One of the key principles that you should follow to succeed in forex trading is to choose a reliable broker. It’s not the forex market that’s at fault, but your choice of broker. The forex market is filled with scam brokers trying to mislead traders in every manner possible. As such, it is your responsibility that you do your proper research when choosing a broker. Furthermore, you also need to determine whether you are going to deal with a dealing desk or a non-dealing desk forex broker.
Dealing desk or DD brokers are basically market makers, meaning they trade against their clients to make money. They provide liquidity directly to their clients, meaning if a trader opens a buy order with them, they automatically place the sale order of the exact trade to complete the client’s trade.
On the other hand, non-dealing desk (NDD) brokers never trade against their clients. Instead, they source liquidity for their clients from outside, including banks, hedge funds and institutional investors. Furthermore, non-dealing desk brokers are of two types:
- Straight Through Processing (STP) Brokers
- Electronic Communication Network (ECN) Brokers
The major difference between the two is that STP brokers source the liquidity from different external liquidity providers, whereas ECN brokers have their own network of liquidity providers, which includes banks, hedge funds and more. Also, there are cases when the broker offers via both external sources and an internal pool of liquidity providers; these are known as hybrid NDD brokers.
So, How To Identify A True ECN Forex Broker?
The forex market has all sorts of brokers; while some are genuine, others are merely con artists looking for their next prey. Then there are some brokers who pretend to be ECN brokers but in reality are not. Therefore, if a broker claims to be an ECN broker, it becomes mandatory to solidify their claim. For this, you need to be able to distinguish between the real ECN forex brokers from the fake ones. Here are some tips that you can follow to do the same:
- It is compulsory for an ECN forex broker to mention in their service agreement with the client whether they are a true ECN broker or ECN broker by association. Thus, you can go through their service agreement, and if this clause is missing, it’s a case that the broker might be masquerading as an ECN broker. It is a mandatory requirement for all ECN brokers to disclose this information to all their clients.
- Check the spread offered by the selected broker. The reason is that a true ECN broker will only offer you variable spreads. Therefore, if they claim to be an ECN broker and offer you fixed spreads, chances are they are fake.
- Regularly monitor your slippages and check whether the broker has allowed any negative slippage. If yes, they might be just pretending to be an ECN broker, while in reality, they are market makers.
- Check if there is any restriction on order placement by the broker. This can be done by placing an order of more than five standard lots. If your order gets rejected, the ECN broker may be fake.
Video Source: ForexSignals TV
- Another essential factor that can help you find whether your broker is a true ECN is by checking if there are any restrictions on limits for “Stop Loss” or “Take Profits”.If there are restrictions, they might not be a true ECN broker. Furthermore, an ECN broker will never restrict you from scaling, which is also a good way of identifying one.
- Last but not least, check if the broker is actually a non-dealing desk. ECN brokers never trade against their clients, while market makers do.
Conclusion
An ECN broker offers liquidity to clients sourced from a networked pool of providers. The tips mentioned above will help you identify a true ECN broker if you are interested in dealing with one. It’s worth noting that the right broker goes a long way to ensure you earn good returns on your investment in the forex market.
