The forex market represents huge business in the modern age, with an estimated $5.1 trillion on a daily basis.
Accessing this market can be difficult, however, as unlike with stocks there are no fixed locations through which to trade.
This is why forex trading must often be conducted through brokers, who will compete for business by providing a clearly defined channel and route to market through which you can execute your orders.
In this post, we will look at how you should choose a forex broker and the key considerations that you must keep in mind:
Understanding the Various Types of Available Broker
To begin with, we must consider the fact that different types of brokers exist in the modern age. The two main options are market makers and ECN brokers, each of which offers an alternative proposition to traders and a variety of pros and cons.
You may also have heard of STP brokers, which fuse the services of market markets and ECN operatives and can vary in terms of the precise services that they offer.
For the purposes of this article, we will focus on the two primary brokers and asses their core propositions.
In simple terms, market makers are proactive operatives that actively strive to profit by trading directly against your order.
While these brokers generally drive higher levels of liquidity and can tempt traders with superior ask or bid prices, there is also scope for them to manipulate pricing in order to profit from your loss.
The lack of objectivity may be off-putting to some, particularly those who are new to the market and lacking in practical knowledge.
In contrast, ECN brokers deliver an objective and user-friendly service, by connecting traders with optimal pricing to suit their needs.
The way they do this is through online platforms, such as Metatrader4. So, while they do not boost liquidity or always allow traders to leverage the best online charts or competitive pricing, they at least source data from numerous service and enable investors to make truly informed decision.
Given that they also generate their income through fixed and transparent commissions, they will not trade directly against your order at any given time.
Which Broker is Right for You?
With this information in mind, the next step is to leverage this and choose the right broker to suit your needs. In general terms, market makers may be better suited to more experienced traders who are looking to benefit from superior knowledge in the market.
Those who have a greater appetite for risk and reward may also benefit from using market makers, as they will be more willing to have operators trade against them in order to access more competitive bid and ask prices.
In contrast, ECN brokers offer a far more transparent service that simply connects traders to well-resourced prices. This minimises the opportunity to maximise profit, but it does provide greater assurance for novice or risk-averse traders.