August 23, 2012 in Forex Articles
ECN trading has a number of significant advantages for individual participants in the trading markets. For a start, each deal is entirely anonymous, which allows smaller traders to access real-time market conditions without any fear that the picture being viewed is biased by a broker’s own strategy or agenda. In the other direction, such anonymity also provides the freedom for traders to pursue an aggressive market strategy without fear of alienating other participants or tipping off the competition too early.
Most ECN trades are also completed instantaneously, allowing rapid reaction on the part of traders and avoiding the problem of re-quotes which can arise when dealing with a middle man. Such speed, when combined with the breadth of data provided by most ECN software, allows traders to deal in tight bid/offer spreads, and to react rapidly to changing market conditions. Such flexibility is not often present in more highly brokered situations, in which restrictions on allowable trading strategies are often imposed for the convenience of the broker rather than the client.
The depth of data mentioned above really comes into its own when used to provide a wider perspective on changing market conditions. Rather than dealing with only one liquidity provider, or through the fixed strategy of a middleman broker, users of an ECN are able to view institutional feedback from many different major players in the marketplace. This can enable day traders to spot shifts in market price as they happen, and enables smaller market participants to use the same information as major traders.
Of course, there are risks as well as rewards to an ECN strategy. Unlike more heavily brokered platforms, an ECN participant relies on his or her own knowledge of the market and understanding of trading strategy. ECNs tend to reflect market volatility, and so in difficult trading conditions it is entirely possible to make significant losses without much warning. Similarly, whilst ECNs often claim to be accessible 24 hours a day and 7 days a week, major trading activity is only usually possible when there is liquidity in the market. For this reason, ECN trading does not transcend the usual market opening patterns in the way that is often promised by brokers.
Ultimately, ECN forex brokers are suitable for small investors who have garnered sufficient experience through retail trading to understand the conditions of the market and to be comfortable in a fast-moving and often changeable commercial situation. As long as you are confident in your trading strategy, engaging with a reputable ECN broker should be a positive experience.