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What is a Forex Broker?

Forex brokers buy and sell international currencies.
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  • Written By: John Sunshine
  • Edited By: Niki Foster
  • Last Modified Date: 20 July 2014
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    Conjecture Corporation
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Foreign exchange (forex) trading is an attempt to make money from the relative movements of different world currencies. For instance, today one US dollar (USD) may purchase 0.7095 Euro dollars (Euros). Tomorrow, one USD is likely to buy a different amount of Euros. The change will likely be very small, but over the period of a week, the change may be significant. A week later, for example, one USD may buy 0.6995 Euros.

In the example above, if you had spent 1,000 USD to purchase 709.50 Euros, a week later you could have sold your Euros for 1,014 USD, making a nice profit of 1.4% in just one week. Most forex brokers will allow you to use leverage to increase this amount considerably. However, leverage magnifies both your gains and your losses.

A forex broker makes money from the difference between what the buyer pays for the currency and what the seller receives for the sale. This means that there is no commission on each sale; it is built in. This is very similar to the way a market maker on the NASDAQ makes money.

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Very few people were aware of or involved with forex brokers and foreign exchange trade until recently. In the past, only large banks and very large corporations or investors tooke advantage of the foreign currency market. However, there are now thousands of forex brokers that allow people to open accounts and trade through the Internet. This has allowed almost anyone with an interest in trading foreign currencies to set up an account and begin trading.

A good forex broker provides both training and assistance. In principle, foreign exchange trading is as simple as buying low and selling high, not unlike the advice given to stock traders. In practice though, foreign exchange trading is much more difficult to do. For beginners, it is important to choose a forex broker who can provide training and assistance. Research on the Internet can help one locate a good forex broker.

The qualities you should look for when choosing a forex broker include a low spread, the quality of the institution associated with the forex broker, the tools and information the broker makes available to you as the trader, the software provided for making the trades, the availability of leverage options, and the length of time the broker has been in business. A low spread is important, as it is equivalent to the commission you pay on each trade. Most brokers are associated with a large financial institution or bank, and you should choose a forex broker with such an association. A good forex broker should also be registered with the Commodity Futures Trading Commission. Definitely avoid any forex broker who is not registered!

While you can guess as to which way the currency markets are going, you will have more success if your trades are based on some research and a system. A good forex broker will have the resources and tools in place to make this research easy. All foreign exchange trading is done online, so it is important that you are comfortable with the software used to do the trading. A good forex broker will have trial or demo versions available so that you can evaluate how well the system works for you before making any real trades.

Leverage is a very powerful option, so make sure that the forex broker you choose has the leverage options you need and are comfortable with. Finally, choose a forex broker who has been in business for some time and has a good reputation. Only very experienced traders should consider using a new brokerage.

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