Is Ecn Forex Trading Right For You?
Seasoned forex traders are usually well versed with the different forex trading models such as market maker or ECN or DMA and so on
. However, to a beginner in forex, such factors don't quite play a decisive role when chosing a forex broker. In fact, most beginners tend to look at factors such as the minimum deposit amounts required, leverage, the trading platform itself and so on.Its usually after a couple of months of trading forex online, do beginners actually start realizing the differences in forex brokers. If you were to tell a beginner about the benefits of trading with an ecn forex broker, they would in all probability not end up understanding what you are saying.
In this article, we focus on beginners and explain what ecn forex trading is all about and if it worth a beginner's time and investment to opt for an ecn broker rather than trade with a regular fixed spread broker.
Forex Brokers - Market makers v/s ECN Brokers
The forex broker business model is primarily divided into two kinds. Markets makers are known as fixed spread brokers. Such kinds do not charge any commissions and most of their accounts are also known as 'commission free' accounts. Instead, these brokers make their profits by marking up the spreads (the bid/ask prices) you get to see and hedge them accordingly. In other words, market makers tend to profit by trading against the client/trader.
An ecn broker on the other hand, provides the bid/ask prices that are aggregated from different liquidity providers such as banks and financial institutions. They do not take counter positions against your trade and neither do they make money from the spreads.
Instead, ecn brokers charge a fee per lot that you trade. These are also known as commission only accounts.
As obvious from the above definitions, ecn brokers are usually preferred and are considered to be the high end of the forex broker circuit. They offer transparency on their prices and also do not have a 'conflict of interest'
However, ecn brokers trading is usually reserved for the more advanced or well experienced trader because the prices offered in this model is usually quick and fast and thus can make or break your trade if you do not know what you are doing.
The market maker broker usually offers a controlled trading environment. Meaning that you won't see much of volatility. However with such control comes certain restrictions such as not being able to scalp the forex markets and so on.
As a beginner in forex trading, it is quite clear why most traders would prefer to trade with a market maker forex broker for the above reasons. In fact it is considered as stepping stone when most traders start off with market maker brokers and eventually move on to ecn brokers.
Traders should note that while it is ok to trade with a market maker forex broker, they should only make use of their time with such a broker in order to get a grasp on the ins and outs of forex trading. In other words, gain the experience required in order to graduate to trading with a forex ecn broker.
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