Over the past four years I have traded foreign exchange with many companies both in Australia and overseas, throughout this time I’ve experienced the very best and worst of the forex markets and also the best and worst of forex providers in general. I’ve dealt with market makers, fixed spread brokers and on electronic communication networks (ECN’s). Regularly I get asked which sort of forex broker model is the best. To answer this query and share my experiences I made a decision to write this short article on each kind of forex broker model.
Fixed Spread Brokers
There are quite a few fixed spread forex providers in Australia, a few have spreads as little as a couple of pips on the EUR/USD. Trading on a fixed spread can have its advantages as well as disadvantages. One of the key advantages of trading on a fixed spread is that investors are guaranteed reliable spreads during times of market volatility for example interest rate announcements. Volatile times are often the periods during which spreads can widen allot abruptly time and again catching beginner investors off guard.
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In spite of having the benefit of a set spread throughout market instability, fixed spread providers will often quote wider spreads throughout quiet periods, frequently their spreads are a great deal wider than those offered by market markers or ECN foreign exchange brokers.
Trading on a fixed spread can often be good for beginner traders who are not yet accustomed to the wild price volatility of the forex market.
There are a couple of market markers who have given the rest a terrible name by buying and selling against their clients and taking advantage of client losses, however this is not common practice for all market makers only a select few. Generally market makers are capable of offering fairly tight spreads across all the main foreign exchange pairs, however it is important to know that this not always true if you’re looking to trade large parcels or trade around announcements like interest rates or non-farm payroll.
A few market makers are known to widen their spreads by as much as 50 points during times of market volatility, they regularly do this to protect themselves from scalpers looking to take advantage of their tight spreads.
When deciding on a forex broker who is a market maker you will need to make sure that you do your homework and make certain that they are not one of the few that are in fact trading against you and profiting from your losses.
By far the most transparent forex broker model is an electronic communications network or ECN. An ECN broker simply aggregates one of the best price feeds from a variety of investment banks and always shows the best bid or offer. Nearly all ECN providers will charge a commission rather than applying a spread to the normal market price this ensures that you’ll be trading on the real market price as set by the world’s leading investment banking institutions.
There are lots of advantages of forex trading with an ECN broker probably the most obvious being the spreads obtainable; frequently there is no spread or an inverted spread, these are prices not achievable from market markers or fixed spread providers. Throughout volatile times an ECN forex broker will at all times show the best price available, as ECN brokers depend on a lot of investment banks who’re actively trading over these times you will always get the best price and not be subject to extremely wide spreads which you would otherwise get with a market maker.
Of course it is up to you to select type of forex provider that suits you best as each have their very own unique advantages. You must always make your choice based on the trading plan that you use and your degree of knowledge of the market. My individual preference is to buy and sell with an ECN forex broker like IC Markets as I can be confident to receive the best pricing available.