Saturday, October 11, 2008

Forex Trading ECN Lesson

Pros:
You can usually get better bid/ask prices since they come from several sources
Variable spreads between bid and ask may give no spread or tiny spreads at times
If they are a true ECN, they will not be forex trading against you but will pass on your orders to a bank or another customer on the other end of the transaction.
You will be able to offer a price between the bid and ask with a chance of it getting filled
If they support Stop-Limit orders, you can prevent slippage during news by making sure that your order either gets filled at the price you want or not at all
Prices may be more volatile which will be better for forex scalping

Cons:
Many do not offer integrated forex charting
Many do not offer integrated forex news
Many of the forex trading platforms are less user-friendly
Because of variable spreads (between bid and ask,) it may be more difficult to calculate stop loss and profit target in forex pips beforehand.
Examples of some ECNs*:


http://www.mbtrading.com
http://www.efxgroup.com
http://www.hotspotfx.com
http://www.interactivebrokers.com


* Some of these "ECNs" may not be true ECNs, and you may be going through a dealing desk. It is impossible to verify for sure because of the lack of regulation governing forex brokers.

It is important that you carefully look into the pros and cons of each forex broker before choosing the one which best suits your needs. You may also wish to have several broker accounts to mitigate the risks, and so that you can compare bid/ask prices and trade on the broker with the best prices for the direction you wish to forex trade.

Because of the unregulated nature of forex, US brokers are not required to keep your money in an untouchable account that only you can have access to if they were to collapse.

As customers of Refco (was one of the world's largest forex brokers) found out, their unprotected accounts made them unsecured creditors, and thus are less likely to get their money back than those who had given secured loans to Refco. What this means is that the customers' money was used to pay other creditors.


The moral of the story is this:


Deposit as little money with your forex broker as you need for forex trading, and withdraw your profits when they exceed a certain amount. Keep the rest of your trading capital in your own bank accounts which are probably government-insured.

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