Does Your Forex Broker Really Want You To Profit?
Topics: forex, forex market maker, forex broker, ecn broker, electronic communications network, currency
‘See a need, fill a need.’ It is this sentiment that actually led to the creation of the retail forex market, where individuals with as little as $500 are able to trade the largest market in the world.
Less than a decade ago in 1999, retail or individual forex trading simply did not exist. Trading the foreign exchange markets was pretty much restricted to big banks, hedge funds, and high net-worth individuals simply because of the capital requirements for trading. The minimum trading size was usually $1,000,000 USD.
However, as information began spreading about the profit potential that forex trading holds, more people wanted in, even if they could not trade on the traditional interbank market because they did not have huge sums of money to work with.
There was a growing need for forex market access for those investors who had around $10,000 to $50,000 to invest or less, and so the retail forex market was born. New forex brokers began (and still are) springing up rapidly to meet this high demand, yet this aspect of forex trading is still highly unregulated.
Many of the forex brokers out there operate under the ‘market maker’ or bucketshop model, and these are the guys who actually have NO interest in seeing you succeed as a trader. Why, do you ask?
Well, it is their job to make forex market access available to smaller investers (hence the term market maker). In order to do that, they need to be able to fill every order that you place on your trading platform, and they do this by taking the opposing position of every trade that you make.
Well, since they will have an opposing position open for every trade that you make, they will actually lose money every time you have a winning trade. Imagine that you bought the EUR/USD pair because you think the Euro is going to appreciate. Well, in order to provide market access to you, the broker will have to take a position where they are selling EUR/USD in order for your trade to go through.
Since they are in a sell position here, it is in their best interest for the Euro to depreciate in value, or to see you lose on the trade. And keep in mind that your forex market maker will never, ever reveal this to you, as they count only a small minority of traders actually fully understanding their business model, and thus the majority of traders will fall victim to it.
The other type of forex broker business model is called an Electronic Communications Network (ECN), and it is more trader-friendly simply because the broker does not have a vested interest in seeing you fail. In order to understand how this type of setup works, remember that the goal of any broker is to provide market access and liquidity.
A forex market maker does this by taking an opposing position to every trade you place, but an ECN broker does this buy routing your trade order through their communications network and matching it with another trade (for example, if you placed a buy order on a certain currency pair, the ECN would match you up with another trader selling that same pair).
ECN brokers are really your best choice, as it is much easier to make money using a broker that offers this type of trading setup. Because they have no vested interest in seeing you lose money and instead only care about providing a network where they can match your orders with other traders, you would never have any problems withdrawing your profits as you might have with a market maker.
If you are a forex trader and are looking for good free information on how to trade profitably, there is a large collection of free forex-related ebooks and guides on my site, available at TheForexSurfer.com
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