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FCA, BoE & CFTC Agree on Derivatives Market Post-Brexit Measures

The three agencies have agreed on measures to ensure a smooth transition of the derivatives markets after Brexit.

The Financial Conduct Authority (FCA) has issued a statement this Monday, confirming that United Kindom and United States authorities are putting measures in place so when the UK leaves the European Union (EU), in whatever form that may take, there will not be regulatory uncertainty regarding the derivatives market between the two markets.

The statement today was released on behalf of the FCA, Bank of England (BoE) and the Commodity Futures Trading Commission(CFTC). Specifically, the three authorities have stated that US trading venues, central counterparties (CCPs) and firms will be able to continue to provide services in the UK.

At present, because the European Commission has declared CFTC regulatory framework equivalent to that of the EU, US trading venues and firms can provide services within the region. Now, UK authorities have come to the same conclusion and British firms will be able to access these firms on the same basis.

Andrew Bailey of the FCA
Andrew Bailey
Source: FCA

Commenting on the new measures, Andrew Bailey, Chief Executive of the FCA, said: “We have worked closely with the CFTC and other UK authorities on these measures to ensure continuity and stability for consumers, investors and other market participants, regardless of the outcome of the UK’s withdrawal from the EU.

“Cooperation with our international partners has always been an important part of our work, and it will remain so after Brexit. This partnership will support our day-to-day supervisory activities and rule-making, as well as encouraging open markets and the development of rigorous global standards, by ensuring that wherever firms operate, they are regulated on a consistent basis.”

BoE, FCA and CFTC Update MoUs to Ensure Smooth Transition Post-Brexit

The BoE, FCA and CFTC have also put in place information-sharing and cooperation arrangements. This is to support effective cross-border oversight of the derivatives markets and participants.

As part of this effort, the BoE and CFTC are in the process of updating their Memorandum of Understanding (MoU), which was originally signed in 2009 and covers clearing activity. This MoU will now recognise CFTC-registered CCPs.

Furthermore, the FCA and CFTC are also updating their MoUs which cover select firms in the derivatives and the alternative investment fund industry. These agreements were signed back in 2013 and 2016.

Mark Carney of the BoE
Mark Carney
Source: Bank of England

The Governor of the Bank of England Mark Carney added: “Derivatives can seem far removed from the everyday concerns of households and businesses, but they are essential for everyone to save and invest with confidence.

“As host of the world’s largest and most sophisticated derivative markets, the US and UK have special responsibilities to keep their markets resilient, efficient and open. The measures we are announcing today will do that. Market participants can be confident that the clearing and trading of derivatives between the UK and US will maintain the high standards of today when the UK leaves the EU.”

For more information, you can read the full statement here.

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What is CFD trading and is it suitable for you?

Over the past decade, CFDs (Contracts for Difference) have become one of the most popular ways for investors to trade commodities, indices and currencies online. Although they have grown rapidly and many online brokers now offer them to traders, CFDs are risky and certainly not suitable for everyone. Understanding the volume of potential gains and losses is just one important consideration in deciding whether CFDs are right for you.

CFDs may look attractive because if you do not have the money to buy the underlying assets you can still take a share in the potential gains in the value of those assets using leverage, but the biggest risk with leverage is that it eventually makes you exposed to losing much more than you put in. Thus any large gains can be offset with large losses. Learn what it means to trade on leverage and margin before using CFDs.

What are CFDs?

CFDs can be traded on a variety of financial instruments such as stocks, indices, commodities or currencies. The profit in CFDs depends on the change in the value of the underlying asset over time. In both cases you can get the difference between the closing price and the opening price of the contract. It works as an agreement between two parties to exchange the difference in the price of the asset. This means that you do not have the asset in real terms.

Learn more about what are Contracts for Difference and how they work

How do CFDs work?

CFD trading is similar to investing in any other financial market. For example, if the price of a commodity rises by 10% then you have earned the same percentage. If the commodity falls by 10% then you will lose the same 10% value. The main difference between the actual investment in financial assets and investment in CFDs is that the contract gives you more flexibility and you can also apply leverage that maximizes profits. You can also use stop loss orders and choose when you will take your earnings, loss ratio and closing time of the transaction.

Do you profit only when prices rise?

One of the big advantages of CFDs compared to other financial instruments is that you can take advantage of price declines as well. Remember that CFDs are all about the difference in price, where you can invest in high or low prices according to what you think is more likely to happen.

Is CFD trading more risky than traditional investments?

Any financial investment involves risk and CFDs are not exempt from that rule. In fact, they can carry substantially more risk when using leverage, which increases your exposure to the markets. Leverage increases your profits but also increases your exposure to losses.

Why do traders prefer CFDs?

Apart from the ability to borrow and take advantage of leverage, there are several good reasons why many traders prefer CFDs:

  1. No fees are paid for trading contracts apart from the spread (see this brokers’s CFD pricing).
  2. You can access a large segment of markets including commodities, indices and others.
  3. You can access all the markets from a single trading platform.
  4. Trading is possible when the market is closed due to 24-hour trading.

If any of this appeals to you or you would like to learn more, get in touch with us below and we’ll take you through the entire process step by step. And remember, a risk-free demo account is a great way to try things out before committing any actual money.

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CFDs 101 – What are Contracts for Difference and How Do They Work?

Contracts for Difference, or CFDs, can be a great financial instrument to trade given their unique properties and ease of execution. However, the same properties that make them appealing to seasoned traders can be tricky to navigate for novices. CFDs are complex products that carry a high-level of risk, and thus require a clear understanding on the part of traders in order to utilise their advantages correctly and avoid loss. Read on to learn more about this product.

This* is a CFD execution-only broker that offers CFD products in over a dozen commodities and global stock indices.

What are CFDs?

In its essence, a Contract for Difference (CFD) is a form of over-the-counter (OTC) derivative trading which allows you to speculate on rising or falling prices of various instruments such as indices or commodities. A CFD is an agreement between a trader and a broker to exchange the difference in value of a financial product between the time the contract opens and closes. The trader never actually owns the underlying asset, but rather receives revenue based on the market changes of that asset.

In this scenario, if the trader has bought a CFD and the asset’s value rises the trader gains a profit. And conversely, again after buying a CFD, if the asset value decreases the trader makes a loss. Essentially the trader is predicting future price performance. CFDs allow you to take a position on the future value of an asset depending on whether you believe it is going to go up or down. Instead of you making a full purchase or sale of an asset, the contract mirrors the profit and loss of your intended purchase or sale.

How do CFDs Work?

For example, if you believe that the value of Brent Crude Oil (UKOIL) is going to rise, you enter into a contract with a CFD broker like this. You agree to buy 1 lot (equal to 10 barrels) at $70 a barrel. Using margin, this broker requires that you pay only 1% to enter the contract, so you pay $0.70 a barrel for a total of $7. If as you anticipated the commodity increases in value, on closing day of the contract you sell it and gain the difference in value as profit. Of course, if it decreases you are then at a loss.

The same mechanism works for selling shares if you believe the price will drop. You do this by opening your contract to go short (sell) rather than long (buy). If, as you expected the price moves downward, you can buy the instrument back at a lower price to make a profit on the price difference. If, however, your prediction is incorrect and the value rises, you will sustain a loss. As with all leveraged products, this loss can exceed your deposits.

Advantages and Disadvantages of CFDs

The advantages of CFDs include access to the underlying asset at a smaller financial commitment than buying it outright. CFDs also provide access to a variety of global indices and commodities. Lower fees, ease of execution and the ability to go long or short are some of the other attractive attributes that have quickly increased the popularity of CFD trading as a flexible alternative to traditional trading mechanisms.

On the other hand, disadvantages of CFDs include market risk which grows amid increasing volatility. And when entering a CFD the investor’s initial position is reduced by the size of the spread. CFDs are a leveraged product that allow you to put down a small deposit for a much larger market exposure. While this is a benefit that gives your smaller trading capital greater power, it also carries a significantly higher risk as you can lose more than you deposit.

What is the difference between CFDs and Forex?

The main differences between CFD trading and Forex trading is that the former involves different types of contracts covering a diverse set of markets and asset classes, such as indices and commodities, whereas Forex is purely currency trading. CFDs are mostly influenced by specific factors such as supply and demand whereas Forex is mainly driven by global events. This broker offers you both, in addition to precious metals trading.

What is the CFD financing cost?

The financing cost for your CFD trade is referred to as ‘rollover.’ This is the interest paid depending on the size of the position and for holding a position past 20:45 GMT on a daily basis. For Index CFDs, any dividend adjustments issued are included in the rollover amount as well. The formula for financing cost is as follows:

Closing Price of the Index * the interest rate / 100 / Number of Days +/- Dividends * Trade Size

On Fridays, if you hold a position over the weekend, rollover is charged 3 times as usual.

You can close your position before 20:45 GMT to avoid rollover and the charge will not apply.

Swaps on CFDs

For CFDs on a “spot” basis, when you roll an open position from Friday to Sunday, on a trade date basis, Monday of the following week becomes the new value date, not Saturday. Therefore, the rollover charge on a Friday evening will be three times the value indicated in the table.

Learn more about this broker’s attractive CFD pricing and contract specifications.

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What it Means to Trade on Leverage and Margin

Your ability to borrow money from your broker to trade currencies is what leverage and margin are all about in forex. With leverage you can increase your ‘trading power’ – giving you more money to trade with than your deposit. Before you enter a leverage or margin trade, make sure you understand how it works so you can make the most of your trading while calculating your risk.

Our broker gives you up to 1:500 leverage

One of the most powerful tools in forex trading is leverage. Using leverage means that if, for example, you want to make a $100,000 deal, and with a 1:200 leverage you would need a deposit of only $500. High leverage can make the forex market highly profitable though very risky.

Open a trading account today.

You can make and lose more money

Essentially, the aim of trading on margin is to magnify profits by being able to take out larger positions than you would be able to with your money alone. However, this also increases your risk. It’s important to remember that you can lose more than your initial stake. If a currency underlying one of your trades goes in the opposite direction of what you anticipated, leverage will greatly amplify the potential losses. To avoid such cases, traders should use a strict trading strategy that involves the use of stop and limit orders.

It’s similar to buying a property

To show you how it works, let’s look at the process of buying a house. You have a deposit of GBP50.000 and the property costs GBP250.000, five times your deposit. You need to use your bank as leverage to be able to buy the house, so you apply for a mortgage that covers the remaining GBP200.000. The ratio – or your leverage – is 50,000:250,000. This is more commonly expressed as 1:5.

Here’s how it works in forex trading

Before you start trading, you are required to put up a percentage of the money that you borrow ‘in good faith’. Let’s say you want to trade the EURUSD currency pair and the amount you want to invest in that position out of your own pocket is GBP2.000.

Your broker requires you to make a minimum deposit to hold this position. This initial deposit is your margin requirement. The value of your trade is much higher than this. When you trade with a good broker the value can be as much as 500 times your initial deposit. If you choose 1:10 leverage, your GBP2.000 would let you place trades up to the value of GBP20.000.

Now let’s say you want to trade 1 lot of GBPUSD with a leverage of 1:500. The equivalent of 1 lot is 100,000 units of the base currency (GBP). So in this example, the calculation is 100,000 units divided by the leverage of 500. This gives you the margin required for your trade, which is GBP200.

Ensure you understand the risks

It’s important to remember that you should be careful and not over-leverage your position based on the equity in your account. Trading on margin and leverage can greatly increase your profits, but it can also magnify your losses very quickly if the markets move against you. Before you make your first trade, ensure that you fully understand the risks of trading on margin.

Your leverage check-list

  • Your margin requirement is the initial deposit you need to make with your broker to enter a trade.
  • Your leverage is the ratio of the total value of your positions compared to your margin requirement.
  • Leverage enables you to magnify profits but your losses also increase.
  • If you over-leverage your position and the markets move against you, there is the risk that your broker will liquidate your positions.

Margined Forex and CFD trading are leveraged products and can result in losses that exceed deposits.

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How Long is the Forex Market Open? Forex Trading Hours Explained

In addition to being the largest and most liquid financial market in the world, one of the great advantages of forex trading and one of its most attractive features is the all-day operation of the market – making it open to all global participants regardless of time of day. With 24 hours of daily trading opportunities, it is truly the market that never sleeps. But how does the forex market manage to be open around the clock? Find out.

How Long is the Forex Market Open?

First things first, just how long exactly is the forex market open?

The forex market is open 24 hours a day, 5 days a week so you can trade whenever you want to, not when the market dictates. There is no waiting for the opening bell or scrambling to get your order executed before a daily close. Trading begins with the opening of the Sydney session and closes with the New York session, by which time it starts all over again, round the clock. This means you can be as active or passive as you’d like, and trade on your own schedule – be it morning, noon, or night.

This is one of the big differences that sets it apart from the stock market, where trading sessions are limited to exchange hours, generally coinciding with regular business hours, Monday through Friday. The New York Stock Exchange (NYSE) for instance, is only open 09:30 to 16:30 EST. There is after-hours trading involved on some exchanges, but there is usually much less liquidity available. And as a stock trader you’re also limited to trading on exchanges of your home country or that of your broker.

The forex market, on the other hand, gives traders anywhere in the world the flexibility to trade during the US, Asian and European market hours, with good liquidity available at most hours of the day. A good retail broker like ICmarkets gives you the opportunity to trade this huge decentralized market with access to top liquidity, most accurate data, and fast execution by using ECN (Electronic Communication Network) technology.

Forex Market Sessions

So how is the forex market able to stay active around the clock? Sessions.

Forex trading is not done at one central location such as an exchange but is conducted between participants through electronic communication networks (ECNs) in various markets around the world. Trades are conducted over a global network rather than any single physical location that closes at the end of the local working day, ensuring that international currency trades can happen at truly international hours, with each major time-zone having its own regional session.

The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. The market opens in Sydney at 7:00 AM Monday local time and closes at 5:00 PM Friday local time in New York. In between each forex trading session, there is a period of time where two sessions are open at the same time, and these session overlaps are generally the busiest times during the trading day.

When is the Forex Market Most Active?

Unlike stocks and commodities, currency is a global necessity for banks, international trade and global businesses, and this requires a 24-hour market across various time-zones to satisfy need. The international scope of currency trading also means that there are always traders around the world who are creating and fulfilling orders for a particular currency. All during the trading week there are possibilities to make currency trades, but some hours of the day are indeed busier than others.

Each trading day starts with the opening of the Australasia region, followed by Europe and then North America. As one region’s market session closes another opens, or has already opened, so forex trading continues without pause. When these markets overlap for a few hours, the most active period of forex trading commences. There is more volume when two markets are open at the same time, and thus more opportunities to conduct big trades. These hours are:

New York and London: between 8:00 am — 12:00 noon EST (EDT)

Sydney and Tokyo: between 7:00 pm — 2:00 am EST (EDT)

London and Tokyo: between 3:00 am — 4:00am EST (EDT)

For example, trading EUR/USD or GBP/USD pairs during the New York and London session overlap would provide the best volume as the two markets for these currencies are active simultaneously.

We will cover the best hours to trade forex in a follow up post, so stay tuned.

Chances are that as you’re reading this the forex market is open right now. The flexible forex trading hours provide the best opportunity for trade in the global markets, and can be experienced risk-free with a free demo account that will give you a taste of all the action. Practice trading during the various forex sessions to get a feel for the markets, and feel free to contact our support team with any questions. We’re open whenever the markets are (24/5).

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Trading vs Investing – What’s the Difference?

Though the terms trading and investing are sometimes used interchangeably, they are actually two very different concepts in the context of the capital markets and the foreign exchange market in particular. A trader and investor may both be seeking the same objective – profit in the various financial markets, but while their goals are the same, their methods and styles differ quite markedly. Let’s look at these trading vs investing differences, and see which one is right for you.

Trading

Trading is all about the actual active act of trading, involving frequent buying and selling of financial instruments such as currency pairs or commodities. The goal of trading is to earn a profit through rapid buying and selling, with the objective that it will bring better returns than traditional long-term investing. Traders concentrate on monthly or even weekly returns of as much as ten or more percent, whereas investors may be aiming for such return percentages on an annual basis.

As a fast-paced and involved process, trading usually entails very close and active monitoring of the market to quickly identify buying and selling opportunities and capitalize on good trading windows. Traders aim to make a profit by buying at a lower price and selling at a higher price, often in a short period. They can also make profit by short selling, which means selling at a higher price and buying to cover at a lower price when the market is falling.

Traders, unlike investors who have the luxury of waiting out their positions, must get in and out within a specific time window, and often utilize automated orders such as stop losses to get out of losing positions or automatically sell once their desired price level is reached. Traders are more likely to favour technical analysis over fundamental outlook when making daily trades, and use tools such as moving averages to identify good trading opportunities.

Investing

In contrast to trading, investing involves much slower and longer time frames, and often more buying than selling. The goal of investing is to slowly generate profits over time through the buying and holding of investment instruments, often diversified portfolios of stocks, bonds, and mutual funds. Investors generally aren’t looking to make a quick return, and can compound their profits by reinvesting any interest or dividends into additional shares of an instrument.

And unlike trading, investments are usually held for longer periods of time, from a year up to decades, as famous investors like Warren Buffet have so successfully done. Although traders, too, can hold positions for long periods, they are generally done as weekly swing trades or even just day trades, some positions are even held for just seconds! The longer periods of holding allow investors to take advantage of things such as interest, dividends, and compounding returns all along.

Whereas traders must be constantly wary of potential downtrends and respond accordingly, investors can stay put during market fluctuations, and if the fundamental outlook is good, expect the prices to rebound and to recover any losses. As such, investors more often use fundamental analysis and try to identify things that hold less value now than they believe will be worth in the future. Investors look to grow their money by making long-term strategic investments.

Trading vs Investing – The Bottom Line

The main factor in the difference between trading and investing is time and level of active participation. While both traders and investors search for profits in the global markets, traders take a more active daily role, some even making it their full-time job. Where investors look for larger returns over a long period of time with buy and hold tactics, traders find success in both rising and falling markets through a multitude of positions and potentially smaller, but more frequent, profits.

So, you fancy yourself a trader? Open a free demo account and take a shot at trading currencies, popular commodities, top global indices, and precious metals with $10,000 in virtual money.

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Dealing Desk vs. No Dealing Desk Forex Brokers

Which type of broker should I choose? A dealing desk broker? Or a no dealing desk broker?

That’s completely up to you! One type of broker isn’t better than the other because it will all depend on the type of trader you are.

It’s up to you to decide whether you’d rather have tighter spreads but pay a commission per trade, versus wider spreads and no commissions.

Usually, day traders and scalpers prefer the tighter spreads because it is easier to take small profits as the market needs less ground to cover to get over transaction costs.

Meanwhile, wider spreads tend to be insignificant to longer term swing or position traders.

To make your decision-making easier, here’s a summary of the major differences between Market Makers, STP brokers, and STP+ECN brokers:

Dealing Desk
(Market Maker)
No Dealing Desk (STP) No Dealing Desk (STP+ECN)
Fixed Spreads Most have variable spreads Variable spreads or commission fees
Take the opposite side of your trade Simply a bridge between client and liquidity provider A bridge between client and liquidity provider and other participants
Artificial quotes Prices come from liquidity providers Prices come from liquidity providers and other ECN participants
Orders are filled by broker on a discretionary basis Automatic execution, no re-quotes Automatic, no re-quotes
Displays the Depth of Market (DOM) or liquidity information

Brokers are not evil… Well most of them aren’t!

Contrary to what you may have read elsewhere, forex brokers really aren’t out to get you.

They want to do business with you, and not run you out of business! Think about it, if you lose all your money in trading, they too will lose customers.

The ideal client of dealing desk brokers is the one who more or less breaks even. In other words, a client who neither wins nor losses at the end.

That way, the broker earns money on the client’s transactions, but at the same time, the client stays in the game by not blowing out his account. In essence, brokers want their clients to keep coming back for more (trading)!

 

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Forex Broker Types: Dealing Desk and No Dealing Desk

The first step in choosing a forex broker is finding out what your choices are.

You don’t just walk into a restaurant, knowing what to order right away, do you?

Not unless you’re a frequent customer there, of course. More often than not, you check out their menu first to see what they have to offer.

There are two main types of forex brokers:

  1. Dealing Desks (DD)
  2. No Dealing Desks (NDD).

Dealing Desk brokers are also called Market Makers.

No Dealing Desks can be further subdivided into:

  • Straight Through Processing (STP) and
  • Electronic Communication Network + Straight Through Processing (ECN+STP).

Dealing Desk vs. No Dealing Desk Forex Brokers

What is a Dealing Desk Broker?

Forex brokers that operate through Dealing Desk (DD) brokers make money through spreads and providing liquidity to their clients. Also called “market makers,”

 

Dealing Desk brokers literally create a market for their clients, meaning they often take the other side of a clients trade.

While you may think that there is a conflict of interest, there really isn’t.

Market makers provide both a sell and buy quote, which means that they are filling both buy and sell orders of their clients; they are indifferent to the decisions of an individual trader.

Since market makers control the prices at which orders are filled, it also follows that there is very little risk for them to set FIXED spreads (you will understand why this is so much better later).

Also, clients of dealing desk brokers do not see the real interbank market rates. Don’t be scared though. The competition among brokers is so stiff that the rates offered by Dealing Desks brokers are close, if not the same, to the interbank rates.

Trading using a Dealing Desk broker basically works this way:

Let’s say you place a buy order for EUR/USD for 100,000 units with your Dealing Desk broker.

To fill you, your broker will first try to find a matching sell order from its other clients or pass your trades on to its liquidity provider, i.e. a sizable entity that readily buys or sells a financial asset.

By doing this, they minimize risk, as they earn from the spread without taking the opposite side of your trade.

However, in the event that there are no matching orders, they will have to take the opposite side of your trade.

Take note that different forex brokers have different risk management policies, so make sure to check with your own broker regarding this.

What is a No Dealing Desk Broker?

As the name suggests, No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk.

This means that they do not take the other side of their clients’ trade as they simply link two parties together.

NDDs are like bridge builders: they build a structure over an otherwise impassable or hard-to-pass terrain to connect two areas.

NDDs can either charge a very small commission for trading or just put a markup by increasing the spread slightly.

No Dealing Desk brokers can either be STP or STP+ECN.

What is an STP Broker?

Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.

Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market.

NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.

Let’s say your NDD STP broker has three different liquidity providers. In their system, they will see three different pairs of bid and ask quotes.

Bid Ask
Liquidity Provider A 1.2998 1.3001
Liquidity Provider B 1.2999 1.3001
Liquidity Provider C 1.3000 1.3002

Their system then sorts these bid and ask quotes from best to worst. In this case, the best price in the bid side is 1.3000 (you want to sell high) and the best price on the ask side is 1.3001 (you want to buy low). The bid/ask is now 1.3000/1.3001.

Will this be the quote that you will see on your platform?

Of course not!

Your broker isn’t running a charity! Your broker didn’t go through all that trouble of sorting through those quotes for free!

To compensate them for their trouble, your broker adds a small, usually fixed, markup. If their policy is to add a 1-pip markup, the quote you will see on your platform would be 1.2999/1.3002.

You will see a 3-pip spread. The 1-pip spread turns into a 3-pip spread for you.

So when you decide to buy 100,000 units of EUR/USD at 1.3002, your order is sent through your broker and then routed to either Liquidity Provider A or B.

If your order is acknowledged, Liquidity Provider A or B will have a short position of 100,000 units of EUR/USD 1.3001, and you will have a long position of 100,000 units of EUR/USD at 1.3002. Your broker will earn 1 pip in revenue.

This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too.

While some STP brokers do offer fixed spreads, most have VARIABLE spreads.

What is an ECN Broker?

True ECN forex brokers, on the other hand, allow the orders of their clients to interact with the orders of other participants in the ECN.

Participants could be banks, retail traders, hedge funds, and even other brokers. In essence, participants trade against each other by offering their best bid and ask prices.

ECNs also allow their clients to see the “Depth of Market.”

Depth of Market displays where the buy and sell orders of other market participants are. Because of the nature ECN, it is very difficult to slap on a fixed markup so ECN brokers usually get compensated through a small COMMISSION.

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History of Retail Forex Trading

Now that you know a little about forex, you’re probably itching to start your pippin’ adventures.

But before you set off on your journey, you need one more thing… An actual account with a broker!

Of course, we want you to work with a broker that will provide the right services for your individual needs, so we decided to come up with this section to walk you through the right things to consider when choosing!

Forex History

But first, we’ll begin by revisiting the pages of history to find out how brokers came to life.

Name the best thing that the mighty powers of the Internet have brought us. YouTube, Facebook, Netflix, XNTRADES.com… Yes, those are all awesome.

But what we want to talk about is the greatest gift to forex junkies like you and me: Retail FX trading!

In fact, forex junkies probably wouldn’t exist if not for the birth of online forex brokers.

You see, back in the 90s, it was much more difficult to participate in the retail FX market because of higher transactions costs.

At that time, governments were like strict parents keeping a watchful eye on exchanges, restricting their activities. After a time, the CFTC decided that enough is enough.

They passed a couple of bills, namely the Commodity Exchange Act and the Commodity Futures Modernization Act, and opened the doors for online forex brokers.

Since almost everyone had access to the worldwide web, opening an account with a forex broker was simple and convenient.

Various forex brokers started popping up here and there, eager to take advantage of the booming forex industry.

But now that there are many choices out there, it’s a little tougher to distinguish between the good brokers and the evil ones.

We’re not kidding about the evil ones, which are also known as bucket shops, and we’ll delve into that a little later.

 

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Why Trade Forex: Forex vs. Futures

It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks.

But wait, there’s more… So much more!

Liquidity

Forex vs. Futures
“Mr. Futures, our short shorts look cool!”

In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world.

This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.

The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!

The futures markets can’t compete with its relatively limited liquidity.

The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

24-Hour Market

At 5:00 pm EST Sunday, trading begins as markets open in Sydney.

At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST.

And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST.

Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!

As a trader, this allows you to react to favorable or unfavorable news by trading immediately.

If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.

Minimal or no commissions

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions.

But really, the commission fees are peanuts compared to what you pay in the futures market.

The competition among spot forex brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

Price Certainty

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.

Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain.

The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.

Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account.

During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).

In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.

Advantages Forex Futures
24-Hour Trading YES No
Minimal or no Commission YES No
Up to 500:1 Leverage YES No
Price Certainty YES No
Guaranteed Limited Risk YES No

Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex market.

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