Forex Broker Choices: Necessary Information
There’s a extremely wide choice of currency broker firms online and when you’re starting in forex trading it can be difficult to find the best. We have a tendency to be drawn to advertising, presuming they are all working in the same way. In fact this isn’t true. Currency exchange brokers have very different business models which affect the way that they operate. In a few cases, you could be surprised to hear that they could be working against their customers instead of for them.
Naturally historically a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with phone orders and simply put in 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 price . However, you do still need a broker who will connect to the market thru their software platform.
Many brokers still work in the traditional way, placing orders for clients as they are instructed. These are often the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the Net has opened up currency trading to folks with much lower investment funds. More lately, firms have come on the scene to cater for these smaller investors and they do not always follow the pattern of traditional brokers. To cut costs, they usually don’t have their own dealing desks and they may operate in some absolutely different ways. This may have significant results for your funds and how they are managed.
So let’s take a look at the kinds of business model that you may come across in your search for a currency broker.
No Dealing Desk (NDD) Currency Brokers
NDD brokers work in a similar way to brokers with dealing desks, but they use a selection of liquidity suppliers to essentially match their clients’ orders in the market. Competition between liquidity suppliers keeps the spread low, even though the broker typically increases the spread to cover their own costs and earn a little cash.
Electronic Communications Network (ECN)
Foreign exchange brokers who use the ECN can access an online network where trades are filled. Many market makers work this way, as well as some brokers, banks and other large currency traders. Spread is usually low but you may be billed per trade.
Market Makers
Market makers are not brokers in the real 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, though naturally these will be related to market costs. They regularly don’t like clients to use scalping strategies as the awfully short term nature of these trades makes it harder for them to offset their risk. Some traders are happy to use market makers but others consider that they’ve a conflict of interest that may work against you as a trader.
Bucket Shops
Forex bucket shops are like bet takers in that they simply match your trade without necessarily taking any position in the market. They may not even have any connection into the genuine forex market. They win if you lose, so if you are successful they may probably close your account and return your funds. There’s truly no point in getting concerned with a bucket shop unless you just want experience at extremely low levels of investment, and plan to lose cash. They are not legal in some jurisdictions, and don’t should be described as a currency broker.
Currency Trading – Pips Explained
I’ve been reading about the new foreign exchange software Pip Android and I commenced wondering if the newbie traders know what are those pips anyway. FX trading pips are a vital part of forex trading that any trader must grasp. They are the measure of movements in prices, and thus of profit and loss. Brokers generally interpret pips into bucks and cents for you, or into the currency that your account is held in, if it’s not US dollars. However, when comparing two trades with different position sizes it is the profit or loss in pips that tells you more than the profit in bucks.
PIP means percentage in point. It is used as a measure of change in price. Spread is also measured in pips. The pip is the littlest part of the measured cost of a quoted currency.
In practice, most currencies are quoted to 4 decimal places, e.g. 1.2315. In this case one pip is 0.0001 units of the quote currency. So if that price changes to 1.2316, the price has increased by one pip.
The Japanese yen is the sole one of the major currencies that’s low enough in value to be normally quoted to 2 decimal places. So when the yen is the quote currency, one pip is 0.01 yen.
Some brokers are now starting to quote the other major currencies to 5 decimal places. Rationally this should mean that one pip would be 0.00001 currency units, but the potential there for misunderstanding is huge, if a pip would be worth ten times as much with some brokers than with others. So it seems likely that the pip will stay at 0.0001 units for most currencies.
Most traders record their profit and loss in foreign exchange trading pips as well as in money. This enables easy comparison of one trade with another so you can appraise a system. It also means that traders can discuss their results in a forex forum without unveiling the dimensions of their account or their profits in dollars and cents.
If a trader tells you that they made one hundred pips profit, you do not learn anything about their financial situation. If they are trading a pair like EUR/USD where the buck is the quote currency, 100 pips profit would be $1,000 on a standard lot of $100,000 but only $10 on a $1,000 micro lot. To grasp the size of one pip in dollars in this position multiply 0.0001 by the lot size.
To calculate profit or loss from pips where the dollar is the quote currency, you just need to know that one pip is $0.0001 x lot size. If you have another currency as the quote currency, the pip is of course in that currency, and you can multiply by the exchange rate to know the pip value in bucks.
All of this may seem confusing at first glance but anyone who starts trading will pretty soon understand what a pip means in practice. Currency trading pips are a useful tool for measuring and recording changes in price in forex trading.
