The sad thing about Forex trading is that many people associate it with scams and fraud. This is because there are many unscrupulous companies out there trying to screw people over their hard-earned money but that is not what Forex trading should be about. Knowing what you are getting into and choosing the right trades is going to make your Forex journey a lot more stress-free. Visit multibank group
Understanding the difference between ECN and STP Forex broker models will be a step in the right direction and will help you make better decisions further on in your journey.
All About STP Forex Brokers
These are brokers who use STP technology or Straight Through Processing. The technology is such that a no dealing desk is required for it and it is a model that is widely used by Admirals. All trade orders get routed through the broker’s liquidity providers. The liquidity providers provide the bid or ask rate. If you are wondering who these liquidity providers, are, the answer is hedge fund groups, big investors, and big banks. They are the ones that act as the counterparty to each trade that gets executed.
The STP Forex brokers will have their own liquidity pool that gets represented by different liquidity providers.
What it means for you as a Forex trader is that the broker is going to act as a silent connection between you and the market. You don’t have to deal with a dealing desk that will re-direct your trades for you. Your broker will also have DMA or Direct Market Access.
DMA means brokers who pass orders to their clients directly to their liquidity pool this ensures that orders can get fulfilled at the best price.
The aim for you when you choose the STP Forex broker model is to select someone who has the most variable spreads. Such a broker will get the best bid from one liquidity provider and the best ask price from another liquidity provider. This is a win-win for the trader.
If you are someone who is trading the news, then this is a great option for you. The lightning speed on offer makes it a wonderful idea.
All About ECN Forex Brokers
While you will find a lot of similarities between STP and ECN Forex brokers, they are not completely the same. The main difference between the two lies in routing.
While STP brokers can decide which one of the liquidity providers it wants to deal with on a particular trade, the ECN will act as a sort of hub. The hub is the most important liquidity source and hedge funds, major market players and banks represent it.
All of them come together and become interconnected so that they can find counterparties for those orders that they are not able to complete internally.
Another major difference between STP and ECN traders is that ECN trading may be difficult for new and inexperienced Forex traders to perform.
Which One to Choose?
As a trader, it can be confusing to have to choose between both. As a beginner forex trader, it can be downright intimidating to have to choose.
Let’s look at the benefits of both and then you can decide.
Benefits of the STP Broker Model
- The best trading platform used is one of the most important benefits on offer. MT4 and MT5 are the most commonly used platforms for STP brokers and they are the most stable and most popular of the lot.
- The initial deposit you have to come up with is not much. You can start with a small deposit if that is what you want. For beginners, this is fruitful because they don’t need to put in a lot of money to get started. They can start off small and then trade in forex.
- STP technology is used for processing orders which is wonderful. It is definitely an advantage that is passed on to the trader.
- There are just a single or just a few liquidity providers. This ensures that things are kept under control and do not spread too much.
- Since the maximum trade size is capped, it is definitely worthwhile for traders who sometimes trade with their emotions. It keeps things from going out of hand and will keep your trades in check.
- There is no commission you have to pay your broker which is another good point to remember.
Benefits of the ECN Broker Model
- Since it is a network in itself, the hub is self-explanatory. You are trading within a hub and only if a particular trade is not possible to complete internally are other liquidity providers brought in.
- The liquidity providers of a particular ECN broker are top-tier and reputable in their own names. The biggest names in the hedge fund and banking industries are usually the liquidity providers so you will be in good hands.
- The commissions are low.
- The spreads are floating which can either mean good or bad.
To Sum Up
Now that you have got the gist of what STP and ECN brokers are, it is time to decide which one is good for you. The truth is that if you are a beginner trader with little or no experience with the Forex trading market, the best thing for you to choose would be an STP broker. The capital investment required will be low and the zero commission is certainly another way to save money while getting started.
Yes, the ECN model has many positive salient features but the thing is, it is suitable for those who have a huge capital to invest and trade with. The maximum trade size is unlimited which means the bigger players play the game and it will probably not be suitable for you.
So go ahead and open an STP live trading account with the best platform out there and start trading in Forex. It can be one of the first steps forward for you in the trading world.