Choosing an ecn forex broker is the best way you can start your forex trading career

Choosing an ecn forex broker is the best way you can start your forex trading career

Ecn forex is an essential concept which needs to be addressed more often because it can make the difference between winning or losing in forex.ECN means Electronic Communications Network.Basically with an ecn forex broker you have direct access to a very large pool of liquidity providers which allows you to trade in a very efficient way . Before digging into the nitty gritty of ecn forex it is important to understand the mechanism of a dealing desk.

Many brokers you will find online are called Market Makers. Market makers have a dealing desk which means that they take the other side of your trade. This means that there is conflict of interest because if you win they lose. This also means that the risk of hitting your stop loss very quickly and always failing to reach your profit target is greatly increased. In essence they "make the market" and as such have a precise idea where your stop loss and profit target are. And through stop loss hunting they can easily manipulate their currency prices and absorb slowly but surely all the money that you have in your trading account.Given that these market makers also make their profits through the spreads from the bid/ask prices, these spreads tend to be relatively less competitive.

In contrast ecn forex brokers offer very competitive spreads because they have access to multiple liquidity providers.More importantly ecn forex brokers only take the volume of orders and channel it to the best possible match elsewhere in the world. They do not trade against you and so there is no conflict interest.

So what happens in fact is that you trade in an anonymous trading environment through your ecn forex broker who has access to the largest institutional traders in the world. For example, a small forex trader trading with an ecn broker can have his buy order filled by "Bank 1" but his sell or close order for this trade filled by "Bank 2". As it happens, the best bid and ask is always displayed to the trader. Let us take a look at an example:

Assume there are two banks Bank 1 and Bank 2.

And in this example Bank 1 buys (bid) at 1.3521 but sells (ask) at 1.3523. Bank 2 buys (bid) at 1.3522 and sells (ask) at 1.3524

This is shown as follows:

Bank 1 1.3521 1.3523

Bank 2 1.3522 1.3524

From here the best bid and ask prices for the tightest spread is displayed to the retail forex trader and is as follows:

Client price: 1.3522 1.3523 (1 pip spread)

.

Forex Trader 1 buys at the best ask price from Bank 1 at 1.3523 instead of 1.3524 from Bank 2.

And Forex Trader 2 sells at the best bid price of 1.3522 to Bank 2 instead of 1.3521 to Bank 1.

.

From the above table you can get an idea of the process. Prices are streamed from multiple liquidity providers to an aggregation engne which then chooses the best buy and sell from the streamed prices. The best selected prices are posted to clients.Ecn forex is definitely more advantageous than brokers who have a dealing desk. It does not only give more security but also offers very competitive spreads to the small forex retail traders

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