What Is The Difference Between A Forex Broker And A Dealer?
While a broker matches traders against each other and makes money through commission, a dealer pits them off against each other. The difference is that a dealer’s entire income comes from the losses of traders. Dealers trade against their clients. They buy low from one trader and sell high to another one, and the spread is their earning. However, this doesn’t mean that dealers are dishonest or illegal. Dealers are a necessary force in the market due to which the market has liquidity. Because of this, prompt trades can be placed and fulfilled in the market.
With dealers, the fulfillment of the orders is almost instant because they cannot lose any time. Even a second’s delay could translate into losses for them. Thus, they have a more personal stake with their clients’ trades. They don’t care much about how much the trader is making or losing, all they care about is their profit as a result of the traders’ transactions. However, dealers also deal with more risk than regular brokers. If they are not quick with order matching, they could end up losing a lot because of the dynamic nature of the Forex market. This is why the profits and losses of dealers are usually quite extreme.
Similar to brokers, dealers too have a wide network in the market. They get great spreads and rates which they are able to pass on to their clients. Dealers do not charge any commission for trades but the spreads that they earn are a lot wider. Most traders cannot differentiate between brokers and dealers, and end up trading with dealers.
Are Forex Brokers Regulated?
There is no clearing house or central exchange in Forex. This is why there are various regulatory commissions that regulate the markets and provide license to brokers. The main objective of choosing a regulated broker is that the safety of the trader is taken care of. The regulatory body ensures that ethical behavior and honest practices are followed. Also, because of these regulations, regular evaluations and audits are conducted on the broker’s business to ensure that industry standards are maintained.
For a trader, it is extremely important to ensure that the broker is regulated and to find out about the regulatory body of the broker. Different countries have different regulatory bodies. A trader should choose a Forex broker who is regulated by an organization in their own country. In case of off-shore countries, regulations can be pretty liberal which is why traders should research whether the regulatory body is on shore or off shore. USA, UK, Eurozone, Japan, Australia and Switzerland have their own regulatory agencies.
- ASIC is Australia’s main regulatory organization. Switzerland has FINMA. UAE has Central Bank of UAE. In Russia, there is FFMS with its headquarters in Moscow.
- FCA is the regulatory body in the UK and is also pretty popular in EU. FSC in Mauritius is another regulatory body. USA has CFTC as its regulatory body. Another US based regulatory body is NFA which has a specific role in trading of commodities and futures.
- Cyprus’ famous regulatory body is CySEC which oversees everything in the Eurozone. South Africa’s FSB not only regulates all the brokers and trading activities, it also regulates their stock exchange in Johannesburg.
What Are The Basic Types of Trading Accounts Offered By Forex Brokers?
The purpose of brokers is to allow small traders to compete easily with large banks, hedge funds and institutions. All the traders need to do is choose the right kind of account and set it up. The 3 basic account types are – Standard account, Mini account, and Managed account. The names might vary (usually Gold, Silver, and Platinum) but the basic features remain the same.
The Standard account is extremely common and perfect for basic traders. It requires that the trader trade in standard $100,000 lots. With a typical leverage of 100:1 and margin rules, this means that the trader requires $1000 in the margin account in order to trade a standard lot. This kind of account has a lot of gain potential, converting $10 into $1000, but the loss potential is also equally great.
A Mini trading account is like a mini standard account because it allows the trader to trade in mini lots. Most brokers offer $10,000 lots to the trader. This kind of account is usually used by Forex brokers to bring novice or new clients who are reluctant to deal with full lots. These low risk and low capital accounts offer a lot of flexibility to the trader because managing risk becomes easier. However, the reward is also low with Mini accounts. Micro accounts are sister accounts of Mini accounts and have trading lots of $1000.
In a Managed trading account, the trader gets a manager who acts like a stockbroker. The only decision that the client makes is the capital and objectives. The actual selling and buying is performed by the manager. Managed accounts could be individual accounts or pooled accounts. The professional guidance is a huge benefit with this kind of account but the high price tag attached to it could be a negative for some.
What Is A Demo Account And Is It Offered By All Forex Brokers?
There are various trading platforms that are popular. Apart from those, brokers also have their proprietary platforms. So, an effective trading strategy for both novice and veteran traders is to test their trades and learn Forex trading using a demo account before they trade with real money. A demo account allows the trader a trial period in which they can download the platform on their desktop or use its web version. For new traders, it is a known fact that succeeding on demo account is absolutely important before any live trading is attempted.
A demo account answers basic questions of a trader like – How can a limit or a stop order be placed? Does the platform offer variable or fixed spreads? Is it possible to set stop or limit during entry? What is the minimum trading lot size? Is it possible to mix and match with lot sizes? What if the internet connection isn’t working?
For veteran traders too, demo accounts have amazing benefits. There are various successful traders who test out their strategy on a demo account first, just to check how it will work out. If they make profit on the demo account, they can feel a bit more confident about their strategy. It is, however, important to remember that the demo account does not equate with real trading in any way. Just because a trader makes profits on a demo platform doesn’t mean they will make profits while trading with real money.