One of the most basic questions when it comes to Forex trading is what type of broker to use. The answer of course will depend on your situation but let’s look at the main difference between an ECN and a standard account. ECN stands for Electronic Communication Network, simply meaning that computers are connected to each other. It’s a bit of a broad term, but when it comes to Forex trading, it can be somewhat advantageous.
The main reason why using an ECN can help you is that it offers liquidity through a network. In other words, there are various bids and offers out there that are available for trading, meaning that the spread between ask/bid can be quite tight. For example, you may see spreads as tight as breakeven. You can buy or sell at the same price, but usually there is some type of commission involved.
It is because of this that you must pay attention to commissions, because they can be a bit expensive if you aren’t paying attention. In general, the commission works out to be about one half of a PIP. Ultimately, that is cheaper if you are a more short-term trader and have a several in and out positions. However, you may be thinking that even a longer-term trader can take advantage of this, and while that’s true to a point, the reality is that it isn’t as advantageous for a longer-term trader as it is a short-term trader. This is because a longer-term trader doesn’t have to worry about the cost of transactions so much.
Another thing that you should be aware of is that liquidity can dry up occasionally. For example, if you have the Nonfarm Payroll Numbers coming out, a lot of traders will choose not to be in the marketplace. While your typical spread on the network might be 0.2 pips in the EUR/USD pair, right around the announcement you may see something closer to 15 pips. Obviously, that can drastically change your profitability if you aren’t careful.
As a general rule though, the network will keep relatively tight spreads most of the time, especially if it is a larger network because there are more traders involved. Ultimately, a profitable trader can take advantage of either type of broker, an ECN or standard broker.
As a general rule, a standard account is generally thought of as one with the fixed spread. The broker is the counterparty to any position you put on. It’s not always the case, but overall it tends to be. The EUR/USD pair might be offering a spread of something like two pips, and while most of the time that is more expensive than an ECN, when it comes to news related events it can save you quite a bit of trouble.
The downside of course is that if you are a frequent trader, you might be paying something like 1.5 pips extra per trade. People do not pay attention to the cost of execution, which is a killer over the long term if you are not careful. However, if you are more apt to have a position on for days or weeks, at this point neither is going to make much of a difference as you don’t have a lot of cost involved.
Pay attention to costs
Figure out which broker you need based upon the idea of expenses. At the end of the day, the only thing you need to worry about is whether or not the broker can give you a decent and reliable fill, and of course whether or not it is fair. Forex brokers have come a long way over the last 10 or 15 years and are much more reputable. The days of the wild west are gone, so really at this point most traders will find that they can use either an ECN or a standard account and make money.
If you are worried about the type of broker, the only time it really should come into play is if you are a scalper. Otherwise, any difficulties you run into should not have anything to do with the broker.
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