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Choosing a Forex Broker

By Grace Cheng

As you may already know, foreign exchange (Forex/FX) is an unregulated market that is not traded on an exchange, which means that prices you see and get from one broker could vary from those of another broker. There are mainly two types of brokers. One type is an ECN (Electronic Communications Network) and another a Market-Maker.

Market-makers "make" or set the prices on their systems based on what they think is best for themselves as the counter-party. This is because every time you sell, they must buy, and when you buy, they must sell to you. This is why they can give you a fixed spread since they are setting both the bid and the ask price. Many of them will then try to "hedge" or "cover" your order by passing it on to someone else; however, some may decide to hold your order, and thus trade against you. This can result in a conflict of interest between the retail trader (you) and the market-maker.

ECNs, on the other hand, pass on prices from several banks and market-makers, as well as from the other traders in the ECN, and display the best bid/ask prices based on these input. This is why sometimes you can get no spread on ECNs, especially in very liquid currency pairs. How do ECNs make money then? They do so by charging you a fixed commission for each transaction.

Here are some of the pros and cons of ECNs and market-makers:

Market-Makers

Pros:

* Usually give free charting software and news feed
* Prices can be "smoother" and less volatile than ECN prices (this can be a con if you are scalping or trading very short term)
* Often have a more user-friendly trading and analysis interface

Cons:

* They may trade against you. In that case, there will be a conflict of interest between you and them
* The price they offer you may be worse than what you could get on an ECN
* It is possible that they may trigger stops or not let your trade reach your profit target levels by manipulating prices
* During news, there will usually be a large amount of slippage; their systems may also lock up or not allow order placing during times of high volatility
* Many of them discourage scalping and put scalpers on "manual execution" which means their orders may not get filled at the price they want

Examples of some market-makers:

http://www.goforex.net/forex-broker-list.htm#MMECNs

* 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 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 scalping

Cons:

* Many do not offer integrated charting
* Many do not offer integrated news
* Many of the 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 pips beforehand.

It is important that you carefully look into the pros and cons of each 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 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 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 broker as you need for 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.

http://www.gracecheng.com/

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There are risks in trading foreign currencies. Like any investment, forex investing carries substantial risk. You can lose all of your money and foreign currency trading can be extremely volatile. Make sure you thoroughly research futures trading and foreign exchange trading entirely before setting off on your adventure.

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One method used in forecasting foreign currency exchange is called technical analysis. This method uses predictions by looking at trends in charts and graphs from past Forex market happenings. This system is based on solid events that have actually taken place in the Forex in the past. Many experience Forex traders and brokers rely on this system because it follows actual trends and can be quite reliable.

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In the field of Forex trading systems, mechanical trading systems are techniques that make trading decisions for you. You input the trading data, and the system generates a response that indicates the appropriate action. You buy, sell, or do nothing depending upon the formulas this system uses and operates upon. The latest computer versions of these mechanical systems are complete "black box" operations (you cannot have all the emotion involved when you follow a specific system). Perhaps, that is one of the reasons that these systems are called mechanical systems. But that doesn�t mean that they aren�t intelligent enough. Turn the computer on, start the system, and it updates your database, and generates trading recommendations, and places your orders directly to the brokers.

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