In forex trading, one of the key principles of success is working with a reliable broker. The image of the forex market has been distorted with information that sometimes misleads traders. The forex market should provide traders with potentially profitable opportunities rather than the current statistics that float around in leading online media.
As such, choosing the right type of broker becomes very crucial, and to do this, a trader must first decide whether they are going to work with a dealing desk (DD) broker or a non-dealing desk (NDD) broker.
Dealing desk brokers are basically market makers, which means that they can trade against their own clients for profits. They are the ones who provide liquidity to their clients, such that if a client places a buy order, they can place a sale order of the same trade so that the client’s trade is completed and executed.
On the other hand, non-dealing desk brokers do not trade against their clients. Instead, these brokers source for liquidity from external provides, which include banks, hedge funds, and institutional traders. There are two types of non-dealing desk broker. Straight Through Processing (STP) brokers and Electronic Communications Network (ECN) brokers.
STP brokers source for liquidity from different external providers whereas ECN forex brokers have a networked pool of liquidity providers composed of hedge funds, banks, and institutional investors. In some cases, there are brokers that offer liquidity through both the outside sources and a pool of liquidity providers. These types are brokers are called hybrid NDD brokers.
So, how do you select you ECN forex broker?
The forex market attracts all forms of players from genuine brokers to con artists. There are some brokers that masquerade as ECN forex brokers, but they are not. As such, it is important to know how to separate the real brokers from the fake ones. Here are a few tips to guide you through.
- An ECN broker will state in their client agreement whether they are a true ECN or an ECN by association. It is a requirement for any broker claiming to be an ECN forex broker to disclose this information to their clients. A failure to do so suggests that it is possible the broker is just masquerading as an ECN forex broker.
- Check the spreads offered by the broker. If the broker has a package that offers traders fixed spreads, then that is a sign that it is not a true ECN broker. True ECN brokers provide variable spreads to their clients.
- Monitor the regularity of slippages and check to see whether the broker only allows negative slippage to affect client trades. If this is the case, then the chances are your broker is not a true ECN broker.
- Check to see whether the broker has placed some restrictions on order placement. You can do this by placing an order of, say more than 5 standard lots. If it gets rejected, then the chances are that the broker is not a true ECN.
- Another thing that can help you to determine whether your broker is a true ECN is restrictions places on ‘Stop Loss’ and ‘Take Profit’ limits. If you broker has placed some restrictions on how far from the current price a trader can put the stop loss or take profit limit in a trade, then the chances are that broker is not a true ECN. Furthermore, most non-ECN brokers also restrict traders from scalping which means day-traders have limited opportunities to make profits.
- And finally, check if the broker is an absolutely non-dealing desk. Market makers are dealing desk brokers and place trades against their clients. ECN brokers are absolutely non-dealing desk brokers.
In summary, an ECN broker provides liquidity to the clients sourced from a networked pool of liquidity providers. Critics of some retail brokers have claimed that some of the liquidity providers sometimes have a conflicting relationship with the broker, which in a sense compromises their credibility. But in most cases, this claim is never proven. And while there is no fool-proof method for forex trading, starting up with the right broker can go a long way to making you profitable in the market.