Forex brokers are entities that connect forex traders with the forex market. By so doing, forex brokerage firms offer traders the opportunity to get into contact with the banking network where currencies are traded and execute their trades. These brokerages allow traders access into the market using their trading platforms. In addition to that, forex brokers perform functions in the market that traders will not be able to do on their own. Some of these tasks include:
Regardless of what you have heard, trading the forex market is not an easy thing to do. You need a channel that simplifies all of the complexities into something more understandable. And this is what forex brokers are meant for. However, it is always recommended that you choose your forex broker carefully.
Basically, there are two types of forex brokers in the market. They include:
Each of these brokers can be used to trade the forex market under specific varying conditions. Also, the plan for the successful operation of forex businesses as provided by these brokers is designed such that it caters to certain classes of traders.Here are some of the things you need to know about each of the brokers mentioned above.
An ECN broker (sometimes referred to as a direct market access broker or non-dealing desk broker) is a forex brokerage that matches trades between market participants by using electronic communications networks (ECNs) to give them direct access to liquidity providers at the interbank market. ECN brokers do this by furnishing traders with price quotes from liquidity providers and giving their clients the technology to trade these quotes directly with the major banks without interference.
ECN brokers pass on prices that are provided by the liquidity providers in the forex market (banks) straight to the trader. This is known as the Level II, institutional-type pricing. The trader has the choice of selecting from the several prices that are displayed on their network, and then submits an order, is then transferred directly to the liquidity providers for processing and completion. This transparent model of pricing is the reason why ECN brokers are known as the most transparent in the market. Also, as typical of any financial market, their spreads usually fluctuate, and the trader is expected to begin trading with a large capital base. Capital requirements typically start from $10,000 up to $50,000 depending on the broker.
ECN brokers excellent execution speeds, and it is not uncommon to find that spreads are non-existent or inverted for either one or two seconds. Similarly, they allow their clients to capitalize on the best quotes possible by providing them with tools that further expedites trade execution. However, traders are required to acquire professional training before they begin trading using ECN brokers. Just putting money into their account won’t be enough to earn you the profit that you desire.
While ECN brokers usually charge lower spreads than market maker brokers, they compensate for this by charging extra commissions on trade entries as well as exits, which is calculated as a fixed amount of the entire value of the trade executed.
The following are the pros of ECN brokers:
The cons of using an ECN account include:
Most forex brokers you may find online may be classified as forex market maker brokers. The term “market maker” is derived from exactly what the brokers do: making the market. Market maker brokers are sometimes known as dealing desk brokers. There are many ups and downs associated with this type of brokers. By definition, market maker brokers are on the other side of a trader’s trade. that is, if the trader is the buyer, then they are the sellers. If on the other hand, if the trader is the seller, then they are the buyers. In a nutshell: it’s hard to be on the same page with market marker brokers, due to their failure to match up buy and sell orders from individual traders. Once all the buy orders have been exhausted at any given price, the market will move. In any particular forex pair, the forex market maker is guided by some buy and sell orders.
With market maker brokers, the prices offered by a liquidity provider is normally routed to a dealing desk operated by the market marker. The dealing desk broker then marks up the prices slightly and send them to the trader as a single price quote. When the trader initiates a trade, the trade then goes back to the market maker broker who executes it at that level. In this manner, the trader is not actually buying these prices from the liquidity provides, but rather from the market maker broker.
While there seems to be a conflict of interest with market maker brokers, there is a reason why they usually take the opposite sides of the trade. They do this in order to create an even flow of volume and trends. This method works out in the interest of both parties. Without dealing desk brokers, retail traders would be locked out of the forex market.
The type of broker you decide to use will have a serious impact on your trading performance. It is essential that you carefully consider the pros and cons of each broker before you decide which one to trade through.