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Forex Education Series

Author: fxtrader   |   Latest post: Fri, 11 Jan 2019, 6:02 PM

 

Comparison of Forex Broker Types (Part 1)

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Introduction

Forex trading is known to be able to generate high profits but it also carries great potential risk. Hence, we must be aware of the risks and trade according to our risk acceptance level. However, some traders especially beginners might suffer from huge losses without getting expected returns from forex trading. The main reason of this situation is most of these traders has lack of knowledge about the types of Forex brokers available in the market.

In this article, we will be sharing the comparison of forex broker types before we begin our forex trading journey. To know more about the key consideration on choosing a forex broker, you can read How to Choose a Forex Broker (Part 1).

Major Types of Forex Brokers

First of all, it is very important for traders to find out what their criteria and trading strategy for forex trading are before choosing a forex broker. Basically, most of the forex brokers are divided into two main categories:

Dealing Desk (DD) Broker

Market Maker

Market maker is the person who “makes” the market by setting bid and ask prices within a certain currency pair. Market makers tend to take the opposite position to forex traders without going through any trading floor or an electronic exchange. This means that market makers place sell order when traders put buy order creating a virtual market.

Profits are made by market makers through spread by creating liquidity to the traders through their dealing desks. Spreads are fixed by market maker and they are usually kept at a reasonable rate, so as to stay competitive among other market makers. 

Pros:

  • Availability of higher leverage
  • Simpler and user-friendly forex trading platform
  • Free charting software and news feed provided
  • Less volatility of currency price movement
  • No commission on trades is charged

Cons:

  • Worse big/ask prices might be displayed as compared to other marker maker’s or ECN’s
  • Conflict of interest exists due to opposite transactions made by market makers against traders
  • Manipulation of currency prices such as slippage, re-quotes and triggering of stop loss is likely to happen
  • Limitation on scalping trades and automatic trading
  • Spread can be wider than ECN’s

If you are inexperienced but you would like to trade in smaller lets, a market maker may be suitable for you. To know more about other forex broker types, please proceed to Comparison of Forex Broker Types (Part 2)

 

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