want and theoretically, there are no daily trading limits imposed on traders. Your Forex trading platform may impose its own limits so check before you decide on which is the right platform for you to trade on. The market is truly 24 hours, currency is not tied to the opening and closing of individual Stock Exchanges, unlike commodity trading.

    Forex trading is also very flexible. Because Forex trading is not tied to one individual market and it is easy to move your money from one currency to another, your money is not tied up for the long term. So there is no such thing as a Bull market or a Bear market in Forex trading – the market is whatever you make it.

    What is Forex Trading?

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    admin     Forex Basics

    Forex trading is a form of betting on the foreign exchange markets (Forex) between currencies. Forex traders buy one currency and trade it against another one, hoping that the one that they have bought will become more valuable than the other one. Forex traders use a Forex trading platform provided by their broker to facilitate their buying and selling activities.

    Forex trading has only recently been opened up to individuals as it was previously the domain of banks, lenders and fund managers but now it is open to everyone. Having said that, individuals are not permitted to buy and sell currency directly but instead must go via a broker who will buy and sell on their behalf. Brokers must be licensed, either by the FSA or another regulatory body.

    The market has become very popular for individuals despite this restriction, because the returns can be very high, and because the market tends to be less volatile than the stock market. Currencies are generally more stable than commodities, particularly now so few of them are tied to the gold standard.

    The market operates 24 hours a day and so it is important that new traders have an idea of what the signals to look out for which can indicate that a currency may move. There are a number of different Forex trading systems available online and it is useful to review these before starting to trade. Many Forex platforms allow new traders to operate a dummy trial account before they actually commit any cash.

    What Affects Currency Value?

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    admin     Forex Basics

    When you are trading in Forex, you are effectively investing in the economic well-being of a nation in comparison to another nation. So if you sell British Pounds for US Dollars, you are betting that the US economy is going to do better than the UK one.

    But what are the factors that can influence a nation’s economy? There are the obvious financial indicators such as a nation’s gross domestic product (GDP) and Consumer Price Index (how much basic items cost which affects the spending power of the country’s population). However, the main factors in currency value fluctuation are current affairs. These are not just political developments but interest rates, leading companies in the country releasing their figures, and general financial developments. The weather can also have a substantial impact on currency value; Japan’s recovery from recession has been severely hampered by the tsunami and earthquake the country suffered in early 2011.

    When these events take place, brokers will send out their traders an alert via their Forex trading platform to their clients so that they can make an informed decision on their position. Traders can also subscribe to a range of news feeds via RSS feed (online) or SMS (text message) so that they are receiving information from a number of sources. This means that the risk of false signals is reduced because receiving the same information from different sources makes it more robust and so traders can be more certain that they are making decisions likely to increase their profits.