Forex Trading Lessons - What You Must Know About Your Forex Brokers

05/10/2009 - Finance Even if you have not been trading forex for very long or you have just started, you will know that there are plenty of forex brokers out there in the market, right? When you trade, the prices you see and get from your own broker will vary from other brokers, and the spreads will be different too.

Though there are many brokers in the forex market, but there are only 2 types of brokers. What are they? One of them is Electronic Communication Network (ECN) while the other type is Market Maker.

ECN has a big network where they take prices from several banks, institutions, market makers or other forex traders in the ECN. From there, they will be able to filter out the best bid/ask price and display in their forex trading platform. Usually for very liquid currency pairs like EUR/USD, USD/JPY etc, sometimes there are no spreads but then you will have to pay for fixed commission per transaction that you do. That's how they earn money from forex trading.

Market makers, on the other hand, they 'decide' or set the price based on their systems where they think it's the best for themselves and the other parties. So when you buy a currency pair, they must sell it to you and vice versa if you sell.

Many of the market makers will try to cover your orders by passing them to somebody else who trades opposite of you or they will just take your order themselves and trade against you. That's why sometimes you will see a spike in your trade and your trade was stopped out. Oops.

Below are the pros and cons for the 2 types of forex brokers.

ECNs

Pros:
- You may get the best price since the prices come from different sources
- Scalping forex strategy may be viable as the prices are more volatile
- Slippage can be prevented during news release if the ECN supports Stop-Limit orders
- If they are a true ECN, they will not be trading against you but pass your order to other customers or other banks

Cons:
- Their trading platforms are not as user friendly and will take more time to learn and get used to it
- Many ECNs do not offer integrated news feeds
- Many do not offer integrated forex charts
- Stop loss and profit targets may be more difficult to calculate as the spreads are variable

Market Makers

Pros:
- Have a more user friendly and technical analysis platform
- Charting platforms and forex news feed are provided free most of the time

Cons:
- They will trade against you (big problem), they may just trigger your stop loss if it's small
- There may be huge slippage during news release and orders may not be allowed during high volatility
- The price they offer you may be less attractive than ECN and orders may not be filled at the price you wanted