Forex Questions You Were Too Scared to Ask
If you are just starting out as a forex trader, then the chances are your mind is full of questions. The trouble is that you’re probably reluctant to ask these questions – some seem just too obvious, while others seem downright scary. However, if you’re serious about forex trading, then you need to ask these questions – particularly when you’re evaluating brokers.
Let’s look at a few of the most common questions.
How does my forex broker make money?
In principle, forex brokers make money on the spread – the difference between the buying and selling price for a currency pair. However, some forex brokers take a very different approach. They assume that most of their traders will lose money – and 95% usually do lose – so the broker pockets these traders’ losses without actually trading in the currency markets. For the 5% of traders who consistently win, the broker hedges these trades by taking corresponding positions in the currency markets – so the broker is not risking their own money.
Can I place orders inside the spread?
With some forex brokers, you can. This is known as scalping, where you are looking to make profits from very small price movements over short periods of time. However, this is a very high risk strategy. Also, if you do win, then it means that the market maker loses, so some forex brokers actually prohibit you from doing this.
What is a rollover?
If you hold a forex position overnight, then you may earn interest – or may have to pay it. Basically, the amount of interest you earn paid depends on the difference between interest rates for each currency in the currency pair. If you sold the currency that pays the higher interest, then you owe interest – this is known as a negative roll. If you bought the currency with the higher interest rate, then you earn interest – this is a positive roll. Make sure that your broker pays you on positive roles, and doesn’t pocket the money.
Does it matter how big my broker is?
Yes it does. The most important thing is to select a reputable broker – but once you have a number of reputable brokers in mind, size matters. There is no central forex exchange, so all trades are carried out ‘over the counter’. Brokers and other institutions with large trade volumes and good credit ratings typically get better prices and faster execution. If they are reputable, they’ll pass this advantage on to you.
How are my orders executed?
There are two main ways that brokers execute your orders. The first is known as Dealing Desk. This is when the broker sets the price and executes your orders directly. This generally means that they offer fixed spreads, which are higher than the average variable spread. In this case, you may also face restrictions on placing orders around economic events.
The other type is No Dealing Desk. In this case, multiple banks send competing prices to your forex broker, and execute your orders – the forex broker is not involved. In this case, you’ll usually get a variable spread, and you should be able to trade around economic events. However, it’s always worth making sure of this with your broker.
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