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Technical Analysis

there are Five Types of Forex Brokers

There are several types of Forex dealers with online access. They range from the perfectly legitimate brokerage firms to illegal betting houses. Each trader will have to choose their type of dealer carefully to select the right type of dealer ? many share similar qualities and access to the Forex market, but their policies and procedures differ quite dramatically.

Beginning traders need to be especially vigilant about the type of dealer they select. Remember, the Forex market remains loosely regulated and this allows for a wide range of trading services that may not be suitable for many traders, particularly beginning traders.

Each type of broker represents a different level in the Forex market. Some levels are very high and have direct access to the Forex market while others are very distant and have very little connection to the Forex market. Yet most of these types of broker are legal in most countries and are used by different types of traders.

    * Bucket Shops

      This type of broker has virtually no connection to the real-world Forex market. Bucket shops depend largely on using currency futures and options. These types of brokers will essentially ??book? or take the opposite position of a trade made by a retail trader. However, they will not actually execute them on any exchange. Basically, the bucket shop is betting against the trader. Since the legality of bucket shops is questionable, this type of broker should be avoided by beginning traders.

    * Book makers

      A book maker is very similar to a bucket shop. However, the book maker does not earn profits by winning the ??bet?, but rather makes profits based on the spread (difference between the buy and sell price) of the trade. Like the bucket shop, this type of broker has little or no connection to the Forex market. Book makers are illegal in the United States and many other countries. Book makers are also called spread betters or spread betting companies.

    * Retail Market Maker

      These types of brokers represent the vast majority of online Forex dealers. They differ in many respects and offer a wide range of services. Most traders will use a retail market maker. They take different approaches in their connection to the Forex market. Some are directly connected while others deal with an intermediary for access to the Forex market.

      Retail market makers are suitable for beginning Forex traders, but they should consider the services offered before making a selection. They are legal in the United States and most other countries.

    * Institutional Market Maker

      These types of broker are very closely aligned with the Forex market. They have a more direct connection than most Retail Market Makers. They are very suitable for beginning traders, but usually require large amounts of money for direct access to the interbank market.

    * Institutional Forex

      Institutional brokers are directly connected to the Forex market. This consists of a consortium of approximately 200 banks. It also represents nearly half of all Forex trading. This is not suitable for beginning traders since only banks are allowed to participate. If any broker claims to have direct access to the Interbank market, they are committing a fraud since only banks have this type of access.

So, these are the five different types of brokers. Actually, only four types are available individual traders. The most appropriate type of broker is the Retail Market Maker. There are many different types of Retail Market Makers and they are easy to find. However, traders must closely investigate this type of broker to make sure that it offers the necessary services and that it does not engage in fraudulent activity.

Book makers and bucket shops should be avoided because they are not regulated by the Commodity Futures Trading Commission.

Which Type of Broker Should I Choose?

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:

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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