How the Forex Market Works
*OspreyFX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
- Select an account that suits your trading style
- Consider the features of available account types
- Things to keep in mind at all times
You are just starting your forex trading journey. And one of the very first decisions you have to make is choosing the best trading account type. While many parameters influence this decision, there is no right or wrong, only the right match. The account type you select will be the most adapted fit according to your experience level, capital, and trading style. But in addition to these things, you will look at the features available in every account.
Some of those common ones include:
- Transaction costs, spreads, commissions
- The trade routing method: Straight Through Processing (STP) or Electronic Communication Network (ECN)
- Available markets
- Technical features of the platform and trading software
Key Features to Consider
STP or ECN
In the recent past, people often referred to dealing desk brokers in order to trade. But these brokers usually have an interest in the trader’s loss. That’s the advantage of STP and ECN accounts. As these are known as non-dealing desk accounts. This basically means that your order is placed directly via a liquidity provider or the interbank market. The benefit is that your orders are matched with other orders in the wider market. And the broker does not have to participate by taking the other side of your trade. Therefore the middle man plays a neutral role in the outcome of your trades.
The main differences between an STP and an ECN account are:
- Straight Through Processing, STP accounts link all your orders to the broker’s liquidity provider. The STP broker usually has an internal system or platform linking to all the main providers. And these compete for the best price on bids / ask orders.
- While similar to STP, Electronic Communication Network (ECN) accounts route all your transactions directly with a liquidity provider without a middleman.
The cost of trading known as spread, is the difference between the buy price and the sell price of a currency. And this amount is known as a ‘pip’. Spreads vary during a day according to the supply and demand. While most brokers advertise their services as commission fees, the hidden cost for traders appears in spreads. Therefore always check what the spread is when you are starting a trade.
The Importance of Software
How would you feel if you spend time strategizing for a trade, only to face technical issues with the trading platform? A trader requires reliability. That is the reason behind the popularity of MetaTrader4 and MetaTrader5 platforms. These offer user-friendly features that appeal to brokers and traders:
- Comprehensive charts
- Real-time data
- Automation strategies
- Mobile optimization
- Custom technical indicators
- Risk management and protection notifications
At the end of the day, choosing a platform is a personal choice. And the easiest way to decide is to try out demo accounts.
Another key parameter to consider when choosing your account and broker is the quality of customer service offered. As a beginner trader, customer support is essential for your trading experience. Even as a seasoned trader, you may need some guidance, and you want to be able to get a timely and effective response. So, have a look at reviews before you make a decision. Also, check for the various ways available to contact customer care. Most brokers include live chat, telephone, email options.
Choosing an Account
Generally, forex brokers propose different trading accounts that fit the needs of different types of traders. The most common accounts are usually similar to the following:
Some online brokers offer the micro account option. These accounts are typically used by investors with small budgets or young traders with limited knowledge of the trading world. Starting with as little as USD 25 to open an account, they offer a small capital-friendly advantage.
The mini account allows traders to use mini lots in their transactions. Usually, this amount is USD 10,000 or a tenth of a standard account. This type is recommended for new or hesitant traders. The main advantage is a lower capital investment and lower risk. This allows newcomers to test strategies and get familiar with the world of trading. Some mini accounts can be opened with a budget as low as USD 250.
The most popular type of accounts out there, it gives users access to standard lots of currency each worth USD 100,00. This is not representative of the investment you need to place. The leverage is typically 100:1. However, it does require up-front capital to trade full lots. Therefore brokers often provide better services for investors using this account. It is usually recommended for experienced traders with larger funds.
Every newcomer to trading should first test the water and have a live-market experience to try out tactics without the risk. That’s the purpose of demo accounts. It is also a good way to try a new broker.
Things to Keep in Mind
When selecting your broker and account type, due diligence, checking reviews, and asking as many questions as you need is the right way to proceed. If you have any doubt, try to clear it up before committing yourself. Some of the most common things to ask:
- Deposit and withdrawal process and fees
- Customer service hours and level of forex know-how
- The broker’s regulatory status
- The details of the account types available
- What account type is recommended for your experience and capital
Once you have signed up with a broker and decided on an account type, familiarize yourself with trading strategies.