Forex training accounts are the best way to cut your teeth in forex trading. In this article I will show you what type of brokers are available so you can start off on the right foot.
Let’s first take a look at the Market Maker (MM) type brokerage firms. We already had a glance at how they work in my “Interbank forex review” article. Now I will show you what the advantages and disadvantages of using MM type brokers are so you can make an informed decision when selecting training accounts.
Firstly, there are some significant advantages for forex traders to use the MM type brokers. Because they have an internal order matching system, MM’s provide many benefits that other institutions often can’t or don’t. These benefits include smaller contract sizes, high leverage on small account balances, and no commission. Their trading platform is usually of a higher standard and comes with free charting software and news feeds. Their price movements also tend to be less volatile compared to currency prices quoted on ECNs. This is often better for trading news announcements, although it can be undesirable to scalpers.
There are also some disadvantages in using the MM type brokers. The exchange rates that market makers set are based on their own best interests. Most orders are dealt with by their internal order matching system, but there are also times in which market makers may decide to take the other side of your trade; in effect “trading against you”. Because they may “trade against you”, market makers can present a clear conflict of interest with the ability to set the price in their own favor. Some of the market makers practices to manipulate currency prices (real or just perceived) are to run their customers’ stops, not let customers’ trades reach take-profits, and moving their quotes away from other market rates.
Other disadvantages possible due to the synthetic nature of MM’s is the amount of slippage that can occur when news is released and platforms “freezing” during times of high market volatility. They may display worse bid/ask prices than what you could get from another market maker or ECN. Market makers may also take a disliking to scalping practices and “news trading” and have a tendency to put scalpers on “manual execution”, which means their orders may not get filled at the prices they want.
MM’s would not generally manipulate prices with forex leaners accounts the same as a real money account. Therefore forex training accounts are not an indicator of possible manipulation. The only real way of avoiding this practice is to only trade with companies that have a good, or at least known, reputation. Even so, in most cases of suspected market manipulation on the part of MM’s, there is no case to answer. They are often just normal market fluctuations.
Now let’s take a look at the ECN type brokerage firms. We already had a glance at how they work in my “Interbank forex review” article. Now I will show you what the advantages and disadvantages of using ECN type brokers are so you can make an informed decision when selecting accounts.
There are some significant advantages for forex traders to use ECN type brokers when selecting trading training accounts. The main benefits are smaller spreads, giving theoretically higher profits, and an “actual” as opposed to “made” marketplace. They are more of a Direct Market Access (DMA) model than MM’s, but are still not the Interbank. There are still spreads because the participating banks are going to make their spread or they will simply not bother. Depending on the bank this will take the form of “price shading” or widened spreads depending on market conditions. However, the spreads on offer are still generally tighter during normal trading than MM’s. So essentially the ECN’s are inherently more open in the way they operate since there is an actual marketplace instead of just a synthetic one. Given this factor, dealing with an ECN is often more palatable to traders.
There are also some disadvantages for using ECN type brokers when selecting these accounts. Besides having to pay commission, most ECN’s offer much lower leverage and only allow full lot transactions making it harder to trade with smaller amounts of capital. During certain market conditions, the banks may also pull their liquidity leaving traders without an opportunity to enter or exit positions at their desired price. Many ECN’s also do not offer integrated charting and news feeds such with MM’s and their trading platforms tend to be less appealing. Also, because of variable spreads, it may be more difficult to calculate stop-losses in advance. Finding arbitrage opportunities is easier with ECN’s although news trading can be more difficult.
In the end it is your personal choice as to which forex training account is for you. You may well be forced to use an MM because your capital is too small to trade in full lot increments. Remember too that there are good and bad apples in each group so make sure you do your homework on who is reputable. Hopefully now you have a sufficient understanding of how brokers operate to choose which training account is most suited to your needs.
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