Articles of Interest

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.

There are two main types of CFDs, direct market access (DMA) and market made (MM). The most popular type is the market made variety. The reason for the popularity of market made CFDs is simply because CFD providers offering this type of CFD are also able to offer CFDs over indices and forex pairs.  DMA CFDs are typically more common with traders that are more familiar with share trading for the simple reason that DMA CFDs allow traders to participate in the opening and closing phases of the market and also the order book of the underlying security over which the DMA CFD is based. Both varieties of CFD have their place amongst traders and investors and it is important that you choose the type that suits your trading style.

It is not uncommon for day traders and scalpers to utilise DMA CFDs rather than the market made variety as their orders flow directly onto the exchange and there is no market maker intervention meaning that order execution speed is often quicker with no risk of being re-quoted.  DMA CFDs are also favoured because day traders are able to participate and influence the opening and closing match price. The opening and closing phases of the market are the most liquid and of course liquidly is essential in any effective day trading strategy.

Often day traders also have CFD trading accounts with CFD providers offering the market made variety. The reason for this is because day traders like to monitor the movement of the cash indices, in addition to being able to trade them. Market made index CFDs are a cheap simple alternative to trading the actual futures contract which generally requires a higher upfront margin.

Some CFD providers offer both DMA and market made CFD from the same platform, this is the preferred solution for active day traders as it means that their DMA share CFD positions can be cross margined against their indice and forex CFD positions. Having both DMA and market made CFDs in one account also saves allot of paperwork as only one account needs to be managed, making the preparation of tax returns much easier.

Day traders often use both DMA and market made CFDs in their trading strategy, CFD providers who only offer market made CFDs refer to these traders as snipers as their strategy revolves around taking advantage of price discrepancies between DMA and market made CFDs. Such discrepancies often occur during the opening and closing phases of the market as it is during these phases that there are significant price changes, some of which may not be accurately reflected in the price of the market made CFD.  These pricing inaccuracies can result in arbitrage opportunities for shrewd traders.

It is important to note that each and every trader has their own trading style, some styles are better suited to DMA CFDs and others to the market made variety. Before making the selection between DMA or market made CFDs you should consider your trading style and determine whether the speed and accuracy of DMA CFDs or the versatility of the market made variety is better suited to you.

To find out more about trading CFDs you should download a copy of your free CFD Guide.