What Are the Different Types of Forex Brokers?

Forex Trading Tips - Part 1

One of the most indispensable elements of the forex market is forex brokers. They play an important role by providing individuals access to the currency market. These individuals may be aspiring traders who lack financial resources to fund their trade and participate in the interbank market.

The smallest trade in the interbank market is valued at $1,000,0000, which only a high-net worth trader can manage to place. Contrary to this, participation in the retail or individual forex market can start with $500, which can easily be achieved with the help of retail forex brokers. However, retail or individual traders who wish to make it big in forex trading must understand the different types of brokers to make an entry into the interbank market.

Types of Forex Brokers

There are two types of forex brokers in the forex market i.e. ‘market makers’ and ‘ECN brokers’.

ECN (Electronic Communications Network) Brokers: An ECN forex broker performs the role of a matchmaker by matching buyers and sellers. He does this by putting orders using his communications network. An ECN broker does not provide liquidity. He does not play any role in the manipulation of market prices and only provides a medium for buyers and sellers to contact each other.

Market Maker: These brokers provide liquidity to aspiring traders by taking the opposition position on their trades. For instance, when a trader buys 1 lot of GBP:CHF, for this trade to take place some other party will sell a lot of the same size. The role of the other party is performed by market makers. They stand on the opposite side of the trades. In this way, forex trading is a zero-sum transaction, whatever one entity loses the other makes (profits).

So, when an individual is choosing a market maker as his/her forex broker, this means that his/her loss will be the brokers gain and vice versa. However, market makers do not ever admit this to forex traders. It is in their best interest when traders lose money.

It is not impossible for traders to make money when dealing with market brokers. And, when traders make high profits, it is not uncommon for these brokers to find excuses to not give traders their money. At that point it is better to move to another broker for forex trading. To find more information on the types of brokers along with reviews, visit Forex-RateIt.

Mike is into currency trading and write blogs on latest forex trading [http://www.forex-rateit.com/] topics. For more information on forex trading and forex markets, visit Forex Rate It! website. Forex-Rateit is a leading resource on international forex exchange market and forex brokers.

Many of you must have seen glossy ads for Forex Trading claiming a great amount of profit & a high leverage. Although it would not be proper to say that all the claims are sham, one can safely say that the claims are always inflated to attract gullible investors. No doubt, it could lead you to the path of prosperity provided you are well equipped with proper strategy & in-depth analysis.

Here the need for forex broker comes into picture. This article would discuss the meaning & rational for existence of brokers in the currency market.As many of you must be knowing the forex trading is mainly of OTC (Over the counter) nature. Now what do we mean by OTC? OTC means ‘Non Exchange Traded’. Let me elaborate this a little more. In case of Equity (stocks) & Futures the trade occurs on one or more Stock exchanges. In case of OTC products, which includes Forex, the trading that is buying & selling is done between the private parties & they are in more vicinity than any trade you may enter for Equity & Futures. When you buy or sell any equity or future you buy it from the Stock Exchange & you don’t know who is selling what the scrip you are buying or vise- a-versa.

Is My Blog Going To Make Some Money?I’m not beholden to any forex brokers. I don’t sell advertising to forex brokers; I’m not engaged in any sort of introducing broker role with a single forex broker. So I can afford to tell you the truth about forex brokers.

I’ve seen firsthand some extremely troubling statistics of the failure rates of forex traders. There’s a number that’s floating around the industry. It’s 95 percent! Can you believe it? Upwards of 95 percent, plus or minus a few percent, of forex traders fail. That’s an astonishing figure.

There are many reasons why so many forex traders fail. It’s partly due to the misconception that forex trading is easy, that the forex market is like an ATM, just sitting there waiting for you to withdraw money. If you have any experience at all trading forex, you know this is flat out wrong!

These misconceptions stem from the vast amounts of marketing online and in print, marketing that is pushing trading systems, buy and sell signals, and forex “education”. This marketing comes from system designers, portals, but even a lot of the forex brokers. There’s definitely a land grab going on in the forex industry, one that started about five years ago and has since accelerated. Retail forex trading will continue to grow like crazy in the coming years, judging by the recent entrance into the space by some big time Wall Street banks.

A lot of the retail forex brokers have taken a “churn ’em and burn ’em” attitude towards their customers. These brokers want to gather as many new accounts as possible and as quickly as possible. The mentality among many of these forex brokers is very much short-term, focusing on generating quick commissions and profits for themselves. This attitude has, in part, led to a tremendous failure rate among individual forex traders.

There’s something even more sinister that contributes to the failure of so many individual forex traders. It’s the bucket shop operating tactics that many forex brokers employ. Some forex brokers actually trade against their clients. Can you believe it? A lot of forex traders complain about having stops mysteriously hit only to see the market go right back to where it was trading. It’s called running stops, which many of today’s forex brokers do to their own clients!

The reason that some of the bucket shop brokers have been able to get away with this practice is because the spot forex market is loosely regulated at best, and not regulated at all at worst. Regulation of spot forex trading varies from country to country but, for the most part, it’s not regulated. This has led to a lot of fraud and the deceptive marketing and tactics that many forex brokers use on their unsuspecting clients.

The good news is that there are more reputable and honest forex businesses rising to the top, including brokers. Moreover, some regulation is coming to the market in the near-term, which should help to stem some of the predatory tactics employed by forex brokers.

Still, it’s extremely important for you, the individual forex trader, to carefully research your broker before trading real money. There are some really good forex brokers out there, especially those that offer an ECN-like service that essentially matches orders and provides liquidity via the interbank market.

Another step you can take to protect yourself is to avoid the overactive, hyper trading that so many system vendors and online forex “education” providers promote. Day trading the forex market is an incredibly expensive and, for the most part, futile attempt at making money. Moreover, it increases your risk of a bucket shop broker trading against you.

A better, smarter approach is to take advantage of the forex market for one of its biggest benefits: big, long-lasting trends. There are huge moves in the forex market every year, trends that are relatively easy to identify and trade with the right knowledge. You can make a lot of money over the long-term riding these trends in currency pairs if you know what you’re doing. By using a common sense approach to identifying these trends, trading the right position size, and staying diversified, you can minimize the risks of a bucket shop forex broker taking advantage of you. Most importantly, you can realize the wonderful benefits of the forex market in their fullest.

Visit http://www.fxpnf.com to learn more about how to take advantage of the benefits of the forex market.

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