Understanding The Two Different Types Of Forex Brokers
Topics: forex, forex trading, forex market, foreign exchange, currency trading, forex broker, market maker
If you are trading the forex market on a retail or individual level, there is a very slim chance that you will be able to participate in the interbank market.
Typically, the smallest trade that can be placed on the interbank market is USD $1,000,0000, so really only high-net worth individuals could possibly have the trading capital to participate in this segment of forex trading.
The smaller part of forex trading is called the retail or individual forex market, and anybody can trade this market with as little as $500 due to the existence of retail forex brokers.
It is, however, important to understand the two different types of forex brokers that you will encounter when you are navigating the slightly murky waters of forex so that you can grow your money and not lose it.
The two different types of forex brokers are called ‘market makers’ and ‘ECN brokers’ (ECN stands for electronic communications network). The most typical question that many traders ask initially is ‘Which one is better?’ and it would probably be best to say that ECN brokers are better for the simple reason that market makers have a vested interest in seeing you lose money trading (as you will see below).
First, let’s break down how each of these two different types of brokers are set up.
Let’s begin by making sure you understand the reason that these brokers exist in the first place: they exist to provide forex market access to people who have a willingness to trade but do not have access to vast reserves of capital necessary to participate in the interbank market.
Simply put, the only role an ECN broker is to match buyers and sellers by putting orders through their communications network. ECN brokers play no role in actually providing liquidity, all they do is provide a medium where buyers and sellers can find each other, so they also play no role in manipulating market prices in any way.
The goal of the forex market maker is to provide liquidity to potential traders, and the way that they do this is to take the opposite position on every trade that you make. For example, if you want to buy 1 lot of EUR/USD, some other party will need to place a sell of this same size in order for the trade to go through.
This is what the market maker does, and they will be on the opposite side of every trade that you make.
Also realize that forex trading in this manner is what we call a ‘zero-sum’ transaction, which simply means that for every time that you make money, some other trader has to lose money, and vice versa.
So what does this mean for you if you choose a market maker as your foex broker? It means that every time you have a profitable trade, you take money away from your broker, and your broker will make money every time you have a losing trade.
Now your market maker will probably never admit it to you, but because they stand to profit every time you lose on a trade, it is actually in their best interest to see you lose.
It is, however, still very possible to make money for yourself if your broker is a market maker, though if you become highly profitable then they may come up with some BS excuses for why they cannot give you your money. So if this ever happens, and your broker starts giving you fake excuses like ‘We cannot guarantee this fill on your trade because you entered the market at a volatile time, blah blah,’ it is time to find a new broker!
If you are a forex trader and are looking for good free information on how to become a profitable trader, there is a large collection of free forex-related ebooks and guides available at TheForexSurfer.com
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