Andrew Bezen

Financial Writer


Understanding a Forex Broker

Fundamental analysis is part of the decision-making process that leads to the trader buying or selling a currency pair. A reputed Forex broker will always communicate to its customers about the important events ahead that are possible to influence trading conditions.

Such example may be political events, like referendums. The classical example here is the Brexit referendum, that took place on a Thursday during the trading week, but the results were made public later after London and North American sessions ended.

Because markets were open during the vote and the estimated outcome was supposed to be seen during the London night, volatility was supposed to be elevated, while liquidity during that period is scarce.

What Brokers Do

Forex brokers, wanting to avoid a similar situation like the one from January 2015 when the SNB (Swiss National Bank) dropped the peg on the 1.20 level on the EURCHF pair, increased the margin needed to support open positions and to open new ones. This is being made in the client’s interest, even though it is being viewed as totally opposite.

This is part of the communication process between the broker and its traders and it is to be increased moving forward. According to the ECN (Electronic Communication Network) and the STP (Straight Through Processing) technologies, the broker is obligated to fill an order if there is a market at that level.

If there is no market, the order will be filled when a market appears. In other words, if, say, you have a pending order to buy EURUSD from 1.0900 and the market moves aggressively during an important economic event like the NFP (Non-Farm Payrolls) in the United States or the ECB (European Central Bank) press conference, the actual filling will most likely be different than your pending order’s level.

This is because the market moved so fast and the broker was filling the order at the market. Thus, the levels are different.

Such an example is a small one, but the same principle was applied when the EURCHF peg was dropped. All the traders that had a stop loss order for the long positions below 1.20 couldn’t be filled at that exact level, but only where there was a market. And a market appeared thousands of pips lower.

To avoid that, Forex brokers announcing changes in trading conditions. A similar situation with the Brexit vote happened with the U.S. Presidential election as the countdown came during a less liquid trading session.

Consequently, wild moves were expected, so by increasing the margin required for a trade, the Forex broker tries to protect as more capital as possible in a trading account. This could backfire against the broker, though, if the trader has open trades because the free margin level will shrink and small moves in the market will result in trades being closed.

Other examples are changes in the trading schedule, for example when daylight saving time is changing, or when a holiday is expected. The broker announces its clients that these events will result in changing market conditions so that everyone is aware.

Trading is ever changing and this is one of the characteristics that attracts traders from all over the world. There is no recipe for constant winning as there is no holy grail to trading.

As in most other businesses, perseverance and hard work will make the difference between traders that succeed and the ones that fail in Forex trading. Brokers are just the middle man, or the connecting link between traders and the interbank market and they are being remunerated for creating this link.

The more transparent the brokerage house is, the better for both its clients as well as for potential future ones.

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