Foreign Exchange Broker: What You Need To Know

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When it comes to choosing a foreign exchange broker, there is a lot of information that a trader needs to know. There are so many brokers out there these days since the market opened up to retail traders. Many brokers have dropped their minimum investment so that the average person can get into forex trading, and even more new companies have sprung up as if from nowhere.

So how do you choose between them? One way is to look at their business model, which can have a big impact on your individual trading results. Here are four types of foreign exchange broker that you need to know about.

1. NDD (No Dealing Desk)

In the old days, brokers had their own dealing desks through which they would place orders for clients who normally called in with their instructions. The time and skill that this required meant that clients had to have a large investment fund to make it worth the broker’s time. That is why the ‘standard’ forex account size usually has a minimum investment of $10,000 to $50,000 or more.

However, as we have seen, the internet has changed all of that. There are still some brokers who only operate standard size accounts but they are much less likely to use their own dealing desk. Instead, traders manage their own accounts through the broker’s trading platform. That is the software on their website that you can access to place your trades. The platform connects up with a liquidity provider that matches the order with a counterbalancing order in the market.

The spread in this situation is naturally low because of the competition between liquidity providers. However, brokers will often increase it a little so that they make money on the deal.

2. ECN (Electronic Communications Network) Brokers

The ECN is a large network on the internet which matches trades. Most market makers connect to the ECN but some brokers will let you access it directly. Again the spread here tends to be low but brokers may add to it with fees.

3. Market Makers

Unlike traditional brokers, market makers will first match your order themselves and then cover their risk by opening a position in the electronic communications network. This allows them to set their own prices – not only spread, but the currency prices that you see on their site.

Market makers have some disadvantages. The main one is that in some cases, especially if you are using scalping strategies, they may not be happy if you are successful. This is because if they did not fully cover your position, they can lose out on your successful trades.

The main advantage, on the other hand, is that they usually have the lowest minimum investment levels. This means that most beginners start out with a market maker rather than a traditional foreign exchange broker.

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