Foreign Exchange Broker Comparisons

Even the newest trader knows that there is a lot of choice when it comes to selecting a foreign exchange broker. In fact, there are so many of them and so many factors to take into account, that many beginners become so confused that they just pick the one that they see most often advertised.

But that is not a great way to choose your foreign exchange broker. Often, you will end up with a new, untried company who are pouring tons of money into their advertising budget. So where do you start when it comes to picking out a service that will be reliable and right for you?

A good way to start is by considering what type of forex broker you want. There are two main types, so you can easily narrow down your options this way.

The two types are ECN (Electronic Communication Network) and Market Maker. Let's look at the advantages and disadvantages of each of these so that you can be clear about which would suit you best.

ECN Brokers

ECN companies operate a big online network which brings together prices offered by all types of traders from banks to retail traders and indeed the Market Makers. The best bid and ask prices are displayed in their forex trading platform. They fluctuate all the time as offers are matched.

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The spread will fluctuate too because everything depends on what others are offering. For very liquid pairs like EUR/USD there may be no spread at all at busy times and the ECN broker does not make money from the spread. So they charge a commission or fee on each transaction.

Advantages of ECNs

- Best prices

- Better for scalpers and day traders, since the prices are more volatile and ECN commission structures mean they usually do not object to scalping

- Less slippage at times of news releases

Disadvantages of ECNs

- Trading platforms are not usually so user friendly

- They may not offer so many charts, indicators and news alerts

- Variable spreads mean that it is harder to calculate your risk and profit when setting stop losses and profit targets.

Market Makers

Market makers are very different because they set their own prices which they then offer to you. Usually these will be based on the price that they can get (or expect to get) on an ECN. They act as a middle man between you and the ECN.

Market makers usually have a fixed spread and will make money from that, but they may also make money by taking your order and passing it up to the ECN to be matched at an advantageous price. Sometimes you may suspect they are just taking your order themselves and trading against you, in which case (since they control the price) they can trigger your stop loss so that you lose, or they may not want your business if you are too successful. Avoid this situation by checking feedback from other users before you sign up.

Advantages of Market Makers

- User friendly platform, good for beginners

- Plenty of charts and technical analysis tools

- Free news feed

- Will almost always offer a mini or even micro forex trading account.

Disadvantages of Market Makers

- They may trade against you (big problem if they do)

- 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 often not as good as ECNs.

In summary: ECNs are preferred by most serious traders but minimum deposits may be higher and you may have to pay for separate charting services. Market makers can be good for beginners because they will accept small investments and provide plenty of tools to make trading as easy as possible. If you choose a market maker for your foreign exchange broker, check feedback in forex forums to find one that has a good reputation from users.