Are You Working With A Legitimate Forex Trading Broker And Is That Firm Working For You ?

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Individuals new to currency trading may be bewildered to find that their foreign exchange broker might work in some amazing ways. In fact, many companies providing currency trading services are not brokers in the usual sense at all.

Conventionally a broker would serve you as a customer, placing your buy and sell orders for you through their dealing desk and charging commission (for equities trading transactions) or making their income from the spread (the difference between bid and ask prices) for currency trading. At one time orders would be given by telephone. Now they are placed online, with you in entire control of your account.

But regular forex trading accounts require considerable account balance. Generally the minimum deposit is somewhere from $10,000 to $50,000. Now that forex trading can be done from home, there are countless new companies springing up with lower deposit limits, offering forex trading mini accounts. But their business model is not inevitably the same as traditional brokers, and this can have consequences for you.

So nowadays, there are other types of firms that operate in different ways in order to provide services to the smaller investor. Most of these do not have dealing desks of their own.

Forex NDD (No Dealing Desk)

Brokers without a dealing desk cooperate with third party liquidity providers to ensure prices and match clients' trades. Because there is a selection of liquidity providers, the real spread tends to be small but the broker can widen the spread to give themselves a better profit margin.

Forex ECN (Electronic Communications Network)

ECN brokers provide a marketplace where many market players including banks, market makers and individual traders can see to have their trades executed. Orders will be entered under the name of your ECN provider for anonymity. Spread is regularly small but the ECN will in many cases charge a matching fee per transaction.

Forex Market Makers

When you have an account with a market maker, your transactions are not being matched by external providers but by the market maker themselves. This means that they take the other side of the trade and offer their prices to you, although of course these prices relate to the current price in the market. They will then cover their risk by taking an equivalent position to yours in an ECN or other environment.

Since they are not actually placing your order in the market, market makers are not brokers in the true sense of the word still many traders use the term foreign exchange broker loosely and include them. Others think that the separation between market makers and bucket shops is not clear and rather avoid them.

Forex Bucket Shops

Bucket shops work a little like market makers but they do not cover their risk and can have very little connection to the real spot currency market. When you trade with a bucket shop you could be said to be betting against them. They take the other side of your trade and they win if you lose. Like commercial bet takers, if you are profitable they tend not to want your business and will probably close your account, giving back your funds to you. They of course won't provide you with additional support, like forex signals. Obviously, as with a forex signal service they would help you to win against themselves, so you can't expect such a suicidal behavior. So the best thing to do is to find a reliable forex signal provider.

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