In continuing our article series on Forex for Dummies, we go on to explain other aspects of forex trading.
Role of Brokers
Brokers play several roles in the forex market.
- They provide the trading platforms that give traders access to the market.
- Brokers hold the money of traders in trust.
- Brokers sometimes act as counterparties to a trade. In this role, they are functioning as market makers who provide liquidity by buying positions from liquidity providers in bulk and reselling same to traders either on the buy or sell side of the market.
You can see that since brokers play pivotal roles in forex, there has to be a system of making sure that they do not run away with clients’ money, do not deliberately skew the market to favour their counterparty positions, or do not alter conditions to give a trading party an advantage over another. This is why brokers are supposed to be regulated either by government agencies charged with this function (CFTC in US, FCA in UK, JFSA in Japan, CySEC in Cyprus, etc), or by industry self-regulating bodies. Regulation is all about protecting the trader and instilling market confidence.
How do some brokers cheat clients?
- Promoting undue slippage i.e. filling of orders at prices which attract higher spread cost to the trader.
- Triggering stop losses when actual prices are not at those price areas (stop hunting).
- Freezing platforms so orders are not closed or opened.
- Refusing to honour withdrawal requests.
In such cases, traders may maintain screenshots of their trading history, their active trades and closed positions. In the event that these need to be tendered as evidence, present your case to the regulatory body. Good brokers do not have anything to fear and will give you no cause to have to take this action.
Platforms
Trading platforms are varied in forex. There are turnkey platforms and proprietary platforms. The most famous example of a turnkey platform is the MetaTrader 4 platform (MT4). Others are those from ActForex, TradeStation, JForex, Currenex, etc. The type of platform a trader is given will depend on whether the trader is a retail client or an institutional client. Retail clients are individual, non-professional traders. The platforms provided for this category is simple and orders go through a dealing desk. Professional traders working with institutional trading firms use ECN platforms which have direct market access to liquidity providers.
Leverage and Margin
Movement of currencies is measured to 4 decimal places (0.0001). With such small movements, it takes large trade volumes to make a reasonable profit. Thus forex positions typically start from $1000 for a micro-lot, $10,000 for a mini-lot and $100,000 for a Standard Lot. Only very few institutional traders, central banks and virtually no retail trader can afford to trade such volumes with their own money. That is why the principle of leverage and margin was introduced in forex. Leverage means that the broker will lend the trader a greater percentage of the capital needed for a trade, while the trader comes up with a small amount which serves as the collateral for the trade and is known as the margin. The leverage is calculated as a function of the trader’s margin and the total investment in the trade.
So a leverage of 1:200 for a Standard Lot means that the traders will invest $500, since $500 is 1/200 of a Standard Lot ($100,000). When a profit is made, the trader enjoys the full profit as if he or she invested $100,000 in the trade. When a loss is made, the full value of the loss is also applied. If the loss in an active trade starts to exceed he trader’s portion of the equity, a margin call is issued. The margin call is an instruction to the trader to add more funds to the account or the position is closed automatically to protect the broker’s portion.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose.Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
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