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How to Use Fundamental Analysis to Make Profitable Trades in Forex

Foreign exchange market offers great opportunities for significant profit while you are sitting on your desk and sipping your coffee. Sounds so easy, right? Wrong! More than 90% of forex traders lose their investment and most of them do it within the first few months. Remaining 10% earns good enough and most of the traders in this category are able to make living solely on trading forex. So how do they do it? Simple. They forecast the price of the pair that they invested accurately and there are two major methods to predict the market direction; fundamental analysis and technical analysis.

Fundamental analysis is a method for predicting price movements by studying macroeconomic indicators such as unemployment rate, GDP growth, inflation and central bank interest rate policies. The logic behind fundamental analysis is that if a country’s economic outlook is positive, the currency shall appreciate. On the contrary, if a country’s economic indicators show weakening, the relevant currency shall depreciate. Fundamental traders use this information to determine the trend of the currency and attempt to profit by being on the right side of the trend.

Forex Fundamental Analysis

For instance, if the US economy is gaining momentum, GDP growth is accelerating and Federal Reserve is poised to raise interest rates, the US dollar will increase in value versus other currencies. A strong economy and higher interest rates are going to draw more foreign investment. Since foreign investors need US dollars in order to invest in the US, they will need to convert their local currency to US dollars. Eventually, this will lead to increased demand for US dollars and thus US dollar to appreciate.

Major Macroeconomic Data That Affect Forex Market

Inflation

Rate of prices of goods and service increase over a certain period of time. It is usually measured monthly and yearly. Central banks base their monetary policy on inflation outlook. If inflation goes above target, central banks tend to increase interest rates to control money supply.

Gross Domestic Product (GDP)

GDP is the most important indicator for an economy that shows its overall health and performance. It is released quarterly and yearly. It measures aggregate value of goods and services produced and consumed by a country. When the growth rate of GDP picks up, the currency tends to appreciate and vice versa.

Employment Indicators

Unemployment rate, participation rate, employment and wage growth are among the most important employment indicators. It has a positive impact on the currency when unemployment rate is low, employment and wage growth is strong.

Trade Balance

Difference between imports and exports of goods and services determines trade balance of a country. If a country’s exports surpass imports, it results in trade surplus and trade deficit arises if imports are bigger than exports. A trade surplus is a positive sign for the health of an economy and supports the currency.

Forex Fundamental Analysis - International Trader

Interest Rates

Central banks monitor the economic indicators mentioned above for the purpose to measure overall health of the economy and determine the interest rate policy. If central banks conclude that the overall economic health is weak, they usually gravitate towards lowering interest rates to give it a boost. Lower interest rate leads to lower return for investors and thus will discourage them to invest or withdraw their investments thus bringing a pressure on the currency.

Geopolitical Events

Wars

A war or a truce fundamentally influences the value of the currencies of the countries at war and contingent upon what nations are fighting, the whole forex market could get jittery. For example, don’t expect a significant impact on global risk sentiment if two small African nations begin to fight. Their currencies would get hurt for sure but you would not see sell-off at USD, EUR or JPY. On the other hand, if two big economies such as Russia and the US get into a real war, expect a huge volatility in almost every currency pair.

Elections

An unexpected early election or unfavorable election results can significantly disturb the value of the currency. For example, if an anti EU political party gets more votes than expected, or as a worse scenario, gets enough votes to set up government, Euro tends to depreciate.

Forex Fundamental Analysis - Elections

Power Changes

A  country that experiences sudden change of power such as a coup d’etat or a hard regime shift will scare off global investors and the currency will lose value versus other currencies.

Natural Disasters

When a country becomes victim of a natural disaster such as earthquake, tsunami or floods, that country’s currency may appreciate in the short term due to the need to repatriate funds from overseas for disaster recovery. This is what we saw right after the earthquake and tsunami in Japan 2011. However, the currency could suffer in the long term if the natural disaster leaves a substantial negative shock on that country’s economy.

Some fundamental factors have long term impact and some others have short term impact on currencies. For example, interest rate policies usually create long term trends for the currency that traders can benefit for months whereas international trade figures may influence the currency for only few hours. But regardless of being short term or long term trader, having fundamental analysis in your toolkit is necessary to improve your trading abilities and decision process.

Some Tips to Reduce Risk When Trading Forex

As anyone can see, Forex is a world of its own, with unique trading techniques, trends, jargon and more. Currency trading is very competitive, and it may take a while to find what forex trading strategies are best for you. These forex trading tips can lead you in the right direction.

First of all, you must use your margin carefully to keep your profits secure. Using margin correctly can have a significant impact on your profits. If margin is used carelessly, however, you can lose more than any potential gains. You should only trade on margin when you are very confident about your position. Use margin only when the risk is minimal.

If managed forex accounts are your preferred choice, make sure you exercise caution by investigating the various brokers before you decide on a forex broker. If you are a new trader, try to choose one who trades well and has done so for about five years.

Foreign Exchange Market is Complex

Don’t think that you’re going to go into Forex trading without any knowledge or experience and immediately see the profits rolling in. The foreign exchange market is infinitely complex. Experts in the field continue to study it even as they make real trades. Most even still conduct demo trading. You are unlikely to come across the perfect trading strategy without first taking the time to learn the system. Do your research and stick to what works.

Foreign Exchange Market

It can be tempting to let forex trading robots (Expert Avdisors) do all your trading for you and not have any input. This could unfortunately lead to very significant losses for you. The opposite is actually the best thing to do. Sticking to a set plan will help to control your urges.

Importance of Stop Loss

Be sure to protect your account with stop loss orders. A stop loss order provides security, much like insurance to your account. Without a stop loss order, any unexpected big move in the foreign exchange market can cost you a lot of money. Put the stop loss order in place to protect your investments.

There is no position so lucrative that moving your stop point is a good idea. Set your stop point prior to trading, and let nothing change it. You should consider a stop point immovable as you may start to react emotionally and irrationally and consider changing it. This is a straight way to lose money.

There is no scarcity of Forex information on the internet. You will be well prepared for trading if you know enough information. Seeking advice from others who are experienced traders (just like me :)), can really help you to become successful.

Information is Bliss

At nearly all hours, news on Forex trading can be easily found. Twitter, forums, blogs and the news all have useful information. Information is crucial because when talking about money, you do not want to be left out on what is happening.

Progress and knowledge come in small steps. It is important to be patient and step into the trading market slowly.

Work on tweaking your critical thinking abilities so that data and charts can become a valuable resource. Critical information comes from places that you may not anticipate; coordinate data from any place that is available to you.

Have a Plan

Design a plan for your forex trading. Short cuts may make some money in the short term, but over time they will end up causing problems. To really become a hit you should take time to find out what you are going to do. Develop a plan so you don’t sink.

Keep a notebook on your person when you travel. Use it to scribble notes and information that you learn about the market. This can also be used to measure your progress. Your journal will become a valuable tool, as you can look back to ensure that your information is still accurate.

Before you dive headfirst into forex trading, learn the forex market through a demo or practice account. You should only use a demo account until you are sure you are ready.

Greed is Your Enemy

Check your greed and weaknesses at the door when it comes to trading Forex. Only trade in areas that you truly know about. Before you make any decisions on entering a particular trade, evaluate whether the information you have at hand justifies execution. Enter the market slowly and guardedly.

In the world of forex, there are many techniques that you have at your disposal to make better trades. The world of forex has a little something for everyone, but what works for one person may not for another. Hopefully, these tips have given you a starting point for your own strategy.

Six Steps to Make Money in Forex Market

More than $4 trillion dollar worth of currency is traded every day in foreign exchange market. This is the largest financial market in the world and it is not hard to make money in forex if traders have the essential experience and a good forex trading strategy. Experience comes through time and a good trading strategy emerges from the mistakes, trial and errors, perseverance and curiosity of the trader.

According to a Bloomberg study and a research conducted by National Futures Association (NFA), more than 80% of the retail forex traders lose money. This suggests that trading in leveraged forex market is not for everyone and self-improvement is necessary.

In theory, the concept of forex trading is not very complicated, since there is only one simple decision that trader has to make; whether to buy or sell a currency pair. If the trader believes that EURUSD will go up and buys and EURUSD moves higher, a profit is made.

On the other hand if EURUSD declines, the trader suffers a loss. But in practice, forex trading is not that plain. Human psychology comes into play and meddles with the trader’s decision. Even the best-devised trading strategies and experienced forex traders are vulnerable to the tricky games of human emotions. In this article, I am going to present some useful approaches that are going to improve your odds of making profit in forex market.

Following a Trading Plan

Investors who make a living from forex trading has developed a daily trading plan and this is by far the first step to take if you are convinced that trading forex market is what you want to do in the long run. Following a trading plan with persistent discipline and patient is going to flourish sound trading habits for you. So what are those habits? Keep reading…

Create a Trading Plan

Learn Before Going Live

Forex is very easy to start with. You register with a forex broker, submit the required documents, fund your account and you are good to start trading. This whole process may take between one to three business days. However, just because forex is easy to get into, it doesn’t mean that becoming a profitable forex trader is likewise.

Well, of course, you could get lucky and make money in forex from your first trades however it is for sure that you are going to blow up your trading account eventually if you don’t train yourself. Learning is an ongoing process as the market dynamics could change frequently and traders have to be prepared to accommodate to new market conditions. A successful trader is obliged to know everything that affects the forex pairs, including economic data, central bank policies, technical analysis, political and geopolitical developments.

A significant portion of training comes through trading live account. Since you are trading with your hard-earned money and manipulative emotions are included, you are to get the most efficient and genuine lessons and experience by trading live. However, applying your trading strategy on a practice account before going live is still very helpful and saves you from the risk of losing real money in the case the trading strategy fails.

My conviction is that you have to apply a strategy on a demo account at least for three months with at least fifty executed trades in order to be able to conclude whether it is a profitable or losing one. A good alternative to practice account is a nano account (named cent account on some brokers) where you can trade as low as 10 contracts, compared to standard accounts where the minimum transaction size is 1000 contracts.

Find a Reliable Forex Broker

The training and experience are two essential factors on the way to make money in forex. Say, you have been trading forex market for several years, you have the enough experience. Besides, you are very well synched with the markets. You are following the economic calendar, political developments and central bank policies in a timely manner.

However, the forex broker that you are working with is a not regulated and reliable one. You are not sure if you will be able to get it into your bank account when you profit on your trades. Does it matter if you have ten years of trading experience and discovered the holy grail of forex market but you can’t withdraw your profit to your bank account or the broker doesn’t allow you profit by applying shady practices on its trading platform?

Therefore traders should only open forex trading account with a broker that is regulated by a reputable regulator such as FCA in the UK, ASIC in Australia, NFA and CFTC in the US, CySEC in Cyprus and FINMA in Switzerland. All those regulators impose strict standards and oversee them to ensure the safety of client deposits and the overall credibility of a forex broker. Please check my list for the reviews and ranking of forex brokers from all around the world.

Find a Reliable Forex Broker

Choose a Trading Style That Fits

Every trader has their own trading style and strategy that is suitable to their personality, experience and knowledge. Some traders like trading based on technical analysis and some others on fundamental analysis. Some traders prefer using multiple technical indicators that ara offered on the trading platform whereas only one indicator could be good enough to see where the market will move next for some other traders.

How about me? I can say that I am a trader who predominantly utilizes fundamental analysis for predicting the markets with keeping an eye open on technical indicators and chart formations. I strongly believe that major moves are triggered by fundamental differences between two currencies such as divergence of monetary policy, economic growth, employment and inflation outlook. However, technical factors such as support and resistance may shape the short term or intraday price action thus should never be ignored.

Establish Realistic Goals

Too many eager traders join to the forex market with a fantasy of making thousands of dollars every month with a limited amount of capital. Do you think that this is an objective and feasible goal? This market is the wildest that you could ever see and makes a lot of fake moves such as bear traps and bull traps. Thus setting hundreds of pips as daily target or ten thousand dollars per month with a starting capital of few hundred dollars are not realistic.

Be Patient

Beginner forex traders are inclined to lose their nerve fast if the trade that they executed does not go their way immediately. On the other hand if the trade earns little profit, they get excited to pull the plug early and get out of the market with a small profit. Patience is a great personality trait and this could not be proven more correct than when trading forex. Emotions and human psychology is the key here and every trader should remember that all human beings are exposed to the same feelings.

I also used to fear for being on the wrong side of the market, blowing up my trading account, getting margin call, etc during early days of my trading career. After all, forex trading is about learning yourself, making mistakes and improving yourself on the lessons you get from your losing trades. This whole process takes time and you have to be patient enough to endure the losses, fears and frustrations in order to be able to bring out the forex trader within yourself.

Forex Trading Terminology

In order to be able to profit from market moves and become successful at forex trading, certain forex terms has to be understood. Otherwise an investor would not be able to interpret if a specific economic data, monetary policy event or speech by a central bank member is going to be positive or negative for a currency.

Economic Releases

Employment, growth and inflation are the macroeconomic terms that you are going to encounter on daily basis during your forex trading journey. Since central bank monetary policies are revolving around natural rate of employment, inflation target and economic growth, markets are rattled very often by release of those three economic indicators or by the comments and speeches from central bankers on these three indicators. However, looking at weekly economic calendar, one cannot see term ‘inflation’. Rather the terminology on an economic calendar that refers to inflation is Consumer Price Index (CPI). Likewise, GDP refers to economic growth; unemployment rate, earnings and unemployment claims relate to employment.

Country Specific Terms for Inflation and Employment

Different countries could express certain economic terms in different ways as some central banks give more weight to certain economic indicators compared to others. For example, in the United States, there are four important sets of data on employment which are Non-Farm Employment Change, Unemployment Rate, Average Hourly Earnings and Unemployment Claims of which first three indicators are released bimonthly and the last one is out on Thursday of every week.

Forex Terminology - Unemployment Rate

On inflation, there are three sets of critical monthly data from the United States; PCE Price Index, CPI and PPI. PCE refers to Personal Consumption Expenditures and Federal Reserve Bank uses PCE Price Index for inflation targeting. Fed conducts monetary policy to bring PCE Price Index at or around 2.00 per cent. CPI is Consumer Price Index which involves different basket of consumer goods with different weights compared to PCE Price Index. Last but not least, PPI is Producer Price Index which is considered as a cost indicator that is incurred by producers and will be passed on to consumers in the future.

On the other hand, three important sets of employment data are released from the United Kingdom; Unemployment Rate, Average Earnings Index and Claimant Count Change. Average Earnings Index is equivalent to earnings indicator from the US but differs in a significant way; it is calculated as three month moving average while the US’s Average Hourly Earnings indicator represents monthly change in hourly earnings that businesses pay for labor.

Claimant Count represents number of applicants for unemployment benefits over a month and equals to the Unemployment Claims from the US however as you might have already realized with a major difference; Claimant Count is monthly basis while Unemployment Claims are published every week.

Even though all those economic indicators are pertaining to the same phenomenon, they are expressed using different terminology. A trader must be able to distinguish the difference and know the specific currency that will be affected when those economic data are released. Besides, knowing what an economic indicator actually represents and the importance of the indicator for a central bank would enable traders to predict the magnitude of the influence on the related currency.

Forex Trading Jargon

Trading has its own special vocabulary just like other disciplines such as Computer Science, Sociology, etc… has its own. Following expressions are used by both market participants and central bankers very frequently and understanding their meaning will improve your financial literacy and make you a more profitable trader.

Long and Short

When a trader buys a currency pair or another financial instrument with the expectation that value of the pair is going to raise that trader is called being long. For example, when you buy EUR/USD, you are long EUR/USD. Contrarily, being short indicates that the trader sold the pair with the intention of profiting in the case price of the pair falls.

Bullish and Bearish

A trader who predicts that a pair’s value will go up over time and buys the pair, (or takes long position), is said to be bullish. Contrarily, a trader who predicts that a pair’s value will decline and sells the pair (or takes short position) is said to be bearish. For example, one can have a bullish view on USD and buy USD versus another currency. On the other hand, when a trader has a bearish view on USD, he/she is expected to sell USD.

Hawkish and Dovish

A central bank or member of a central bank is said to have a hawkish monetary policy stance, if she / he touts risks of high inflation and supports hiking rates. On the other hand, a central bank or a member is called to be dovish, if he/she is more worried about weak economic growth and supports lowering interest rates.

Nicknames for Pairs and Currencies

Some pairs and currencies may be called different than their informal names on media, internet and books of which the most popular ones are being as following;
USD = Greenback
EUR/USD = Fiber
GBP/USD = Cable
AUD = Aussie
CAD = Loonie
NZD = Kiwi

Central Banks

Fed = Federal Reserve Bank
FOMC = Federal Open Market Committee, monetary policy-setting body within Federal Reserve Bank
ECB = European Central Bank
BoE = Bank of England
MPC = Monetary Policy Committee of Bank of England
BoJ = Bank of Japan
SNB = Swiss National Bank
RBA = Reserve Bank of Australia
RBNZ = Reserve Bank of New Zealand
PBoC = People’s Bank of China
Buba = Bundesbank

Don’t be surprised if a high profile market analyst says on TV that he/she is bullish on Greenback because of the hawkish policy stance of Fed or she / he recommends short position on Cable due to a weaker than expected employment report from the United Kingdom.

What is the Spread in Forex? Why is It Important?

It is super essential to fully grasp the importance of spread in forex trading since it has a significant impact on whether you are going to be a profitable forex trader or not. In very simple terms, spread is the difference between bid and ask price.  Ask price is always higher than bid price and difference is banked by the broker as a profit. This is the fundamentals of money making for a broker.

When you go to the exchange office in your neighborhood, you will see way higher spreads compared to online forex brokers. Why? It is always pointed out as one of the greatest advantages of leveraged online forex and I would prefer to delve into this topic in another article.

As you have realized by now, forex brokers are not in the industry as saviors who bother to deal with all the mess in order to be able to render you all those awesome services such as leverage, mobile trading platforms, wide range of instruments so that you would be able to invest in currencies even on your phone and grow your capital. Forex brokers’ one and only purpose is to make money out of your trades and spread is the most basic way for them to fulfill this purpose.

What is the Spread in Forex

Wider the spread is charged, higher profit that the broker makes. You have guessed it right, guys. This extra profit for the broker by widening the spread is created at the expense of yours. So there is a zero-sum relationship between forex brokers and forex traders in terms of profit.

Why Does Spread Matter?

You are going to feel the pain on wider spreads stronger if you are an intraday trader or scalper where you are chasing few to several pips on your trades. Here is an example; let’s assume that you are scalper and your strategy is targeting only 5 to 10 pips. Now imagine that Broker A is charging 3 pips spread on EURUSD whereas Broker B is charging only 1 pips.

You are going to earn 2 pips higher on your every EURUSD trade if you trade with Broker B and that is equivalent to almost 50% of your total profit in the case that your take profit target is 5 pips. Thus you can improve profitability of your strategy as much as 50% by just switching from Broker A to Broker B.

Furthermore, spread is where those phony forex brokers generally try to manipulate the market conditions on their behalf. Widening spreads without the consent of the clients to gain more profit is the easiest and most common way of scamming traders in this industry. Spread is where you have to be over cautious for the sake of your capital and future earnings. You should monitor the difference between bid and ask price and compare it with what the broker advertised and offered you upon opening your account.

What is the Spread - MetaTrader

One easy way to monitor the spreads is by enabling Spread section on Market Watch window in MetaTrader platform. Make sure those spreads are what you were offered and charged when you open a new position.

Fixed spread could be considered as a solution against shady spread exercises. There are few forex brokers out there who offer fixed spreads which means that they guarantee that spreads won’t fluctuate at any moment. However, these type of brokers’ earning model poses another risk for profitable traders which I am going to talk about in another article.

Forex Brokers That Offer cTrader

What is the very first thing ever that you have to do on the way to becoming a successful forex trader? Make a guess. It comes before any other aspects of trading such as technical or fundamental analysis, trading psychology, discipline, etc… The first thing you have to do is to log into a trading platform (MetaTrader or ctrader) with your account number and password in order to be able to start trading.

MetaTrader is the King

A super majority of investors are introduced to forex trading with MetaTrader. MetaTrader is the most common trading platform and almost all of the forex brokers offer this particular platform for their clients. Some brokers try to distinguish themselves by offering their own genuine trading software however no doubt that MetaTrader is the king of forex trading platform world and has the biggest share by far. Perhaps the biggest competition to MT comes from cTrader, though the scale of it is very questionable.

What Is cTrader?

For almost 10 years, there was no other third party trading software application other than MetaTrader until cTrader appeared in 2010. Some forex brokers started to offer cTrader in addition to Metatrader for their clients’s use however cTrader’s use is still very fractional compared to MetaTrader.

Forex Trading Platforms - MetaTrader 4

MetaTrader 4

MetaTrader vs cTrader

Advantages of MetaTrader

One of the biggest advantages of MetaTrader over cTrader is its seniority. MetaTrader was first released in 2001 while cTrader came to the market in 2010. This makes MetaTrader is a way better established and accepted platform compared to cTrader.

The other big advantage comes in the form of a bigger range of trading indicators and expert advisors compatible with MetaTrader. There are hundreds if not thousands of technical indicators and scripts could be easily loaded into MetaTrader and utilized by traders while this important feature is very limited for cTrader.

Forex Trading Platforms - cTrader

cTrader PlatformA cTrader

Advantages and Disadvantages of cTrader

cTrader allows programmers to develop technical indicators, expert advisors and scripts using C#. On the other hand, most of the programmers in retail forex trading have got used to programming language of MetaTrader which is MQL4. Therefore, if you ever would like to hire a freelance programmer in order to develop your own customized indicator or forex system, it is much more convenient and easier with MetaTrader.

Another disadvantage of cTrader is the speed. The software feels heavy with a slower execution time and thus with a higher possibility of slippage. This is particularly too bad for forex traders who likes scalping and chase sharp moves following important economic releases.

A Final Word

After all that was said, you probably have guessed which platform I am trading with. cTrader was a good try to bring competition to trading platform universe however nothing about cTrader encourages me to give up on my long lasted loyalty to MetaTrader and switch to cTrader. However, if you would like to see how it does and give it a shoot, here are the some forex brokers that offer cTrader platform;

Forex Brokers That Offer cTrader Platform

Broker Next Step
How Does a Forex Broker Make Money?

Forex brokers are great mediatores, aren’t they? They provide you online access to the vast market of foreign exchange. Thanks to them, you can join the biggest capital market in the world and trade with a very small amount of investment. Commission-free trades, leverage, super tight spreads compared to banks and foreign exchange offices. All those are awesome advantages. You know that everything comes at a cost.

Forex brokers are not in this business for humanitarian causes. They have to make money so that they can survive and keep delivering you those great services. So how does your retail forex broker make money? And why are there so many retail forex brokers out there?

Let me first tell you that forex brokers are generally divided into two different categories.

Market Makers

The first category of the forex brokers is popularly known as “market-maker” and it is believed to be the largest group. Market makers trade in the exact opposite direction of your trade. This implies that those type of brokers make money when clients (you) lose and lose when clients profit. Since majority of forex traders lose money (sorry guys, this is the truth) because of their inexperience and emotional indiscipline, their losses go into the pockets of the market-maker. If the market makers maintain a high number of newbie traders on its platform, they will certainly make a good amount of money on their clients’ losses.

Forex Brokers - Market Maker

ECN Forex Brokers

The second category is called an Electronic Communication Network (ECN) broker. This type of brokers allows you access to the global liquidity pool which are compromised by regulated financial institutions. Your orders are automatically matched and executed at the best price available and the fasted execution time.

Since the broker earns commission fees on every transaction, the more you trade more they profit. Therefore this trading model encourages ECN brokers not to trade against clients or manipulate the trading conditions contrary to the brokers which are B-booking clients.

Okay, lets face it guys. Most forex traders end up losing a lot of money… Some statistics say only %5 of forex traders profit. This makes the market-maker forex brokers model way more profitable than ECN or STP forex brokers. This is why there are by far more market makers than ECN brokers. Okay, hang on now. I am giving you the tip of your lifetime. The best way to detect a market maker forex broker is by spreads and commissions. If a forex broker is offering very very low spread (lower than 0.5 pips) and not charging you any commission, that broker is a market maker with a 90% likelihood.

Beware the Wrongdoings of Scam Forex Brokers

As I mentioned, market makers profit from customer’s losses. So the more you lose, the more they earn. Tell me pals, how could a market maker maximize its profit? By providing its clients with unfavorable trading conditions so that the clients would lose money. They make it exceptionally difficult for their clients to profit by by widening spreads, delay orders and put out stops.

Scam Forex Brokers

This intrinsic conflict of interest between forex traders and market maker forex brokers lies at the very heart of what determines a trader to be profitable or not. If a forex broker is overseen and regulated by a strict and reputable regulator, it is less likely that they would attempt to get involved into anti-client acts. This is the reason why I am emphasizing regulation and regulators in my every single blog post. I should add that none of the top five forex brokers in my list is a market maker.

Best Forex Brokers With the Lowest Spread

Spread is a one of the most important factors which decides whether a forex traders is going to be a successful one or join to the majority of traders and fail. I am going to explain further what exactly is spread and why it is important in an other blog post. Well, all right, definetely spread is very important so what are the top forex brokers with the lowest spread?

First of all, I would like to put forward that when you pick a forex brokers for your trading, low spreads should not be the only or primary criteria. Instead it should be in the bowl of criteria in addition to regulation, leverage, available instruments, funding and withdrawal options.

It is hard to give a crystal clear answer to the question but I can say that forex brokers that offer ECN forex accounts are the right ones to try for those traders who are over sensitive about spreads. I have explained here what an ECN forex account.

Commission and Spread in Forex Trading

As an example, Pepperstone’s Razor account and IC Markets’ ECN account have tighter spreads compared to standart forex accounts. Perhaps, it has not occured to most of you but your account size could also play an important role for the spreads that you are seeing on your forex account in a way that it gives you a bigger bargaining power if you demand lower spreads.

Commission in Forex Trading

A very critical point to note about ECN accounts is the commissions. Forex brokers dont make quotes up themselves, they receive them from a liqiudity provider with certain spreads and in order to be able to make money, they have to widen the spread.

On the other hand, on ECN accounts, you receive the raw spreads which means that broker passes the quotes directly from liqiudity provider to you. Thus brokers charge commissions on ECN accounts to profit and  in some cases those commissions could easily eat up your profit. So I recommend you to make sure that the commisions would be bearable for your trading strategy.

What is Forex ECN Broker / Account?

ECN stands for Electronic Communication Network. ECN forex accounts have lots of advantages for forex traders and it is how I usually trade. Comparing it to standard forex accounts, ECN lets you trade directly with the liquidity provider. So it removes the risk of broker manipulation.

This type of brokers allows you access to the global liquidity pool which are compromised by regulated financial institutions. Your orders are automatically matched and executed at the best price available and the fasted execution time.

Since the broker earns commission fees on every transaction, the more you trade more they profit. Therefore this trading model encourages ECN brokers not to trade against clients or manipulate the trading conditions contrary to the brokers which are B-booking clients.

ECN Forex Broker

Get Direct Access to the Source With ECN Forex Account

In order to make it easier to understand, think of a supermarket and farmer allegory. The farmer provides supermarket with food. You can’t access to the farmer due to either you don’t have the necessary means or you don’t know the address to the farm.

The supermarket has to mark up the price that it pays to the farmer in order to profit. Perhaps sometimes excessively because it has a monopoly around your neighborhood. Imagine that this particular supermarket promises you that it is going to reveal you the address of farmer but with a commission on every product you are going to purchase from the farmer. This latter supermarket could be thought of as an ECN broker.

Spreads are very low because you are dealing directly with the main guy without any middleman. Execution is instant due to absence of market maker interference and any trading strategy is allowed.  All those make ECN brokers ideal for forex trading, especially for traders whose trading style is based on scalping and expert advisors. ECN has been the way for me for long time.

Is Forex Trading Profitable?

I found myself pondering these two questions very oftenly at early days of my forex trading career; is forex trading profitable and is trading forex for a living really possible? I am sure that most of the forex traders begin trading forex with a dream of earning their living by trading currencies on their computer at home. No obligation to wake up early in the morning to go work, no managers, no deadlines.

Every forex trader has the fantasy of financial freedom and flexibility for living wherever they wish and believe me this market has this potential. There are plently of forex traders out there who are living the dream. Though it takes a lot of experience and pain to reach that level of success. Let me please represent you again the fact that %90 of the forex traders are losing all their investment in less than 6 months. So it is not impossible but it is going to take a lot of time and patience.

Financial Freedom

Forex Trading For A Living

As I pointed out in this and this article, it is really simple to open a forex account and begin trading. But it is the being a profitable trader part that is the difficult part. It requires a lot of time and effort to excel at forex trading just like any other endeavor that you would get involved.

Would you become a successful engineer or banker if you are not willing put the necessary effort to work hard and necessary time to train and improve yourself? No. Very same logic goes with forex trading as well.

Forex Trading For A Living

It would be a grave mistake to think that you are going to be a profitable trader by day one. Well, you could make profit at day one but it would be by chance and you would probably blow your account following days. Forex trading is a serious profession like others. Thus you will have to invest combination of these four to become a consistently profitable forex trader; time, money, effort and patience. Unfortunately, there is no shortcut.

Risk Warning: Trading Forex and CFDs involves significant risk and can result in the loss of your invested capital. You should not invest more than you can afford to lose and should ensure that you fully understand the risks involved. Trading leveraged products may not be suitable for all investors. Before trading, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.