| Before you start trading in forex you need to know about the role played by your foreign currency broker. There are different levels of service provided, so which level is right for you? And do you even need a broker at all? |
Why should you have to go to a foreign currency broker when you want to buy a foreign currency? Can’t you simply ask your bank to convert some of the money in your account to the currency you want to buy?
Well, you could, but you would have to pay for the service. Your bank would simply instruct a broker, or, more likely, their own brokerage arm, so you would end up paying two lots of brokerage fees.
Why are foreign currency brokers necessary, then? Because every day people and businesses need to change currency from that of one country into that of another. If a steel maker in Japan needs to import iron ore from Australia it needs to pay in Australian dollars. It will therefore place sufficient funds in yen with a foreign currency broker and instruct it to purchase the appropriate amount of Australian dollars with it so the Australian producer can be paid.
Because foreign currency brokers deal in foreign currency every day, they keep themselves informed of everything that may affect the value of each one. You as a trader in foreign currencies, are able to share in this information by becoming a client of such a broker. Generally speaking, the cost of such information is cheap by comparison with the profits that can be made from it.
Most brokers offer two or more levels of service. The basic service, sometimes referred to as “execution only”, is where no advice is given to the client, who simply uses the trading platform to trade. Charting and customisable indicators are invariably provided, but otherwise the client is on his own.
More advanced levels of service include advice and recommendations from the broker, and even, ultimately, a service where the broker actively trades on behalf of the client within certain constraints, according to the client’s instructions.
Forex traders now operate invariably online. Forex brokers have to compete with spread betting companies, who provide a basic level of service, with no recommendations or advice, other than tutorials and other training materials aimed at helping clients make their own trading decisions.
This basic service is actually favored by most forex traders, who like the flexibility in using whatever software or robot they have bought for the purpose of trading, and perhaps being able to change it from time to time without it affecting their account.
In any event, advice from a foreign currency broker has to be treated with caution. Remember, when you place a trade (or bet, if you use a spread betting company), then unless that order is placed in the actual foreign exchange market itself, the broker is effectively taking the opposing view and betting against you. With such a broker, is it really in his interest to have clients who are well informed and trained in forex and who therefore consistently make winning trades?
In this lies one of the strengths of the latest generation of independently developed forex robots, systems and software. They are designed to ensure the user has consistent winning trades, and can successfully outfox the broker and the spread betting company.
In summary, while you do indeed need a foreign currency broker, or a spread betting company, to engage in forex trading, you don’t need to take the whole package. Successful traders invariably pick and choose what they use, and have their own system hidden up their sleeve.
Philip Gegan
