ECN trading always amused me when I read trading forums, and the resounding theme is that those brokers are crooks. While it may be true that some companies are chop shops, the majority of the larger firms are likely providing an honest service.
The excitement for retail trades moving over from equities to forex was the lure of commission free trading. Granted there is spread it is a nice perk.
However, just over several years after the first wave of traders gets accustomed to the foreign exchange, virtually all companies currently are offering an ECN gateway.
The ECN trading implementation stemmed from retrial traders frustration with wide trading spreads. The truth is that the wider a company holds a spread, the more it does eat into trading profits. A general spread on the EURUSD from a reputable broker is two pips. The allure of the ECN is that the spreads are not fixed, and traders can get on the bid and ask just like in the stock market.
The ECN can trade with a spread as narrow at half a pip. This sounds great to any trader that now their spreads are smaller and their profits will increase. However, there are two major problems with jumping on the ECN bandwagon. First, ECN brokers are not making any money now on the spread so they must charge a commission. The commission is reasonable and equates to an added one to two pips per trade.
Let us use the best case example of the commission at the cost of one pip. ECN spreads are not guaranteed. Many people complain about spreads being fixed at two or three pips, yet sometimes this is a blessing. An ECN can trade as low at half a pip but can move up to any level. In a fast moving market, the spread could be over five pips.
If you already have a commission of one pip and the spread is two pips. Now you are paying more than your first broker with a fixed spread of two pips. There are advantages to the ECN. Most importantly, with the open market and multiple liquidity providers, it can give you a better feel for the actual market price. This may well be worth the one pip commission.
It is important to know the difference between a broker with fixed spreads and a broker with an ECN charging commissions. I believe that they are suited for different types of traders. It is important to review your ECN trading strategy and select a broker with the plan that best suits your trading style.
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