Forex Ecn Broker Trading - Important Tips To Remember
The Forex broker market is made up of two types of brokers
. Market Maker forex broker and ECN Forex broker. The former is a type of model where the forex broker makes their own markets. In other words, the bid and ask prices are created by the broker. Under the market maker model, the forex broker takes counter position against your trades, also known as hedging. Therefore in this model there are two outcomes, when the trader wins, the broker loses and vice versa. As obvious from this, the biggest disadvantage is that if you end up winning too many times, chances are that the forex broker could either shut down your account or give you re-quotes.With a Forex ECN broker, the market is transparent. This means that due to the electronic network, the bid and ask prices are made by the participants, known as liquidity providers. The liquidity providers are nothing but financial banks and institutions that the forex broker has a tie up with. Of course, besides the big institutions, individual traders also make up the market.
Trading with an ECN broker offers many benefits but here are some important aspects to bear in mind before you decide.
Speed of execution with ECN Brokers
If you try placing simultaneous trades with a market maker and a forex ecn broker it will be quite evident that the trades placed with the ecn broker are much faster. This is one of the most important points to bear in mind. Due to the transparent model and the fact that you are trading in the live markets, forex ecn brokers usually offer what is known as market execution. Meaning that your trades are executed at the current market price.
Due attention must be given to the speed of execution especially in times of volatility this can go against you. Imagine you place a sell EURUSD order at 1.2465 and after execution a few milliseconds later you find the EURUSD pair to have reduced to 1.2460 it would be a trade that is already going against you.
Variable or Floating Spreads
Floating or variable spreads simply mean that the spreads are not fixed and therefore they can be variable based on market conditions. The general rule of thumb is that during peak market hours, the spreads may vary due to more number of participants in the markets. On the contrary, the spreads might not change much during off market hours, such as trading the USD when the US session is closed.
A market maker forex broker usually offers fixed spreads which some traders are comfortable with as this helps protect them against market volatility. On the other hand if you want to make quick profits using scalping for example, it might be a problem.
Commission based trading
Forex ECN brokers charge a commission for every lot you trade. Unlike market maker forex brokers who charge the spread (difference between the bid and the ask price). Commission based trading varies from one forex ecn broker to another and typically ranges between $3 per lot to as high as $10 per lot. Also some forex ecn brokers might have a requirement of trading a minimum of 1 lot, which is 100,000 units. This might be huge for first time traders using the ecn platform. A market maker on the other hand allows trades to be as low as 0.001 or 100 units.
Minimum Capital/Investment Required
Forex ECN brokers usually require the minimum deposit of $1000 and above. This is true if you were using the ECN MT4 trading platform with an ECN bridge. However if you were to trade on another platform such as Currenex, then the typical minimum capital to maintain is upwards of $20,000. This might be an huge investment to put up, especially if you are looking to trade in forex for the very first time. A market maker usually offers micro accounts and can go as low as $1.
Both Forex ecn brokers as well as market makers tend to bring with their their own drawbacks. The decision to opt for a market maker or an ecn is entirely upon the trader and their trading strategies and requirements. Doing a thorough deligence before you start trading will help put you on the right path to success.
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