In present-day situation, a forex broker is an intermediator who buys and sells foreign currencies on behalf of the clients in return of for a commission. Before the internet, forex brokers used to operate by phone. Clients would contact their brokers though phone to tell them about what currencies to buy or sell, and brokers would just do that and in return, they would receive the commission. Now, with the emergence of the internet in last two decades, online forex trading has come into existence. The trading could be done through a variety of electronic platforms and computer applications.
How to choose a forex broker ?
You can find many forex brokers in Sri Lanka. However, choosing the right forex broker can be a very daunting task, particularly if you do not have any idea what you are looking for. Given below are a few factors you must consider when choosing a forex broker:
- Security and Reliability - The most important characteristic that a forex broker must possess a high level of security and reliability. You will be handing over your hard-earned money to a stranger. Least you could do is make sure that the stranger is reliable and legit. Luckily, there are regulatory bodies all over the globe who can help you recognize a trustworthy broker. You can choose any regulated and licensed broker to do trading in the forex market.
- Cost of the transaction - When you trade in foreign currencies, you would also have to pay transaction costs. Every time you do forex trading in Sri Lanka, you have to pay commission or transaction cost. So the best approach would b to find the forex trader with the most affordable rates to do the trading. Also before making final decisions review your every option.
- Convenient deposits and easy withdrawals - A good forex broker will let you deposit or withdraw your funds from the forex market without creating any difficulty. Usually, forex brokers do not have any ground to make things difficult for their clients when it comes to depositing funds or withdrawing profits. They only use your funds to trade on your behalf. Look for the brokers who will make the trading easier and make the withdrawal procedure easier and smoother.
- Forex trading platform - Majority of forex trading happens through brokers’ online trading platforms. So it is important that the trading platform your broker is using must have user-friendly characteristics and must have a stable infrastructure. When choosing a forex broker, make sure their trading platform has a lot to offer to make your trading easier and successful.
- Best advisor - When you are looking for forex brokers in Sri Lanka, make sure that the one you are choosing gives you the best price for your orders, for both buying and selling. It is also important that your orders get filled at the right time so that you can make best of your circumstances.
- Best Customer support service - Usually, forex brokers try to do their best for their clients, but they are not perfect. So choose a broker whom you can approach without difficulty and who is always willing to help you and give the right advice. Also, make sure that the broker is knowledgeable and knows what he or she is doing.
Types of Forex Brokers
Forex brokers can be divided into 2 categories:
Dealing Desks Brokers or Market makers
No Dealing Desks Brokers - can be divided into 2 parts:
a) Straight Through Processing (STP)
b) Electronic Communication Network (ECN)
Dealing Desk Brokers
A dealing desk broker will offer its customers the functions of both the sides of the market. The broker puts both a bid and asks price for at which they are prepared to buy and sell the foreign currencies. Due to this, the forex broker's customers can always fill up the trading orders. Dealing desk brokers are also known as market makers. Their main purpose is to acquire a share of the spread and to maintain adequate volume on both buyers’ and sellers’ sides of the market to avoid risks.
No Dealing Desk Brokers
No Dealing Desk brokers do not process their customers’ orders using a Dealing Desk. It means that they don’t take the other side of their customer’s dealing as their main purpose is to just connect the buyer and seller together. Usually, no dealing desk brokers charge a small commission for their trading services or just increase the spread by adding their own net income into it. No Dealing Desk brokers can be divided into two parts, STP and ECN
a) STP Brokers
STP stands for Straight Through Processing. In this, the STP broker directs their customers’ orders straight to those who bring liquidity to the market such as banks and larger brokerage firms. It is called straight-through processing as the broker does not operate through a dealing desk and brings down the frequency of delays and requotes while trading is taking place. STP has been developed to enhance the speed at which the transactions in the forex trading market takes place. This is done by letting the information that has been filled using electronic means to be passed from one party to another during the settlement procedure without actually re-entering the same information repeatedly at every stage.
b) ECN Brokers
ECN stands for Electronic Communication Network. An ECN forex broker utilizes the electronic communications networks or ECNs to offer their clients an opportunity to have direct contact with other participants of the forex trading market. The ECN provides the buyers and sellers with an electronic system where they both the parties come together in order to execute trades. This network has been designed in such a way that it can match the demand and supply of the currencies at the prices customers want to pay or want to receive for the currencies. Basically, this network match buying and selling orders available in the exchange. Through ECN, customers can also check the ask and bid prices of the currencies listed in the open market.
Type of Forex Trading Platforms / Applications
Online forex trading is similar to any other trading platforms which are used to buy and sell the securities. The forex trading platform act as a mediator between the forex broker and the trader. Platforms also provide the customers with both current and historical data pertaining to a particular foreign currency and provide the customer with an access to all types of orders available in the forex trade market. For forex trading in Sri Lanka, you can use MT4, MT5, and cTrader ( Your chosen broker will provide one or all these platforms ) to enjoy a smooth and easier trading experience.
If you want to know more about Forex markets, you can visit our article, Introduction to Forex Trading for more information.