The following article aims to provide:
- Information about how your Broker choice can make a huge difference in your trading
- What to avoid, and the crucial things to demand when looking at your broker's qualities
This article in not meant to be a complete guide about choosing a Forex broker, but there are a few important things we would like to mention which can greatly affect your trading, whether you think they affect you or not. Remember that your broker is the most important external associate of your trading business. Depending on the way they choose to handle their own part, they can either provide the strong foundation for your own trading business, or they can cripple it slowly and painfully, or even destroy it in an instant when it matters the most.
Before we get overly dramatic due to the stories we hear from time to time, we should clarify that changing brokers is not a difficult task if you need to do it. Even if you have to change brokers more than once in order to find the qualities you should be looking for, in the end you will be very glad you did it and your bank account will thank you too. But changing a dozen brokers will not make any difference if they all belong to the same category and handle your orders in the same way, so before you go ahead and try a new broker make sure to know what qualities you should be looking for.
Changing a dozen brokers will not make any difference if they all belong to the same category and handle your orders in the same way
Starting from the absolute basics, your broker might be a market maker, an STP (straight-through processing) or DMA (direct market access) broker, or an ECN (electronic communications network) broker. The differences in the quality and reliability are huge, and they are not always directly visible or easily verifiable by you by solely looking at their platform or their website. If we had to describe our opinion in one sentence, then we would have to say that on one side there are the true ECN brokers, and on the other side there are all the others. Why be so strict? Well, because you can either choose to have the optimal environment for your orders to the degree possible, or you are willingly (or unknowingly) accepting a harmful environment that can severely affect your performance. This does not mean that by switching to an ECN broker it will by itself make you profitable if you have no idea about how the markets truly work, but it does mean that if you are already on your way to profitable trading there is almost nothing that might stop you or interfere with your progress in any significant way, as is more than common with other types of brokers. And if you are using Metatrader for placing your orders, you already have viable options for switching to an ECN broker without even having to change platform. But as recommended in another article, you should find an alternative platform for doing your charting and evaluation, and you can still use Metatrader with an ECN broker for placing your orders.
Without going into extensive details which can easily be found online, we want to clarify that market maker brokers by definition take the other side of your every trade. They do not have to stick with the opposite side of the trade, they can offset it at any time in the markets, but what can also happen is that they can stay on the other side of your trade and essentially trade against you, which happens to be the usual scenario. This means that in this case they win when you lose, and they lose when you win. That might not sound so incredibly bad until you realize that the market maker displays whatever price they want to their own "market" of clients. Yes, they can modify the displayed trading price, their spreads, and much more in order to either hit your stop order prematurely, or to prevent price from reaching your take-profit order. And what might surprise you is that this can frequently be done legally, even with your own consent which was provided when you signed that thirty-page contract during account opening. Of course they can only manipulate their own price within a safe distance from the actual (real) interbank market price before it gets dangerous for them, but do not be surprised if you hear about the occasional brief 10-20 pip divergence between a market maker's price and the real price in the markets. No matter how briefly this happens (even for a second), and even if it is for just a few pips, your nearby orders remain at the mercy of someone that gains when you lose. Allowing this to happen willingly means that you underestimate the effect it has on your trades, i.e. you most likely believe that the price feed you receive from a market-maker broker is always "real". It "usually" is very close to the "real" price (especially when it doesn't matter), but "usually" will not help you when it matters the most, like when your stop order can be easily hit artificially by a slight manipulation of their displayed price, even for a fraction of a second.
Allowing this to happen willingly means that you underestimate the effect it has on your trades, i.e. you most likely believe that the price feed you receive from a market-maker broker is always "real"
But how much better does the situation get by choosing an STP and/or DMA type of broker? This can range from a little better all the way to no improvement at all. STP brokers do not have a dealing desk and they are not market makers, they just pass your orders directly to someone else. The key here is knowing who that someone else might be, which is not something you can just find out, and anyway it can change frequently and at any time. Trading through an STP broker and having them pass your orders directly to someone else does not mean that you have reached any "real" market (as real as it can be in the decentralized forex environment), it simply means that your order ended up with either some market maker, bank, or broker that needs it for their liquidity or for any other purpose, including their need to fill their own orders.
And if you think that the story ends there then try searching for information regarding the "B-book", where your broker essentially places you in the "loser" category and keeps your trades in-house, and so in effect trades against you behind the scenes while your orders never really reach the market. While the market maker model is expected to do that and the client is supposed to be aware, it sounds absurd when they claim to be a better type of broker but run a B-book behind the scenes, separating their clients to those whose orders reach some kind of market and those whose orders are silently kept in-house to be traded against. Even with the supposed DMA brokers which are a step in the right direction, the market (of the described "direct market access") you are being provided with, can be a liquidity provider's "local" market or the market between a number of such providers and their partners, assuming that your order ever reaches that market. Even in its true and best possible form, the STP and/or DMA trading model and respective market(s) can probably be considered as a simple subset of the true ECN model, and imagine that is the best case scenario which is still quite rare.
The true ECN trading model provides access to a "real" market, at least as close to "real" as it can get today. The Forex market is very decentralized, and although all sub-markets move in the same general direction, the more "local" the market your orders end up in, the more likely they are to be used to feed someone else's appetite as described previously. The ECN model in some ways is the exact opposite, and depending on your broker's ability and willingness to join and aggregate numerous price feeds from different markets and participants with diverse interests and agendas, it can provide you with a thick, anonymous market where a large number of participants can trade with each other with the same "rules" and transparency that your own orders will receive too. Those participants include anyone from banks, institutions, other brokers, professional traders, large and small clients all the way to the smallest retail clients. Anyone can place orders (even between the spread, thus changing the spread), and anyone else can take the other side of any trade by entering an order into the market. In a real ECN market no one can display a manipulated feed to you in the same way it can happen in market maker models, the price feed is aggregated from a very large variety of sources and you only see the best price available. Anything worse than the best price is not even seen on your platform because it is simply irrelevant.
Best price means in the direction you want it to be, i.e. cheaper buying and more rewarding selling for your orders, which no matter the direction of your trade always works in your favor. If you want to buy, you buy from the cheapest seller, and if you want to sell, you sell to the buyer offering you the most, and that is based on real market orders, not any artificial feed displayed by a market maker. The result of this goes beyond the obvious. For example, for your stop-loss order to ever be hit, even the "best available price" has to get worse than your order. This means that every single participant (including the one providing the current best price towards the direction you want), has been actually filled or have moved their order to another price, and so essentially the whole ECN market actually moved towards that direction. This is a real market move and price moved to a different point for the same reasons it always does in a real market: one of the two sides (buy/sell orders) was exhausted at that point, the spread widened momentarily towards the exhausted side as a result, and then other orders filled part of that gap, eventually resulting at another (same, similar or different) spread at the "new" price point.
Anyone who wants to reach your stop order should have to manage to go through the rest of the market Supply or Demand found in your level first, not just display an artificial manipulated price feed
So if anyone was still offering a better price than your stop, then the market price would not reach and hit your stop. Anyone displaying worse prices (against your benefit) than the current "best" price remains irrelevant to you until those best price orders are filled and the second best orders become the new best available price. If anyone wants to hit your stop order or to prevent price from going somewhere, then they actually have to do it by placing real money in the market and fill all the orders that stand between your stop order and current price, they cannot just "display" a hypothetical price and hit your order as a market maker can do. They have to actually get exposed to anyone else that might want to trade in the opposite direction.
The fact that only real money orders matter and everyone's orders are exposed to everyone else's, while only the best price of the aggregated feeds can affect your orders, creates an environment where your orders are as safe as they can be. However, this only means you are safe from "fake feeds" and other unfair practices or unnecessary obstacles. Whether your order is also "safe" from the real market Supply/Demand is a completely different matter, and is exactly what we aim to do as Supply and Demand traders by identifying these possible imbalances in the market and using them to boost our entries while simultaneously helping to protect our stops.
This is why a true ECN Broker is so important to any prudent Supply and Demand trader, because when we use a level to our advantage we know that the fate of our trades depends on our ability to evaluate the market and that anyone who wants to reach our stop orders has to actually manage to get though the rest of the market first before even reaching our orders. But on a market maker model, the displayed price might be manipulated to briefly hit your stops (that were even carefully placed behind a level), while the "real" price might have not even pierced the back side of the level to reach that point. So using tight stops and entries around a level while using a market maker broker might prove to be frustrating instead of pleasurable. As a minimum, it would force you to use widened stops and earlier entries just to try to reduce the possibility of "unfair games" near a level, thus increasing your risk and reducing your reward, and you still wouldn't be able to enjoy the transparency of a true ECN environment.
If you decide to look for an ECN broker please keep in mind that there are some false claims out there, so make sure to investigate well online before opening an account and also try a demo for a while. Observe the spread on EURUSD during the main market hours, you should see zero (0.0) pip spread quite often, even if it only lasts for a moment. Additionally, your broker should only be paid in commissions, not by artificially widening the spread.
IC Markets True ECN spread (MT4)
Any EURUSD spread that refuses to go below 0.1 pips quite often (i.e. reach 0.0 pips spread momentarily) especially during the main market hours, is not a good sign. Also you might want to try entering limit orders between the spread during a time of quiet market. If your broker refuses to accept such orders then you probably need to run away. Some brokers tried to re-brand themselves as ECN brokers while offering very little that is true of an ECN market. This even caused some ECN brokers to re-brand themselves as "true ECN", probably trying to point out that not everything branded as ECN is a true ECN environment.
Also, have in mind that despite the "main" category a broker belongs to, they might offer accounts depending on the client's preference. There are so many novice traders out there still preferring a widened-spread hidden-commission account than a transparent commission account that has forced even quality brokers to try to accommodate this demand. But that should not stop you, if you find a legitimate ECN broker and choose to open a true ECN account for placing your orders, the rest becomes irrelevant to you.
Any order commissions of a real ECN broker end up costing you much less than any "low spread" broker with "no commissions"
A last but very important thing to understand and remember, is that any order commissions of a real ECN broker end up costing you much less than any "low spread" broker with "no commissions". Here we are not even considering the "games" played against your trades, we are only considering the actual calculated cost of entering and exiting the market depending on your broker's displayed price. On a true ECN broker where spreads can even reach zero on the majors, you frequently only pay the commission only. But even when there is a real spread in the market as is completely natural and expected, effectively you pay the minimal variable spread and the commission. So if your true ECN broker's commission is e.g. $7 per $100,000 round-trip order (otherwise $0.07 per $1000 round-trip order), this could be thought of as the equivalent of a 0.7 pip spread (for any order size). So your real cost is 0.7 pips + the real market spread (e.g. 0.0 to 0.3 pips for EURUSD). With a total round-trip equivalent cost of 0.7 to 1.0 pip per EURUSD trade (which includes both the real market spread and your broker's commission), you might find it hard to find a market maker broker offering you anything better. And if you actually do, that is usually a very bad sign if you consider that the price they show you might be far from the real market price. For example, you might see a spread that is "very low" but the price you see is already a few pips worse than the market price you would get from an ECN broker. In this case you would be paying the supposed "very low spread" plus the hidden difference from the real market price, to which your market maker broker will revert at any time instantly making your trade lose a few pips, while possibly also trading against you. The broker would anyway be buying from the market at one price and then selling to you at another artificial price but for a "low spread" (on top of the artificial price difference), as if the spread even matters in such a case. The clients would be happy for the "low spread" when in fact they might have paid 2, 3, or 5 times more without even realizing what happened behind the scenes.
Some people do not like seeing the commissions on their platforms, as if the costs will magically disappear. Or if they are consciously choosing the larger "low spread" over a commission then they probably think the cost is lower, which is not true. If you consider that there is no real professional trader using a no-commission spread-only broker, while the masses generally prefer those brokers and avoid the commissions, that alone should make things clearer for you. There is no broker on earth working for free, so the way they make their money should be transparent and should not create any conflicts of interest between them and you. Conflicts of interest and "low spreads" will cost you more than any true ECN commission that is paid for access to the real market spread, and most importantly, for access to the real market orders which make up the true Supply and Demand in your market.
At Enhancer Signals we use the True ECN account (MT4) provided by IC Markets for all our Forex orders. Click for more info.