What is a Forex ECN and why a ECN is better for Forex Scalping
A Forex trader looking to scalp the markets really needs to have as many factors tilted in his/her favor to have a chance in the long term. In addition to the markets posing its short term obstacles many scalpers also must worry about the firm they are trading with taking the other side or imposing scalping restrictions. The solution for most of these traders is to look for a Forex ECN provider. Which begs a two part question, what is a Forex ECN? Why is an ECN better for Scalping?
What is a Forex ECN? The acronym ECN stands for Electronic Communications Network. A true forex ECN will have multiple liquidity providers giving their best bid and offers on currency pairs. The ECN will aggregate the best bid and offer on a pair for the forex trader. The more liquidity providers the better the spreads will be for the trader. Does this mean it will be the tightest spread? Not necessarily, as most traders are aware of “Teaser” rates which imply a small tight spread but widen as a non true ECN environment deems it necessary, such as off hours or volatile periods. A bona fide Forex ECN will have a better chance of showing tighter spreads during off hours and volatile periods. An ECN will also provide anonymity for the trader. The bridge between the liquidity providers and the traders will allow for pending orders to not be seen by the liquidity providers. If you are trading in a dealing desk environment the company you are trading at is trading against you. Do you think it is human nature to “peek” and see where orders are? Do you think it is in the dealing desks best interest to make money for them?
This leads us to the 2nd part of our question, why is a Forex ECN is better for scalping? Liquidity = trader friendly spreads. When trading on an ECN and you buy a currency pair, one of the multiple liquidity providers takes the other side of your trade. The other liquidity providers do not have a vested interest on that trade. So when you go to close out that trade, there is a good chance that when you sell the currency pair you were long it most likely will be one of the other liquidity providers taking the other side. So an ECN with multiple liquidity providers keeps currency pair spreads more favorable for the forex trader.
If you are a Forex Trader who scalps then you should look for the answers to the following questions
1) Does the Forex Broker take the other side of your trades? (If yes not an ECN)
2) Does the Forex Broker hedge against your trades? (If yes not a true ECN)
3) If the Broker has an ECN platform does it have more than 1 liquidity provider (If no then not a true ECN)
4) How many liquidity providers does the ECN have? (the more the better)
5) Is the Forex Broker regulated in any capacity (If you have problems it is better for you if the Broker is regulated)
J. Peter Slaga is a manager for PFGBEST. PFGBEST is an MT4 ECN Forex Broker with 9+ banks providing liquidity. You can find out more information by visiting www.pfgbestdirect.net/mt4.htm
There is a substantial risk of loss in trading.
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