Could Switching to an ECN Broker be the Key to Success?
In forex, the type of broker available is split into two distinct types: market makers and ECNs. Both broker types have their merits, and some traders prefer one specific type to another.
However, recently, we have seen a huge surge in the number of people using ECNs and swearing that they are the key to their success. Could this be true, and, if so, why?
Trading Anonymity
If you buy and sell using an ecn broker then your trades are anonymous. Although most casual traders may not see the merit in this, it is something that is preferential to people who trade using an aggressive strategy which they do not want to be uncovered by others.
For these traders, anonymity is everything, and ecn brokers are the only option.
Tight Spreads and Improved Execution
Unlike on market makers, spreads are not fixed on ECNs where the spread varies depending on trading volume and liquidity.
Because ECNs get quotes from a number of sources, the spread will change constantly and could even become non-existent. If you’re day trading then the size of the spread becomes incredibly important, and should make your job a lot easier.
As well as this, an ECN broker can provide you with improved execution on your trades because you’re dealing with a liquidity provider and not a single entity. Because the sole focus of the ECN is to match up your price with the opposite side as quickly is possible, the execution is greater.
With an ECN, you’re also able to get a sense of the market depth, because you’re able to see how deep the liquidity is. As well as this, because you’re able to see trades, you may be able to spot patterns occurring, bolstering your knowledge of the markets.
Increased Volatility and Price Movements
Finally, because prices are not fixed on ECNs, there will be incredibly large price swings when the markets are at their most volatile. This is especially good news if you’re either a day trader or scalper who requires such volatility in order to make money.
Once again, all of this is made possible because of the depth of the liquidity provided by the ECN. Of course this combined with the speed of the execution increasing provides the perfect opportunity for anyone who likes to dive in and out of the markets at pace.
With an ECN broker, you can make huge amounts of money in only a few seconds, particularly in times of high volatility. It is also worth noting however that this process works both ways and, if the market moves against your trade, you could end up with substantial losses.
To conclude, recently we have seen a number of people swap to an ECN broker because of their anonymity, tight spreads and improved execution features.
Ideal for short-term traders and scalpers, ECN brokers are incredibly helpful for those looking to dive in and out of the markets but, be aware; the markets can still turn against you with devastating effects.
