Forex trading is the process of trading one currency for another. The reasons for doing this can be various, but often commerce, trading or tourism are the main ones behind it.
A good forex trading platform will be simple to use and flexible, provide you with real-time information, offer you lots of different assets and currencies for trading, be customizable, set out some trading strategies and have solid customer support available. You’ll also have the option of trade demos so you can try out different trading strategies before going ahead with them.
Below is a look at forex trading in the United States, the differences between trading platforms, at the importance of choosing a good platform provider and also at how forex brokers and platforms make their money.
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Forex trading in the US
Just like in any other country, forex trading operators must comply with certain regulations. The authorities, in the form of the National Futures Association (NFA), regulate brokerage accounts. If you’re a high-net worth individual, you may not be covered under a standard brokerage account.
Activities of the NFA include:
- Providing licenses to eligible forex brokers to operate as a forex trading business
- Enforcing adherence to capital requirements
- Combating fraud
- Enforcing record keeping and reporting requirements of transactions and other relevant business activities.
Importantly, it’s worth noting that a lot of forex trading sites are hosted outside of the US as well, so it’s common to see forex brokers accepting US clients. When using a forex broker, you should verify the ownership, status and location of the trading firm.
US regulations regarding forex trading include:
- A limit of 50:1 on leverage on major currencies to protect novice forex investors from taking major risks
- A limit of 20:1 on leverage on smaller currencies
- Keeping of the notional transaction value amount plus the option premium on short forex options
- Keeping of the entire option premium as a security deposit on long forex options
- The first in first out (FIFO) rule preventing holding simultaneous holdings in the same asset of forex. There is no possibility of hedging while forex trading.
How Forex trading platforms differ from each other
Trading foreign currency is complex, so there are several different types of platforms out there to suit your needs. Here’s a look at some of the different types of platforms:
Download or non-downloadable
Downloadable platforms are platforms you can download and install on your device, and they’re designed for use on that specific device only. Non-downloadable platforms, on the other hand, are web based, and you can access them anywhere on the internet. All you have to do is sign in.
Programming languages
Many forex platforms use complex programming languages to develop and deploy their algorithms and execute their functions. As a result, platforms are sometimes classified into their programming languages.
Dealing desks vs non-dealing desks
On a dealing desk platform, the system is connected to the broker’s dealing desk. All the pricing information starts here. When traders make transaction orders, the orders must go to the dealing desk for implementation.
On a non-dealing desk platform, the prices come from many liquidity providers, and these prices are available for the trader to browse. This system is known as “direct access trading.”
The importance of hiring a trusted provider
The sums of money involved in forex trading can be vast, so it’s important to choose a good platform and a broker you can trust. This will help you to make the decisions that are in your best interests. Here are some more reasons why it’s important to choose a trusted service provider:
Advice and real-time quotes
Reliable brokers provide quotes in real time and will advise you on the best currencies to buy and the best time to buy them, not to mention the best time to sell them as well. Real-time quotes are crucial in forex trading because even the smallest change in a currency’s value can be significant.
Education
Good brokers will educate you in forex trading and provide you with a variety of material to help you succeed in forex trading. This helps them to succeed, too, and operate better.
Sufficient leverage
Brokers will offer you enough leverage for you to maximize your profits from trading if you have a successful position. Leverage can work against you, however, so you must always be careful when using it.
How brokers make their money from forex trading
Brokers will make money in different ways from forex trading. One factor that determines whether they make money is the business model. Is it a non-dealing desk platform, in which case the broker will add a small commission to each trade. Are you dealing with a market maker, who will make money from the spread between the bid and ask prices.
Speaking of spreads, this is the first major charge through which the broker will make money. The spread is the difference between the bid and ask price and the cut the broker takes on your position.
As well as commissions and the spread, brokers may make money from other fees, such as deposit or withdrawal fees, and even inactivity fees if you don’t use your account for a long time.
Forex trading is complex and there’s a lot to consider when trading, but first you must choose a trustworthy platform to do it on. Once you do this, you begin to set yourself up for successful trading.
