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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/

Forex Snippets

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The foreign exchange market dwarfs the combined operations of the New York, London, and Tokyo futures and stock exchanges. According to its size and scope it is many times larger than all other markets. Stats shows that spot transactions and forward outright Forex trading take place in the inter-bank market. 51% of the market is in spot Forex transactions, followed by 32% in currency swap transactions. Forward outright Forex transactions represent another 5% of this daily turnover, with options on �interbank� Forex transactions making up another 8%. Therefore the inter-bank market accounts for 96% of the global foreign exchange market, with the remaining 4% being divided among all the global futures exchanges.

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In the currency market, exchange rates are often predicated on the health of a country's economy. If the economy is robust and growing, the exchange rates for their currency reflect that in higher value. If the economy is faltering, the exchange rate for their currency against most other currencies also stumbles. Knowing that, the following makes sense:
- The currency of countries that produce and export oil will rise in value.
- The currency of countries that import most of their oil and depend on it for their exports will drop in relative value.
- The most profitable trades will involve a country that exports oil vs. a country that depends on oil.
Based on those three points, the experts are keeping their eye on the CADJPY pairing for the most profitable trades, and here's why.
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foreign exchange market



Before the advent of Internet and ecommerce, only big corporations, multinational banks and wealthy individuals could trade currencies in the Forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account. Thanks to advancements in online technology, today investors with only a few thousand dollars can have access to the Forex market 24 hours a day and around 5 � days of a week.

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Most of these can be quite complicated for those who are inexperienced using the Forex. Most professional Forex brokers understand these charts and have the ability to offer their clients well-informed advice about Forex trading.
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