Thursday, September 01, 2011

Which Type of Broker Should I Choose?

That's completely up to you! One type of broker isn't better than the other because it will all depend on the type of trader you are. It's up to you to decide whether you'd rather have tighter spreads but pay a commission per trade, versus wider spreads and no commissions.

Usually, day traders and scalpers prefer the tighter spreads because it is easier to take small profits as the market needs less ground to cover to get over transaction costs.

Meanwhile, wider spreads tend to be insignificant to longer term swing or position traders.
To make your decision-making easier, here's a summary of the major differences between Market Makers, STP brokers, and STP+ECN brokers:

Dealing Desk (Market Maker)No Dealing Desk (STP)No Dealing Desk (STP+ECN)
Fixed SpreadsMost have variable spreadsVariable spreads or commission fees
Take the opposite side of your tradeSimply a bridge between client and liquidity providerA bridge between client and liquidity provider and other participants
Artificial quotesPrices come from liquidity providersPrices come from liquidity providers and other ECN particpants
Orders are filled by broker on a discretionary basisAutomatic execution, no re-quotesAutomatic, no re-quotes
Displays the Depth of Market (DOM) or liquidity information


Brokers are not evil... Well most of them aren't!

Contrary to what you may have read elsewhere, forex brokers really aren't out to get you. They want to do business with you, and not run you out of business! Think about it, if you lose all your money in trading, they too will lose customers.

The ideal client of dealing desk brokers is the one who more or less breaks even. In other words, a client who neither wins nor losses at the end.

That way, the broker earns money on the client's transactions, but at the same time, the client stays in the game by not blowing out his account. In essence, brokers want their clients to keep coming back for more (trading)!

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