What is an ECN Forex broker and why should you use one? ECN stands for Electronic Communication Network and basically means a network of traders connected via the broker.
When you trade with a retail broker like Zecco you’re basically trading mini lots that aren’t full size trading contracts. Your retail broker then offsets these mini lots against full size contracts using Interbank.
In effect you’re not actually trading the real currency markets you’re trading in a mini market created by your broker. He then acts as your market maker giving you quotes and spreads and makes money when you buy and sell.
This has a number of advantages, the main one being you can trade smaller lot sizes. The minimum trade on Interbank is $100,000 that’s around $10 per pip and well beyond most traders especially if you’re just starting out.
There are some disadvantages to this set-up however. Because a retail broker has total control of the simulated market, some traders believe they trade against their clients and manipulate the bid ask spread for their own benefit.
There is some truth to this theory, but I’ll try to explain. Most retail brokers employ an army of traders to back up your trades on the real Forex market using Interbank. Of course they’re not stupid, if you make a trade that’s going against the momentum of the market they’re not likely to back that trade up in the real market, they’ll just wait until you get stopped out.
In that sense the retail broker is in effect trading against you, as he’ll be backing up trades that are moving with the momentum. But it’s not the broker’s fault you misread the market, if you had been trading with the market your broker wouldn’t have been trading against you, he would have taken the same side as you. Lesson number one when trading Forex, never blame your broker for your losses.
If you trade with a US ECN Forex broker you can eliminate this simulated market altogether and play with the big boys. ECN brokers charge a flat fee per transaction instead of making money on the spread, so there’s no opportunity for them to trade with or against you. They simply pass your trades directly to Interbank and take a small commission for doing so.
The downside is your individual trade size is huge, minimum $7 per pip so even a modest trader will need to deposit at least $20,000; most traders are going to need at least $50,000 to make any strategy work.
So now we’ve established the differences between ECN and retail brokers, which one is right for you?
Well the answers simple, if you’re an experienced trader and you trade many times a day you would be much better off joining an ECN broker. Trading direct will not only work cheaper in the long run but you’ll be able to use more advanced strategies like scalping, where your looking to exploit volatility within the bid, ask, spread.
Of course you’ll need to have a deposit big enough to cover the trades, personally I don’t use an ECN broker as I only trade part time to supplement my income. And I doubt its worth trading with an ECN broker unless you’ve got a minimum of $100,000 to invest.
For everyone else you’ll probably find a retail broker more than meets your requirements. Sure you’ll lose bit on the spread but that’s more than made up for with smaller trades enabling you to keep your float more liquid.
Here’s a Forex ECN brokers list to help you choose the perfect broker.
|Broker||Min Account Size||Rating||Min Position Size||Max Leverage||Regulated
|ECN Alpha Limited||$250||0.1||1:100|
|EES FX ECN||$500||0.01||1:50|
|You Trade FX||$100||0.01||1:300|