A forex brokerage is an entity that connects retail forex traders with the forex market. "Forex" is the shortened version of foreign exchange, and the forex market is traded on the "interbank." This means that banks trade electronically with each other at various prices that may change from bank to bank.
- A forex account, which you can open through a forex brokerage, lets you purchase and hold foreign currencies.
- Brokerages that deal in forex trading take a cut of the profit when they initiate your purchase.
- Once you find a forex brokerage you feel comfortable with, you can open a demo account and try your hand at forex trading to see if it's for you.
How Does a Forex Account Work?
A forex trading account is something like a bank account where you can purchase currencies and hold them. Currencies are specifically purchased in pairs. If you buy the EUR/USD, you are holding for the US dollar to become worth less per euro over time. The euro must become worth more money in dollars for you to make a profit.
A forex brokerage offers you a way to get into the mix with the banking network and purchase a currency pair to hold in an easy manner. Before there were forex brokers, people wishing to trade in foreign currency needed to have a large amount of money and a special relationship with a bank to buy foreign currencies.
How Forex Brokers Earn Money From Your Trades
Forex brokers make their money by taking a slice of the pie when you make a trade. The change in the relationship between two currencies in a pair is measured in pips. When you make a trade the forex broker charges you a few pips before actually putting your trade on the market. The market might be trading at 1.3100 EUR/USD as a buying price, and when you enter your trade, the broker may put you in at 1.3102. If you immediately close your trade, the forex broker collects the profit between the "market price" and the price you paid. This is called the spread.
You might wonder why the forex broker would pick such a small item to make money on. The easy answer is that most people don't think about a few pips of difference when they are trading. This makes the fee feel "transparent." The way a forex brokerage makes money is that they allow you access to forex leverage. When you use leverage, you can control a larger amount on the market than what you have in your account. If you are trading 10:1, you can control $1,000 on the market with only $10 in your account. Not only does this increase your chance for profit (or loss), but it also makes each pip worth significantly more money, which makes the spread you pay worth more money.
In the U.S., forex brokers are regulated by the National Futures Association.
Whether you win or lose while trading, the forex broker will continue to make a profit on the difference between what you pay, and the actual "market price" that they are paying. The main job of a forex brokerage is to provide you easy access to the forex trading market and make some money in the process. Many of them will even help you learn a bit about how to trade. There are many forex trading brokerages out there, some big, some small, but they all work in a similar fashion.
Finding the Right Forex Broker
If you are searching for a forex broker, you can start with this forex brokers list. Take your time, open a forex demo account with each broker you're interested in and try them out for a while. If you plan on continuously trading forex, you need a reliable forex brokerage to work with.
If you are new to forex trading, take time to get a forex trading education and learn a bit about what you're doing. Forex trading is not hard, but it feels hard early on in the learning process. With a little patience and persistence, anyone can learn how to do it.