How Are Forex Brokers Paid?
Many new Forex brokers offer a no commission, no fee offer to their traders. For new traders, this is good news because they don’t want to increase their trading costs. However, there isn’t one broker who works for free. Thus, no commission-no fee should never be construed as free trading. The commission structure of most brokers is in 3 forms – fixed spread, variable spread, and commission in % of spread.
While most traders think fixed spread is the best choice, there is a loophole in it. A fixed spread remains unchanging. This means that even if the bid and ask rate fluctuate in the market (for or against the trader), the fixed spread would still remain as it is. When the conditions are extremely volatile, fixed spread might be a safe approach but in usual conditions, it could cause the trader to lose a great opportunity of making money.
Variable spread, on the other hand, keeps changing as per market conditions. This means that when the market is favorable, it could be as low as 0.5 pips for major currencies. At volatile times, the spread could rise to 5 pips. Unlike fixed spread, there would be no protection from market forces. In case of the commission of spread structure, the broker charges some commission on the spread. It is usually 2/10th of a pip. In exchange, the trader gets to enjoy tight spreads that only large traders and investors have access to.
There is no best structure because it completely depends on the services that the broker is offering. Some brokers have a good connection in the market and some don’t.
What Are The Common Funding Methods Of Forex Brokers?
Traders can add money to their account by using credit cards (MasterCard or Visa), bank transfers or even electronic transfers such as PayPal. Most payment methods are quick and ensure that the trader can open their account quickly and start trading as soon as possible. Some Forex brokers also accept checks, provided they in the account name of the corporation or the individual.
When it comes to withdrawals, different brokers have different ways but they are all hassle free. It is important to mention withdrawal methods clearly on the website of the broker. Certain fees are used for processing withdrawals and typically, the credit card which was used to fund the account of the trader is used. The amount of withdrawal cannot exceed the deposit amount. Common modes of withdrawal include bank wire transfers, credit card and electronic means.
The broker’s website states how long it will take for the funding to get processed. It is also important to read the broker policy to find out if the processing charges would be passed on to the trader. Sometimes, brokers say that there are no fees but there are hidden charges whose details are mentioned in the policy.
How Can A Market Order Be Placed With A Broker?
A market order is basically buying or selling at the immediate best price or market price. The guarantee with this kind of order is execution, not price. When a trader buys a stock, the execution would be close to the posted ask. When a trader sells a stock, the execution would be close to the posted bid. A common misconception with the market order is that it would be executed at the last traded price. This only happens when the ask and bid rates are the same as last traded rates. When the market is volatile and moving very fast, the price at which an order is filled could be different from the last traded price.
Market orders can be placed with brokers when a trader simply wants to cut out any delay in trading and order execution. Despite that fact that trader is unaware about the price at which the stock would be traded, stocks that trade a lot of shares every day have market orders usually executed close to the ask and bid rates. The commissions for this type of order are extremely cheap, as compared to other orders. The difference can be huge, sometimes reaching up to $10.
Since other kinds of orders are costlier, market order is the most popular kind of order. Also, despite the difference and the opportunity to buy the stock at a lower price or sell it at a higher price, the higher commission usually sets off the losses in case of other orders. Also, there is an element of risk because no trader can absolutely predict the direction that a market would take. Thus, market orders also reduce risks.
How Can A Stop Order Be Placed With A Broker?
A stop order is basically an order to stop the loss from escalating further. It becomes a market order and gets executed when the market price crosses a specific limit. For exiting an existing position or entering a new one, this order can be perfect. There are two kinds of stop orders offered by brokers – buy stop and sell stop. The buy stop order instructs buying of a pair when the market price crosses the specified price which is higher than the current best price. The sell stop order instructs selling of a pair when the market price crosses the specified price which is lower than the current best price.
When a trader is trading with breakouts, stop orders can be extremely useful. The stop loss can be placed a few pips over the resistance level in case of upside breakout and below the support level in case of downside breakout. This will open the trader’s long or short position in case things go according to expectations.
- Stop orders are great tools for limiting a trader’s losses. Losses are a part of forex trading and even the best of traders have faced them. But with the help of a stop order, the trader can ensure that a trade is exited should the market become too fickle.
- A pre-determined stop order limits losses on a trade even before entering the market. Stop orders can also be used for protecting profits.
- When a trade is acting profitably and the market is favorable, a stop order can ensure that the trader retains some amount of profit. Thus, even if the market decides to take a negative turn, the order would be executed at a profitable rate.
How Can A Limit Order Be Placed With A Broker?
A limit order is placed to enter or exit the market only when the trader’s expectations are met. Thus, a currency pair can be bought if the specified price is reached by the market or it trades even lower than that price. The specified price is already lower than the current market price. Similarly, a currency pair would be sold if the market trades at the specified price or higher than it. In this case, the specified price is already higher than the current market price.
Limit orders are one of the major orders that every trader must know about because they are perfect for entering or exiting a position. When traders are sure about their expectations of the market, they can use a limit order to make a lot of money. Since it would only be executed if the conditions are met, there isn’t a chance of the trader losing, assuming that the specified price has been set after careful deliberation.
Also, traders can easily set their profit objectives with the help of a limit order. Since the order execution is always done in the profit zone, traders would know about their profits in advance, should the conditions be met. A limit sell order would help in setting the profit objective when the trader goes long on a currency. A limit buy order would help in setting the profit objective when the trader goes short on a currency. This is also the most common type of order that the traders test when they take up a demo account. It allows traders to hone their instincts about the market as well.