As a pro trader in the forex market, you ought to know that the standard account comes with certain limitations, such as wider spreads, slower order execution, and price variations. This is especially important for scalpers who conduct short-term strategies for which every fraction of a pip or millisecond counts. So, what is the best approach for trading in real-time using real pricing? Simply change your standard account to an ECN account.
✅ What is ECN?
ECN stands for Electronic Communication Network – a trading system that links all trading transactions of the traders as well as the largest liquidity providers in a single trading mechanism. The network provides direct access to information on existing trading orders from liquidity providers (e.g., banks, investment houses, and hedge funds that make up Interbank Forex) as well as other participants of the forex market. In this way, you can follow the live movement of the currencies in the market in order to configure and execute your trading activities instantly, regardless of the location or closing/opening times of the market.
Moreover, direct access to the market allows liquidity providers and traders to trade amongst themselves without having to involve a broker. As a result, all trading activities can be conducted in real-time using real market prices.
🔶 How does ECN work?
The ECN system includes all the information on the orders of all relevant participants, including liquidity providers and retail traders. This network facilitates the execution of orders by automatically matching buy orders with sell orders for the same price. If the system cannot find the matching order information, it will submit the highest bid and lowest asking price and publish it directly; this will enable you to conduct your trading activity immediately.
You may ask, why should the ECN broker get involved in the process?
The ECN system indeed connects all the subscribers; however, not everyone has full access to the interbank market. This is where the liquidity providers come into play; they demand minimum transaction volumes for trading, even though they offer the best currency rates in the market – a requirement that small traders simply cannot meet. There is also a balance requirement for trading with these liquidity providers, which is why ECN Forex brokers are required. These brokerage companies form a bridge between the primary liquidity providers (the interbank) and traders.
ECN Forex brokers use a technology called FIX or Financial Information Exchange Protocol to carry orders from clients to liquidity providers. As a result, small traders get to trade using interbank rates without having to buy the high volume demanded by the liquidity providers.
👉 1. Direct Access to Liquidity Providers (Interbank)
Registering for an ECN account allows you to gain direct access to most liquidity providers without a large trading volume or a minimum balance. What is more, your forex company can execute your orders in the market on your behalf, but cannot, under any circumstances, interfere with your trading or trade against you.
👉 2. Direct and Transparent Market Pricing
Since you have access to a group of qualified and licensed financial institutions, you will be able to trade in real-time using the most current rates. Moreover, the spreads are too small, there are no profit margins for the company, and the prices are direct and transparent according to market mechanisms.
👉 3. Real-time Trades
If you are using an ECN account, all your trades will be executed instantly and directly by the liquidity providers without any errors or delays.
👉 4. Anonymity
Since you are dealing with a large number of Liquidity Providers, no one knows which liquidity provider matches your orders. The liquidity providers won't be able to tell where the orders are coming from either. There is also no conflict of interest because the companies are not market makers, and therefore, earn nothing from the spreads.
👉 5. Various Spreads
As previously mentioned, an ECN account gives you access to real-time quotes from the interbank market, i.e., fast price movements within a fraction of seconds with very flexible spreads. This is especially beneficial for professional traders who prefer to use profit-taking techniques. In this way, you can place your trades using real-time pricing and low spreads to maximize your returns.
Which account is the right one for you? ECN or Standard? Let’s break down both of these accounts to get a better picture.
🔔 1. Standard Account
The Standard Account is very simple and uses a traditional forex trading method. Trades are conducted through the forex company, which is an intermediary between you and the liquidity providers. The brokers (market makers) can also take the other side of your trades.
The spreads on Standard accounts are more varied - usually from 1 to 1.5 pips - compared to ECN accounts because Forex brokers make profits by adding a small margin to them. However, these spreads are more stable than those of ECN accounts because price fluctuations are already included in them.
Forex companies do not charge any commission for their standard accounts, plus these accounts usually come with simpler and more user-friendly platforms.
So, if you are a fledgling forex trader in the market, a standard or a micro account would be a better choice for you.
🔔 2. ECN Account
The ECN account comes with more advanced trading platforms and high price swings because of your direct access to the interbank market. In this way, you may have some difficulties in calculating your stop-loss and break-even points.
In an ECN account, orders will be executed instantly using the market price with low spreads; therefore, you cannot lose sight of the market due to its instantaneous nature. If you are a fan of profit-taking techniques, then the ECN account is the right choice for you. Needless to say, ECN accounts are much better for professional traders with years of experience. You should also know that ECN forex brokers charge a certain amount of commission per transaction.
Before deciding which route to take, Standard or ECN, try to consider all the pros and cons of these two accounts with your trading objectives in mind.
