Articles of Interest

There are a number of different types of forex brokers, market makers, fixed spread providers and those offering electronic communication networks (ECN's). A common question asked which most people new to forex ask is which type is best. To help answer this question below is a brief comparison.

Fixed Spread Providers
There are quite a few fixed spread forex brokers in Australia some have spreads as low as 2 pips on EUR/USD. Trading on a fixed spread can have its advantages as well as disadvantages. One of the main advantages of trading on a fixed spread is that traders are guaranteed consistent spreads during times of market volatility such as interest rate announcements; these are often the periods during which spreads can widen dramatically without warning often catching novice traders off guard.

Despite having the benefit of a fixed spread during market volatility fixed spread providers will often quote wider spreads during quiet periods, often their spreads are much wider than those offered by market markers or ECN forex providers.

Trading on a fixed spread is often good for newbie traders who are not yet accustomed to the wild price fluctuations of the forex market.

Market Makers
There are a few market markers that have given the rest a bad name by trading against their clients and profiting from client losses, however this is not common practice for all market makers only a select few. Generally market makers are able to offer relatively tight spreads across all of the major currency pairs, however it is important to understand that this not always the case if you are looking to trade large parcels or trade around announcements such as interest rates or non-farm payroll.

Some market makers are known to widen their spreads by as much as 50 points during times of market volatility, they often do this to protect themselves from scalpers looking to take advantage of their tight spreads.

When selecting a forex broker who is a market maker you will need to ensure that you do your homework and make sure that they are not one of the few that are actually trading against you and profiting from your losses.

ECN Providers
By far the most transparent forex broker model is an electronic communications network or ECN. An ECN broker simply aggregates the best price feeds from a variety of investment banks and always displays the best bid or offer. Most ECN brokers will charge a commission rather than apply a spread to the natural market price this ensures that you are trading on the real market price as set by the world's largest investment banks.

There are many advantages of trading with an ECN broker the most apparent being the spreads offered; often there is no spread or an inverted spread, prices not achievable by market markers or fixed spread providers. During volatile times an ECN will always show the best price available, as ECN brokers rely on a number of investment banks who are actively trading over these periods you will always get the best price and not by subject to extremely wide spreads which you would otherwise get with a market maker.

Of course it is up to you type of forex broker you choose as each have their own unique advantages. You should always make your decision based on the trading strategy that you employ and your level of experience in the market.

To learn more about selecting the right forex broker you can download and read this free Forex Guide.

ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of the ECN broker, providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price level. A large number of market participants providing pricing to the ECN broker leads to tighter spreads. ECN brokers typically charge a commission for matching trades between their clients and liquidity providers.

Using an ECN broker to trade forex offers a number of significant advantages, the most apparent being tight spreads and deep liquidity. Tight spreads means that day traders and scalpers can take advantage of small price movements on an intraday basis. Deep liquidity means that large volumes can be traded without having any effect on price this is especially important in volatile market conditions and offers significant advantages for traders using automated forex trading systems. These two factors combined mean that you will be able to take advantage of more trading opportunities, more opportunity equals more profit potential.

There are a number of ECN brokers available in the marketplace today with the most common ECN being Currenex. Currenex is typically used by institutions and investment banks and out of reach for most retail traders, however in recent times as the demand for tight spreads and transparency has improved significantly many commonly know retail trading platforms such as Metatrader have been adapted to suit ECN brokers. Now more than ever the bridge between retail investors and investment banks is narrowing.

Of course using an ECN broker will not be of any advantage if you do not have a trading strategy or plan in place. Formulating a forex trading strategy that takes into consideration your risk profile, lifestyle and capital outlay is essential before you start trading. After formulating your trading strategy you should then try a few forex platform demos to determine which platform best suits your trading strategy. Of course it is important that you choose a forex platform offered by an ECN broker. It can often be difficult to determine and ECN broker, however as a rule of thumb ECN brokers will charge commission on your transaction rather quoting you a widened spread.

To learn more about forex trading using an ECN broker you can download our free FOREX Guide.

The growing amount of misinformation surrounding forex robots is making it increasingly difficult for the average retail trader to distinguish whether or not they are an effective means of getting exposure in the forex market.  This misinformation is due largely to the fact that the internet is saturated with content from robot developers more interested in lining their pockets, than growing your trading account.
 
I should point out that this article is by no means an attack on the forex robot community, rather it is an unbiased perspective aimed at educating traders so you can make more informed decisions when entering the markets. By the end of this article you will know some of the important pros and cons of robots as well as ways to filter the good from the bad developers.

The developers of robots focus on a few key selling points in order to market their product effectively. These selling points have clear advantages and disadvantages and I will focus on these to help you distinguish whether or not robots remain an effective investment vehicle for yourself.

Access to markets
Forex robots provide traders access to markets 24 hours a day 5.5 days a week. Since most retail traders do not want to spend that much time in front of the computer, this is an effective way to capture more opportunities and potentially increase profits. It also allows trader’s access to a greater variety of currency pairs, more than they would be able to analyse and trade themselves.

Although they can generate more opportunities, robots do have their limitations. Robots limit which broker you use as most robots aimed at the retail community will only run on MT4. The opportunities you are then able to take are limited by the spread your broker offers for that particular currency pair, (some robots will not take opportunities if the spread is too wide). For this reason it is recommended that you chose an MT4 broker that uses and electronic communications network (ECN) feed, as the spreads are typically tighter. Another limitation of robots is the fact that they are typically run off your computer as a virtual private server (VPS), this means that they need exclusive access to your trading account and require you to keep your computer running and platform open to get continued access to the forex market 24/5.5. Usually you will have to run two trading accounts if you wish to do your own discretionary trading as well as the robots.

Built in strategy
One of the biggest challenges facing new traders is developing an understanding of the market, and then building a strategy around that understanding. This can take years and thousands of dollars to develop. Robots remove the need for traders to build a strategy or even understand the market. Assuming the robot is profitable; this may provide traders with a more cost effective way of entering the market, increasing their chances due to the robot having a superior strategy.

It should be noted that in order for the robot to be effective the owner will still have to ‘tweak’ it for optimal results. In this situation it would be beneficial to have some understanding of trading or the forex market so the parameters can be set as optimally as possible. In my opinion, it is up to the vendor of the robot to provide its customers with continued support and instructions on how to optimise the robots settings for best results.

You should also take into account ‘who designed the robot?’ was it designed by a respected company with years of market experience, or an IT guru with internet marketing experience. The long term effectiveness of the strategy of the robot will be dependent on this factor.

Trade execution
Trade order execution is paramount to your trading and ultimately profitability. Robots can be better with regards to order execution due to the speed with which they think and act across multiple currency pairs. This provides a distinct advantage over typical discretionary trading, as more trades can be executed sooner, increasing exposure and potentially profits.

There is some disparity between demo and live trading with robots, due to execution of orders further illustrating the importance of the broker you choose to run your robot with. As was said above an MT4 broker using an ECN as opposed to a deal desk would be optimal for results.

Psychology  
Forex robots remove the need for the owner to think when engaging in a trade. One of the three pillars of an effective trading system; psychology, is what prevents traders from turning a winning strategy into a successful and profitable system. The owner simply turns the robot on, enters parameters specific to their risk and trading profile, and the robot does the rest. This is one of the most attractive features of a robot, leaving the trader to tweak the system based on statistics and profitability rather than emotion.

Money management
Forex robots can come with built in money management profiles that can be customised to meet the traders risk profile. Most new traders enter the forex market with little or no understanding of money management, so having a robot with a built in money management system puts them at immediate advantage than if they were to begin trading on their own. The money management employed by the robot is especially important and consideration should be given to this when choosing a robot.

Market conditions
Although this isn’t a point highlighted by robot developers when typically talking about the advantages and disadvantages of robots, I think it’s important to highlight that this is one of the key reasons robots can fail. There are so many variables in the forex market giving rise to changing conditions it is hard for robots and their developers to keep up. Robots for example a robot cannot detect when there is thinner liquidity giving rise to sudden sharp price movements, or breaking news causing volatility. As humans we can make ourselves aware of these factors and adjust our approach immediately.

When there are so many variables affecting currencies at any one time giving rise to market change and volatility, it seems almost impossible that a piece of software could possibly factor in all these changes to remain profitable and the strategy valid. Because of this robots are inherently designed to fail. This problem can be corrected if the robot is constantly updated and the strategy refined to adapt to changing market condition.

Cost
The last point to consider is cost. With robots, like anything in life, you get what you pay for. More expensive robots are likely to have more research and development behind them. While a support team will help you get setup and customise the robot to your settings, as well as provide you with updates. The less expensive variety has online manuals, placing the onus of tweaking the settings of the robot on the trader.

When considering the price of the robot, remember what it is you are buying and the costs associated with the alternative. The alternative, is spending thousands of dollars and hours educating yourself about the forex market and then, trading by yourself with no guarantee of success.

As you can see above, forex robots are not a sure road to success in the forex market. They have their obvious advantages and disadvantages, but in the end it is the job of the trader to take into consideration these points and question whether it still represents a viable way of getting exposure in the forex market.

It is important to note the reason forex robots have gained so much popularity is because there is a lucrative in selling them. The marketing teams behind robots sell hopes and dreams, which for the most part is what the average retail forex trader desires. They represent an easy solution to tradings biggest problem, making money.

If you take anything from this article, let it be the fact that it is essential to have at the very least a basic understanding of the forex market and trading before engaging in any sort of trading, even through the use of a robot. If a trader is going to use a robot I would suggest doing your homework and finding out the following:  who made the robot, their experience in the markets, years developing robots, support staff if any, do they help you optimise the robot, live trading account results, as much information about the strategy and money management system as possible and how many markets it covers. Once you have this entire information look at the costs. If a company can’t provide you with this information they aren’t worth your time or money!

To find more helpful infomation on Forex trading you can download our free Forex Guide.