There are so many forex broker companies and so many features to take into account that it seems difficult and confusing for beginners forex traders to choose a forex broker company, which fits their trading needs. If you search in Google, you will find many websites that compare forex brokers but you will find out that there are a lot of controversial reviews and comments. For example you may read a comment for a broker which will say that it is the best company there is and then another one that it says that the same company is a scam.
The first thing you should check is if the broker is regulated by an official organization and then when you exclude those that are not regulated you should decide what type of forex broker you will choose.
The two main types are Market Makers (MM) and ECN (Electronic Communication Network).
Below are the advantages and disadvantages of each type.
Market Makers (ΜΜ)
Market makers act as a middle man between you and the ECN. They have a fixed spread (with the exception of extremely volatility moments like news releases) and they make money from the difference of the spreads that they offer you and the smaller spreads that they get from the market and the ECN. They do not charge you with fees since they make their profits from the spreads.
Advantages of Market Makers (ΜΜ)
- A plethora of charts and technical analysis tools
- User friendly platform, easy for beginners
- Free news feed
- Most of them offer a mini or even micro forex trading account. (this means that you could open an account even with a few hundred dollars)
Disadvantages of Market Makers (ΜΜ)
- They may trade against you (The majority of MM use hedging to counter your position so you have nothing to fear but there are some small ones that take the opposite position to your trades which leads to a conflict of interest between you and your forex broker)
-Some of them do not allow scalping or making many trades in a short time of the day
- Slippage: you may not get the displayed price if they cannot match it on the ECN (slippage can be huge during news announcements)
- Prices are usually not as good as ECNs.
ECN companies run a huge online network that brings together prices supplied by all kinds of traders, from banks and financial institutions to retail traders and even other broker companies like the Market Makers. There is no fixed spread but there are bid and ask prices which are displayed in their forex trading platform. The spread depends on what others traders are offering. For very liquid pairs like EUR/USD and USD/JPY there could be zero spread during times of high trading volume. ECN brokers do not earn money from the spread, instead they charge a commission or fee on each transaction or on an amount of trading volume
Advantages of ECNs
- Best prices
- Better for scalpers and day traders, since they normally do not object to scalping and day trading
- Less slippage during news releases and moments of high trading volume
- Best prices
Disadvantages of ECNs
- They may not offer so many charts, indicators and news notifications
- Variable spreads makes it harder to estimate your risk and profit when setting stop losses and profit targets.
- Trading platforms are not user friendly
-Minimum deposits are too high for the beginners
-You may have to pay for charting services
To sum up: ECNs are chosen by most professional traders but they are probably not the best choice for the beginners since minimum deposits are too high and it is not easy to use their trading platforms (at least in the start) but if you start making consistent profits and becoming a professional forex trader it is advisable to open an account in an ECN broker and take advantage of all the benefits. Market makers are probably the best choice for beginners since even someone who knows nothing about online trading platforms could start trading after some minutes and additionally you can open an account only with a few dollars. Before you choose any forex broker company and start trading with real money you should first open a demo forex account and test the trading platform of the forex broker in the markets conditions but without risking your money.