To trade on the foreign currency markets, you need a broker. But what exactly is a broker, anyway? To understand this, consider the following:
Suppose you go to a street market to buy an apple. The street market is the ideal place for you to buy an apple because that’s where they sell them.
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Likewise, let’s say you are now selling apples and you need to find customers. Since people are buying apples there and that is where your customers are, you may visit the street market.
Vendors and consumers come together at the street market. However, as apple sales often occur through stalls at street markets, it is uncommon to witness many individuals exchanging apples with one another there.
In the FX markets, this is also accurate. In addition to a place to meet, various currency buyers and sellers need a facility where those currencies may be purchased and traded.
However, in the FX markets, buyers and sellers might be thousands of kilometers apart. For them to find each other, a strategy that serves their interests must be used, and here is where the broker comes in.
A forex broker’s role
Brokers are used by buyers and sellers to buy and sell assets, including currencies.
The forex broker acts as a go-between for you and the market. In other words, if you want to buy or sell currencies, you may go to a broker and they will match you with a buyer or seller.
However, they serve as an intermediary not only between you and another buyer or seller but also between you and an organization that goes by the name of “liquidity provider.”
A supplier of liquidity
To explain liquidity providers, we will begin with the basic idea of liquidity. Let’s say you want to convert one currency into another in order to buy a certain amount of that currency.
To be able to buy that money, someone has to be selling it to you. To be able to sell the money, you need to have someone willing to buy it from you.
If a large number of people are interested in the currency you are selling, you should be able to sell. If there are numerous people selling the money you want, there’s a greater chance you’ll be able to buy it. A market that has a lot of buyers and sellers is said to as “liquid.”
There is yet another way to have a liquid market. Imagine that you would want to buy cash, but there aren’t as many sellers of larger quantities of money as there are of smaller ones. The market continues to be liquid. These large sellers, which are giant banks or other financial institutions that deal in large amounts of currency trading, are called liquidity providers since they are really providing liquidity in the markets.
Stated differently, it is likely that you will be buying from and selling to a liquidity provider when you buy since they deal in such large sums of money. Given how much money they are exchanging, there is always someone to trade with.
When it is specified that the broker will send your trade on to a liquidity provider, the broker will match your contract with a liquidity provider, such as a bank or other financial institution, to take the opposing side of your transaction.
How can I get in touch with a forex broker? How should I approach trading?
When you phoned someone to buy or sell foreign exchange in the past, you could have referred to them as a “broker.” Thanks to developments in software and the Internet, you may now connect with a broker through what is referred to as a trading platform or trading software.
The conversation
A trading platform is a piece of software that makes it easier to purchase and sell different currencies. Trading platforms are online computer applications that you may download and set up. This is the process of trading forex.
However, some forex brokers allow you to trade using a web browser, which is useful since it allows you to trade from any computer without the need to download any software.