To trade on the forex market you need to use forex brokers. Forex brokers offer you access to the market and a trading platform to complete your trading on. However, there are many traders who wonder which forex brokers they should be using. There are two types of retail forex brokers that you need to know about and they are the market makers and the electronic communications networks or ECNs.
The Use of Market Makers
Market makers are the most common type of retail broker and can be institutional or retail. The institutional market maker can be a bank or a large corporation offering their service to other banks, companies and ECNs. The retail market maker will specialise in offering their rates to the retail trader.
The market maker will set the prices that they offer to the traders. The transactions that they complete on your behalf will be at these prices. The market makers provide some of the liquidity that the forex market is known for. The rates that these brokers use are based on their interests and the ways that they can make money.
The Pros and Cons of Market Makers
To determine if a market maker is the best broker for you, you need to consider the pros and cons that they have to offer. The benefits that you get from the market maker include integrated platforms, user-friendly trading platforms and limited price volatility. There are some traders who feel that these benefits are not worth using the market makers.
The cons of the market maker range from order execution to restrictions on trading strategies. The order execution with these brokers may present a conflict of interest as they could be trading against you. The prices that you get with these brokers may also be worse than the ones you get with other brokers. It is also possible that the market makers manipulated the prices to trigger stop orders. Many market makers frown on scalping and do not allow traders to use this strategy on their trading platforms.
How ECN Forex Brokers Work
The ECNs are brokers that do not have their own trading prices. The network will offer you prices from different market makers and banks. The platform that these brokers offer will have only the best prices that can be sourced. The spreads that you are given will vary because the prices are coming from a number of different providers. As the ECN does not create the prices they are not going to be making money from the spreads. In order to make money most ECNs will charge a transaction fee.
The Pros and Cons of ECNs
There are a number of benefits that you can get with an ECN. The first is that you will always get the best prices for the currency pairs. You will also be offered varying spreads which means that you could find very tight spreads at times. The prices are more volatile which is ideal for certain trading strategies.
The cons of the ECN include the fact that you will get basic trading platforms that are not as user-friendly as the ones from the market maker. It is also harder to determine profits and losses because of the varying spreads. You will also have to pay a commission for the use of the ECN.
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