Forex Brokers – an Introdction

Most currency exchange brokers offering accounts to retail traders operate in one of 2 ways. It is unlikely that you will be signing up with a broker who has their own dealing desk. Much more likely, you will be having a look at either an ECN broker or a market maker.  

1. ECN forex brokers

These companies use the Electronic Communication Network, a global online marketplace that caters for many differing types of trader from retail to the gigantic banks and market makers. The spread on the ECN is tiny, sometimes almost non existent, so brokers using this network will typically either add a couple of pips to the real spread or charge commission or costs per deal. You can often get better costs from an ECN broker but take an in depth look at their fee structure and consider what it might mean for you on a normal deal.

ECN brokers are usually better for scalpers and will even welcome them because they’re dealing at once with a big market. Slippage is not so much of a problem either for scalping or at times of forex news reports. They’re also sometimes well controlled.

On the other hand, the variable spread can mean more doubt when setting stop losses and limit orders. ECN brokers also tend to offer fewer charts and can have a less user friendly trading platform because they don’t seem to be especially trying to attract amateurs. They tend to presume that you know what you do and have a paid subscription to do your technical research somewhere else.

For ECN brokers check out FXOpen.

2. Forex market makers

Market makers sometimes offer you their own costs, based mostly on the price that they are expecting to get on the ECN. When you open a deal they need to match it in the ECN to cover their risk. Obviously here there’s room for the price to modify in the instant between you clicking the button and the deal going on to the ECN. This is slippage. It can mean that you do not get the price that you expect, which can be a difficulty, especially for scalpers who are usually looking for very small profits from each trade. Because of this scalpers and market makers are not a good mix and might be unwelcome.

On the positive side, market makers could be a good choice for an amateur. They will usually provide good technical research, stories alerts, a user friendly platform and a demo account. They can almost always provide a mini forex trading account so that you can start trading with a couple of hundred greenbacks or less. This is a really significant factor for many new traders choosing forex brokers.