As you may have understood by now, the forex trading is a profitable activity and it is tempting to those that want to quickly multiply their hard earned money. The increased popularity of forex trading around the globe has led to the mushrooming of online brokers that offer trading platforms. This makes it difficult for you to choose the right broker to work with. However, it is crucial for succeeding in currency trading.
ECN expands to Electronic Communications Network and it creates a marketplace for individuals and organizations around the world to enable them to bid against each other. Forex experts use electronic communications networks for providing access to other participants in the currency markets.
ECN brokers combine the price quotes they receive from other participants and offer their clients with tighter ask/bid spreads. You may not otherwise have access to these spreads. As ECN brokers just match the trades between the market participants, they don’t trade against their clients. Some unscrupulous retail forex brokers are renowned for doing this. Further, the spreads offered by ECN brokers are narrower compared to those that offered by other brokers. Hence, ECN brokers charge a fee or commission for each transaction.
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As such, it is beneficial to work with ECN brokers as they won’t trade against you like the market makers. They make money through commission. They don’t really worry as to whether you make money or not. However, many brokers pretend as though they are ECN brokers for establishing a client base. You have to be wary of such brokers as they can take away your hard earned money. The aim of this post, therefore, is to help you choose a true ECN Forex broker.
There are three types of ECN brokers: True ECN, ECN because of Association, and Outright Bucketshop.
True ECN brokers offer a completely transparent trading platform where retail traders, banks, and other institutions compete against one another by sending different bids and offers. This gives you access to the best deal at any point in time.
Forex brokers that are categorized as ECN type because of association are level two brokers. They connect you and the marketplace or true ECN brokers. Such brokers offer their own trading platform so that they can manipulate your trades as and when required.
The Outright Bucketshop types are scammers. Their only goal is to steal your money. You should avoid such brokers at all costs.
When there are so many forex brokers out there in the market trying, choosing the right one can be difficult. If you can take the aspects discussed below into consideration when choosing a broker, you will end up with the right one.
#1: Go through the broker agreement with a toothcomb. This document will tell you whether the forex broker is a true ECN or an ECN because of association. All regulated forex brokers are required to state clearly as to what type of broker they are. Disclosure of this information to their clients is obligatory for such brokers. Further, true ECN brokers also offer variable spreads. Therefore, an ECN broker that promises established spreads may not really be a true ECN broker.
#2: An ECN broker will not have a dealing desk. It is the market makers that work through a dealing desk. This means that they can trade against you. The best way to find out whether the broker is of the dealing desk type or not is by opening a demo account, or even a real account, and then testing them out.
#3: Brokers that do not allow scalping or entertain day traders are not true ECN brokers.
#4: If the broker you have chosen to work with is always giving negative slippages, then you must understand that the broker is not of the true ECN type. Slippage is normal in the case of a true ECN broker. However, there should be both positive and negative slippage, not negative alone.
#5: The best ECN forex brokers allow you to place as many trades as you want. They do not promise big discounts at the time of opening an account.
#6: Finally, the best ECN brokers will always update the pricing every minute. This is because the live prices come directly from the markets.
Having discussed as to how you can identify a true ECN broker, it is time for you to decide whether an ECN broker is the best choice in your specific case. In general, ECN brokers ask for a higher minimum deposit amount than other types of brokers. Further, mini-pip traders never play around with ECN brokers. Actually, an ECN broker is similar to an interbank trader.
There are only a few good brokers in the market. You can easily find them on the Internet. It is very clear that these brokers want to attract only serious forex traders that have sufficient capital for backing their trades.
Non-ECN retail forex brokers offer varying spreads. This is because they make money through spreads. They do not charge commission. ECN brokers offer tighter spreads and send your order to the interbank. This way you can be confident that you are trading authentic traders.
A market maker type retail broker always places trades on the other side of your trades. When you work with an ECN broker, you will have banks, insurance pools, hedge funds or other specific speculators on the other side. As the buy and sell spreads are negligible, ECN brokers are best suited for scalpers and day traders.
It pays to work with a true ECN type broker in your forex trading career. If you apply the information provided above, you would be in a better position to identify the right broker for yourself. The above information will also help you to distinguish genuine brokers and scammers. You will need to put in some effort and time to become good at identifying the best ECN broker to trade with. However, be prepared to meet the high demands of ECN brokers in terms of minimum deposit and trading volumes. If you are able to meet these needs, then an ECN broker is the best option for you.
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