What's the Best FOREX Broker; Part 3
We now finalize our look at FX brokerage and try to conclude What's the Best FOREX Broker.
And because there is so much to consider when selecting a forex broker, we have had to break this down to 3 separate blogs.
Once we went through all this, here is what we selected: Best Forex Trading Broker
Forex Islamic Accounts
Holding open positions for over 24 hours is accompanied with a special fee called a SWAP. This special fee is a type of interest, and therefore creates a problem for Muslim traders following the Sharia law.
To solve this, brokers offer Muslim traders a special trading account called an ‘Islamic account’.
This account has all the possibilities and options of a regular account, but it is not subjected to any type of interest.
Different Types of Forex brokers
All FOREX brokers fall into 3 categories:
- DD (Dealing Desk), also referred to as a MM (Market Maker)
- NDD (Non Dealing Desk)
- Hybrid, mixture of both 1 and 2.
Also sometimes if the broker has another customer who wants trade in the opposite direction, they will just match up the trades. But all trades are completed in house, no external LP’s (Liquidity Providers)
So if you place a buy order on the EUR/USD, your broker will sell it to you. This means you are Long the EUR/USD and your broker is Short the EUR/USD If the price goes up, you make money and your broker will lose money.
If the price goes down, you lose money and your broker will make money.
How does the DD broker make money?
Here the broker can make money from all methods, Spread, Commission and by trading against their customers.
These DD brokers can also hedge their trades, so if you have proven yourself to be a profitable trader, they will still take the other side of your trade. But simultaneously hedge themselves, so as not to incur a loss. In this case they will still make money, just only on the spread.
DD brokers are also commonly called Market Makers (MM).
The brokers that solely offer this service are IMO pretty close to the dude with horns…
Initially these DD brokers were all that was available to small retail customers. This is because the big banks did not want to and or could not deal with such small transactions, so these brokers made the market for us.
But as technology has improved over the years, brokers can now easily combine these smaller trades together to get them executed into the larger pools of liquidity. This reduces the risk to the brokers and gives the customers a much fairer opportunity.
A lot of these straight up DD brokers are now either adding Non Dealing Desk services or slowly disappearing altogether.
So are DD Brokers good or bad? Mostly bad, but…
They are generally easier and faster to get started trading with. Not that that has much to do with actually making money, but people are for the most part, impatient…
If you are trading smaller amounts on a longer term swing trading system, then it is not so important and a DD broker maybe ok for you.
FX Broker NDD (Non Dealing Desk)
If your broker operates a NDD (Non Dealing Desk) then when you place a trade, either 1 of 2 things will happen.
1. Your trade will be placed directly into the market with their LP’s (Liquidity Providers). This is generally referred to as an ECN (Electronic Communications Network) broker.
2. Your broker will take the other side of your trade but at the same time place your same trade with their LP’s. Your broker has effectively transferred your trade into the market for you. This is generally referred to as an STP (Straight Through Processing) broker.
How does the NDD broker make money?
he broker will either make money on the spread of every trade you place, or they will charge you a per trade commission. So the more trades you make with them the more they will make.
NDD brokers generally want you to succeed, the more money you make, the more trades you make, the more money the broker makes!
Their interests are aligned with yours!
Forex ECN Brokers
ECN stands for Electronic Communications Network. There is a LOT of confusion around ECN’s, but here is the basics of how an ECN Forex broker works.
These ECN brokers display to you the direct price feed from their LP’s, no spread adjustment. When you are placing a trade with an ECN broker you are effectively placing your trades directly into the market with their LP’s. So any limit / stop orders will be seen by the other trading parties.
And because you are dealing directly with the market you should also be able to see the DOM (Depth of Market). This displays all the other buys and sell orders and at their specific prices.
Also, because you are effectively dealing direct, the broker also generally does not widen the spread. They just charge a per trade commission. And this is fine, because you will see that the
spreads are a lot tighter.
But these ECN brokers normally have much higher initial funding limits, 10k plus. And do not allow micro lots. In saying all that you will see many brokers saying that they are ECN brokers, some will even say that they are True ECN brokers… But I believe many are not, they are STP brokers.
Forex STP Brokers
STP means Straight Through Processing. There is also a LOT of confusion around STP’s, but here is the basics of how an STP broker works.
These STP brokers get their price feed from their LP’s, widen the spread a little and then pass the new updated prices onto their customers. When you place a trade with an STP broker they are taking your trades and then transferring them into the market with their LP’s.
So you are first trading with your broker directly (like the DD brokers) then they are placing the same trade directly with the market (outside of their brokerage firm).
Any limit / stop orders will not be seen by the other trading parties. These will just be sitting with your broker, until they are actioned and at that point they effectively turn into a market order, in the actual market.
An STP broker can use Straight Through Processing to send your orders to:
- The ECN
- Directly to their LP’s
- Or to another DD.
Yes you can have a NDD STP broker that looks all legit, but they are sending their trades to an external DD and this DD is trading against you. Generally in this case the NDD STP broker will get a percentage of the profits generated from trading against their customers that the NDD broker has generated.
All brokers using MT4 are using the STP.
But some send the orders (STP) to their DD, or on to their LP’s, they have to be, this is how MT4 works.
You will find a LOT of conflicting information on this, depending on which broker you are speaking to. Partly because of all the variances in each of these broker types which makes them not so clear cut. And partly because the brokers themselves just don’t know.
Either way, for a retail customer, both ECN and STP brokers (NDD) are in general very good. They want you to succeed!
They also want you to trade as frequent and as large as possible, but this is in your control. As the saying goes,
Hybrid Forex Broker
And many brokers will do both, when you place a trade with them, they will either:
A – Trade against you (B Book), or
B – Transfer your trade onto their LP’s (A Book) based on their belief of your trading success.
Unfortunately some traders you can see straight away that they are most likely going to fail.
These brokers will look at their customers actions, things like;
- Their funding size
- Their per trade leverage
- Trading style
- Trade frequency
- Support tickets
- Stop losses
- Past trade history etc.
So based on this information they will categorize each trader. Some will go into what they call their A Book and the rest will go into their B Book.
1. A Book (NDD): Your trade will be placed directly into the market with their LP’s (liquidity Providers) as either an ECN or STP, as previously discussed.
2. B Book (DD): Your broker will take the other side of your trade or line your trade up with another of their customers in house.
Many brokers still operate this way, for their very small clients (who overall have a very low success rate) they end up on their B Book (DD). And the rest plus the smaller clients that have proven themselves end up on the A Book (NDD).
Forex Broker Peer Reviews
Does the broker have good reviews? And do not only look at the review rating, try and read a few of the comments also to see exactly what the problem may have been.
Some brokers are classed as online discount brokers, they provide low cost trading fees. But they do not have many employees and in return do not provide much support. This is fine, but if you are new to trading and need the support, then don’t use this broker… Remember if you are having issues you can always reach out to us.
Just comes down to doing a little research before you jump in : )
Our recommended Best Forex Broker
So in conclusion to What's the Best FOREX Broker Part 3, selecting a broker needs to be your choice.
But based on everything we have talked about in these last few chapters on brokers in regards to; pricing, spread, support, available pairs, software, funding/withdrawal options, leverage, demos, regulation, STP, Islamic accounts, base currency, hedging, lot sizing, mobile friendly, here is the broker that we use and recommend:
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