Controlling your costs and trading through an STP-ECN broker gives you the best chance of experiencing FX trading success
It’s wrongly assumed that many FX brokers operate a short-term view of the retail trading industry. The widely held consensus is that they operate a churn process, in as much as they’re looking to rake in as much as possible from their clients in a short a period of time. The theory of churn is that traders move onto new brokers believing it may improve their chances to win.
However, there are many brokers who want their clients to succeed as they’ve equally invested a considerable sink cost to acquire their client. You can identify the brokers who adopt a long term view in a few easy steps; they’ll generally provide STP-ECN market access, have no dealing desk and offer a zero fee account if you maintain a modest level in your account. They’ll also offer MetaTrader as their go to platform as opposed to providing their own inefficient, proprietary, trading platform.
It’s extremely important that novice traders fully appreciate the impact not choosing the right broker can have on their bottom-line. If you’re attempting to day-trade you could be donating vast sums to your broker and the market, unless you control your cost of doing business. If you choose an STP-ECN access broker and service then you’re giving yourself the best possible chance of avoiding poor fills and slippage, two trading issues that can dramatically cut your profits. You’re also getting the best spreads available as the ECN looks to match your orders at the best possible price at any given time in the FX marketplace within milliseconds.
Novice traders have to realise the differences between various brokers. An STP-ECN broker has no incentive for you to lose. They can only exist and prosper depending on the volume of orders they receive. If clients place less trades because they’re dissatisfied with their experience, they’ll simply stop trading with the broker. Therefore, it’s in the broker’s best interest to ensure you receive: five-star service, excellent fills, tight spreads and continual support.
In comparison, a spread-betting broker or dealing-desk broker makes profit when you lose. The best comparison is to relate to these firms as if they’re sports-bookies. Because you are in effect betting against these firms and the indicative pricing they create, which could be significantly away from what could be considered the true market prices. Although there is no centralised exchange for FX pricing, overall the prices you see quoted should in theory be within a pip of each other if you’re trading into an ECN.
However, with an indicative pricing model and a proprietary engine operated by a spread-betting firm, pricing could be some distance away from the true market level. The spread-betting broker could in fact create a price which harms the vast majority of their customers at any given time. This process forms part of the phenomenon often referred to as “stop-loss hunting”. For example, if a cluster of its clients have stop losses placed close to a certain round number the firms could move their current pricing by several pips to execute these stops. The broker will have access to software which can execute such an instruction with ease.
You must also control your costs by choosing an STP-ECN broker that offers you what’s termed a zero charges account. The vast majority of FX traders are part time traders, many are swing traders, so you must avoid what are termed ‘swap costs’ whenever possible. Being charged rollover/swaps costs as the new daily 24hr trading period begins can severely harm your bottom-line. It’s worth taking a moment to quickly calculate how not choosing the right broker and failing to control your costs can hurt your profitability. Let’s assume you’re taking thirty trades a week on the major currency pairs but you’re trading through a dealing-desk broker. You might be paying an extra pip per trade, a pip for the stop and the equivalent of two pips as an overnight charge.
Now let’s highlight this in comparison to an STP-ECN broker through which you’d be charged circa one pip per trade. On each and every trade with the spread-betting or dealing-desk broker you could be paying up to four pips per trade more, a stunning one hundred and twenty pips per week and that’s before you account for the increased slippage and poor fills you’d inevitably experience. Your chances of winning with such a firm is remote.
If you haven’t considered these factors on your trading before then hopefully we’ve woken you up to the dangers. These are perils which can be easily avoided by simply closing up your dealing-desk account today and moving to an STP-ECN broker who allows you to control your costs and your trading through using a MetaTrader platform.