Brokers. We need them and to a large degree, they need us. In this blog, we’ll discuss types of brokers, why you, as a retail trader, have specific access to trading volume, and different kinds of accounts – so get a drink, sit back, and buckle in.
Love, Hate, and Indifference
First, let’s talk about your relationship as a trader to the brokers. There are three kinds of traders; Institutional, Commercial, and Retail.
Big Boys
The first group; institutional traders are the “big boys”, or the guys with access to huge money (generally not theirs) who trade volumes which far exceed what you and I might even consider. Sometimes called hedge funds, these traders may trade their company’s money or another company’s money. In either case, the amounts can be staggering.
Strictly Commercial
The second kind of broker, a commercial broker, trades accounts belonging to individuals who entrust the members of these organizations to make financially sound decisions and to all and will try and advertise positive returns. Sometimes called asset managers, they usually have minimums starting in the six digit range, although smaller accounts may be accepted based on how they manage their resources.
My Kind of Guy…or Gal
The third kind of broker, our sort, are considered retail brokers. They come in all kinds of flavors depending on their business model, management practices and overarching philosophies. They offer the ability to trade minimal sized accounts, which can start at less than $100 with leverage that ranges from sensible to obscene.
Essentially, these brokers permit the everyday trader to manage their own trading activities using a proprietary web based platform or a downloadable platform, such as MetaTrader 4 (which we advocate).
Two Sides of the Same Coin
Retail brokers occupy two main camps; ECN, or Electronic Currency Network and on the flip side; the Dealing Desk. There are differences in how your orders are treated, but essentially, our main concern is that our trades get to market as quickly and efficiently as possible. Here are the talking points of each:
ECN
The Electronic Communications Network (ECN) provides through access between the retail trader and the Interbank, which I’ll explain in a moment. They charge a slightly higher premium, or spread, to fill your order. The main thing is that they take neither side of your trade. What should be understood is that whoever provided the market for your trade takes the other side of your trade – because there has to be someone on both sides.
Dealing Desk
The Dealing Desk broker, or a market maker, is the intermediary who takes your order and funnels it through to the Interbank where it can be filled. Dealing Desk brokers generally charge slightly small spreads, but the catch is that they take the other side of your trade; meaning, if you buy, or go long on a particular pair, they short it against you. And conversely, if you sell or short a currency pair, they take it long.
Why, oh Why?
The reason they do this is that they are counting on the fact that 99% (or more) of traders lose money so in the long run, they’re going to get your margin anyway, so it’s easy for them to offer smaller spreads.
Interbank – Where it all Happens
I mentioned this earlier…what is the Interbank? Interbank is the collection of banks which effectively “house” the Spot Currency Market. These banks are electronically connected through massive high-speed world-wide networks which seamlessly process millions of orders 24-hours a day during the trading week from around the world.
ECN vs. Dealing Desk: Rumble in the Jungle?
Does the type of broker really matter? Not really. While most traders look upon the Dealing Desk Broker as some kind of loan shark or nefarious money grubber, it really comes down to the accuracy of your trade. If you take a trade that goes against you, that’s not the broker playing games. That’s you making a bad call.
From Here to There
So, at the end of the day, if you have a good system, solid money management with a tight risk profile and emotionally, your trading psychology is in a great place, how you get your positions to market is irrelevant.
Need a Broker? We can help!
It just so happens that we’ve vetted brokers worldwide and have cultured relationships which you would definitely benefit from; including, incentive programs, outstanding customer service and personalized on-boarding when you open your account. Check it out on the broker page which has loads of information, HERE!
Broker Lesson
By the way, one of the lessons in the Advanced Forex Course deals specifically with brokers. If you want more information about the advanced course, click HERE.
More to Come
There’s a lot more to come. If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.
Our only goal is to make you a better trader.
BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.