Forex ECN Brokers – Benefits of Trading Floating Spreads

As Forex ECN Trading continues to grow in popularity ever since it was made available to the retail Forex trader, the conventional Forex model that of a market maker is clearly losing their market share. ECN brokers tend to offer a certain level of transparency and operate in a business model that is different to that of the traditional Forex model. Besides the fact that with a Forex ECN broker, there are obligations charged per lot traded, another factor worth noting is the spreads which can be clearly different from when trading with a market maker Forex broker.

Spreads are one of the most essential elements in Forex andpite ECN Forex brokers gaining in popularity, there is a major drawback with them, sometimes the way the spreads are displayed. Anyone who has placed a trade with an ECN broker would clearly know that the spreads offered are usually floating or variable spreads.

With floating or variable spreads, the difference between bid and ask price can be anywhere from 0 pips to as high as up to 3 pips . If you consider this same option with a market maker, the spreads always tend to be constant.

So what kind of Forex spreads is ideal to trade with? Variable spreads that are offered by ECN brokers that are known to be volatile or fixed spreads which are known to be constant any time of the day usually seen with market makers?

At the outside, experts believe that the ECN Forex brokers offers some great benefits which should not be overlooked while making a decision on what type of spreads to choose.

Forex ECN Brokers offer the following advantages:

  • Access to true interbank spreads
  • More traders switch from market maker to an ecn broker
  • Availability to trade a wider range of Forex currency pairs, commodities and metals
  • Making use of automated trading tools such as scalpers, hedging tools etc.
  • Trading without any intervention or counter-parties
  • Saving on the lower spreads and responsibilities
  • Instant execution of orders

What's more profitable ECN or Market Makers?

The ECN technology makes it possible for traders to access and trade on the interbank markets which are directly executed. In other words, there are no counter-parties to your trades let alone a dealing desk. The interbank market spreads are usually made up of what is known as a liquidity pool. A network of small to big financial institutions such as global banks, hedge fund institutions and so on.

The primary reason why one gets to see variable or floating spreads with an ECN Forex broker is because of the liquidity pool. Under the floating or variable spreads, what you see is simply an agregation of all different bid and ask prices and a display of only the best bid and ask price to the trader. There are there are times when you will see zero spreads and times when the spreads can go quite high.

While this might be good for traders, the disadvantage is that due to this type of trading model which operates on a transparent no intervention policy during periods of high volatility you might see spreads as high as 3 pips. This is especially true when you trade during economic news releases which can become quite hectic and price variations are insane.

While the huge spreads might be a cause for concern, the fact whether this is an advantage or a disadvantage is highly subjective. For instance, if you are an expert scalper then the floating spreads might be a great way to take advantage of fluctuating spreads in order to make profits from small traders but in large numbers. On the other hand if you were to trade during low or off market trading hours, then the spreads would severely move. Now compare this with a market maker's spreads which usually remain constant.

To answer the question whether floating spreads are good for you or not, the trader needs to first and foremost understand their trading strategy and style and then decide if they want to trade with a market mark that offers steady but fixed spreads or to trade floating spreads that are offered by Forex ECN brokers.

Source by Sophie Delhio

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