A forex broker refers to a legal entity which acts as link between the traders in the forex market. The best online forex brokers are provided with market prices of various currency pairs by enormous banks like Bank of America, Citi and Goldman Sachs. These large banks act like liquidity providers for the brokers, but do not accept retail clients, so in order to trade forex, you need a forex broker.
To choose the best forex broker, it is good to know the various types of brokers in the market. There are four types of forex brokers: Market Makers (DD), Straight Through Processing (STP) brokers, No Dealing Desk (NDD) brokers and the Electronic Communications Network (ECN) brokers.
Market makers maintain Dealing Desks (DD) and simply make the market for the forex traders. Dealing desk broker buys from traders who want to sell, and sells to traders who want to buy. These brokers make money when trades lose and lose money when traders win. This involves a significant and substantial risk of price manipulation and may not be suitable for active traders and scalpers.
No Dealing Desk (NDD) brokers deal with the provision of interbank currency market. They provide forex traders with real market quotes and do not have any intentions of making profits by manipulating the price. NDD brokers make profits by charging a trading commission or by adding a markup to the spread.
Straight Through Processing (STP) brokers send traders' orders directly to their liquidity providers – usually banks which participate in the interbank forex trading. STP brokers may have different number of liquidity providers. An increase in the number of banks and liquidity in the system means better spread and better execution of orders. STP brokers are preferred by many forex traders because of their transparency and fast execution of market orders.
ECN brokers allow all their clients to trade freely by sending competitive offers and bids into the market. Traders can place pending orders inside the spread and act like market makers. ECN brokers charge only a small fee for their services and are preferred by most traders and other online forex trading professionals because of their tight spreads, transparency dealing and low commissions.
When choosing a forex broker, you should be aware of a few factors: fist and foremost, these are the spreads and slippage, which make up your transaction costs. Another thing to look for is regulation and transparency of operations, and last but not least – professional and reliable customer support.
Bellow is a list of recommended forex brokers.
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