An ECN broker can be very profitable for certain types of traders; however, whether it is worth it or not depends on your personal trading style, experience, and financial goals. These brokers differ from the traditional options in several ways. First of all, rather than serving as the counterparty to your transaction, the broker gives you direct access to a network of other participants of the market. This includes other traders, banks, hedge funds, and liquidity providers, among many others. In simple terms, the broker connects sellers and buyers, who participate in the trades in real time and under the best market prices. ECN brokers charge a commission on their services instead of taking the spread as their profit.
Pricing is the main advantage of using an ECN broker. The latter aggregates prices from different market participants, which means that the spreads are much tighter. As a result of this, traders do not need to pay as much as they would have to with a traditional broker. However, they still need to pay the commission to their ECN broker, which is the only difference in terms of the type of broker being used. The overall cost of trading is much lower, which is particularly important for traders who do not keep the trade position open and close their transactions as soon as they receive profit. In addition, since there is no fixed spread, the costs can be reduced significantly under high liquidity conditions. The main advantage of ECN trading is the fact that the orders are not subject to any dealer intervention and are executed in real time. This is particularly important for scalpers and/or high-frequency traders, as even minor delays can affect their profitability. In addition, the ECN broker does not participate in the trades directly and is not incentivized to play against the client.
That said, there are some things to consider. Firstly, many ECN brokers charge higher commission fees than market makers meaning that, for smaller traders and lower trade volumes, this could reduce overall profitability. Secondly, since the ECN spreads are variable, in times of low liquidity or high volatility that is, the times of major economic events, the spreads can widen by a lot, which will definitely effect the trading costs. Making Money with Forex ECN Anyway, the use of an ECN broker does not change the way one can make money with forex trading: this still requires sound strategies, discipline, and strong risk management. Here is what using an ECN broker can do to potentially increase one’s profit:
Making Money with Forex ECN
Scalping and day trading: when using high-frequency strategies, like scalping, the tighter spreads and real trade execution of ECN brokers can become quite beneficial. Since forex scalping means that the trader makes a lot of tiny deals, the ability to pay less in commissions and do these deals right away makes a great difference. In addition, ECN brokers provide real-time order book data meaning that the scalper can see the market depth and the real liquidity;
Access to liquidity: the ECN broker works both sides of the market, providing trades for both selling and buying trades through to counterparty, which ensures access to a greater liquidity. In addition to Tier-I banks, the liquidity providers can also be other traders, Hedge Funds, and major financial institutions which, in majority of cases, provide better pricing. Furthermore, the ECN technology makes slippage less common, which means that a traders’ order is very likely to be executed at the price he or she expects, especially in highly liquid markets, like EUR/USD. This can make a great difference for large-volume traders or those who demon on trading in the times of major economic announcements.
Transparency and Trust
The primary advantage of the ECN broker is that traders enjoy the full price transparency. The cost that you see on your trading platform is directly streamed from the other market players. You are trading at the real market price which can be a confidence boosting factor that the transaction is not going to be rigged. This also means that there is no price manipulation and that brokers don’t make a profit if their customers lose on trades, just some of the practices which are founded on broker’s interest to make a profit, that you can be exposed to with traditional market makers.
Spreads and Commission Costs
At the same time, while forex ECN brokers offer much tighter spreads than their market maker counterparts, traders have to keep in mind the additional commission costs. Even though this may be more beneficial than wider spreads in the case of the market makers, depending on the broker and your trading volume, the difference may not be that drastic in order to be salient. For higher leverage trades or simply having more capital, the commission costs can be easily justified, while for smaller trades or just fewer trades made in the month, there may not be that much room left for the profit.
Perfect for Experienced Traders
ECN is thus usually more beneficial for the traders which already have some experience with trading. When one is able to capitalize on tight spreads, it is possible to significantly increase their profits and reduce their costs through frequent trading. It may also take some time to get used to it since the spread will widen and contract again, depending on the overall market conditions. Once a trader gets accustomed to trading one way, they will be able to maximize the profits many ways because of the no-dealing desk nature of the business, strictly faster execution and notably lower spreads from the start.
Note, however, that traders should be aware of the commission structure and how variable spreads in low liquidity periods will affect their overall profitability. Nevertheless, for more experienced traders, the benefits of the tight spread and truly transparent pricing may be more significant than commissions, which makes choosing an ECN broker an appealing option. For newcomers or traders interested in using smaller accounts, the choice of an ECN is less appealing, as the commissions will be higher than using a standard broker. Still, the choice whether to use an ECN will ultimately depend on the trading style and goals and whether you can benefit from the ECN broker’s superior pricing and speed.