Don’t be Confused by the Different Forex Broker Types Just Read our Helpful Guide
- DD stands for Dealing Desk
- NDD stands for No Dealing Desk
- STP stands for Straight Through Processing
- ECN stands for Electronic Communications Network.
Before we go into more detail let’s first look at a couple of different terms that will be very relevant when discussing different Forex broker types.
What are Fixed and Variable Spreads?
In order to understand what the spread is you first need to be introduced to a pip, as this will be how the spread is expressed. A pip is how the value of a currency is expressed and is the smallest unit in the Forex market. When you see the value of currencies quotes there will often be four digits to the right of the decimal point. The furthest right is one pip. However, in order to make it a little more confusing, a number of currencies only have two digits to the right of the decimal point. One such currency is the Japanese Yen. In some cases, therefore, one pip will be the second digit to the right of the decimal point.
The spread is a term that you will encounter a number of times when considering your options with regards the choice of Forex broker. It refers to the different between the buy and sell price, otherwise known as the bid and ask price. It is normal for two prices to be given for each currency pair., the difference being the spread, which is usually expressed in pips.
Fixed spreads stay the same regardless of market conditions and it is usual for brokers to offer fixed spreads of around 2 or 3 pips for the major currency pairs. The main advantage of fixed spreads for the trader is that they never increase, even when market conditions are volatile.
Variable spreads are always changing. The best Forex broker will always try to offer traders the best possible bid and ask prices. Sometimes variable spreads can be as low as 0.1 pips for major currency pairs. During periods of high liquidity and when market activity is low the spread is usually lower. But when the market is volatile it can be much higher.
Now you’ve got a general understanding of a couple of vital terms it’s time to get on with our introduction to the different types of Forex broker. Afterwards we’ll help with your understanding of a few more bits of trading jargon.
What is a DD Forex broker?
A DD Forex broker is also known as a market marker and is the type of broker that uses a dealing desk in order to act as a counterparty to the client’s trade. In other words, a Dealing Desk broker takes the opposite side of every trade a client makes. This has unfortunately led to many traders becoming concerned about conflict of interest, but on the whole, this doesn’t happen. As they accept all bid and ask quotes a DD broker has to find a counterparty to the transaction from its other clients, and if that isn’t possible it will be passed to a liquidity provider. Only in rare circumstances will the broker act as the counterparty to the trade. The quotes provided by a market maker are generally different than those of liquidity providers on the interbank market, and DD brokers are known to offer fixed spreads.
What is an NDD Forex broker?
With this type of broker, there is no dealing desk, and this particular group of brokers includes ECN Forex brokers, STP brokers and also those which are a combination of the two. When this type of broker accepts an order it is passed directly to liquidity providers for immediate execution, rather than passing it through a dealing desk first. An NDD broker generally offers much lower spreads and promises faster execution. They earn their money either by charging a commission or through a small markup on the spread.
What is an ECN broker?
When it comes to trading Forex ECN brokers are a popular choice for many traders as there are a number of benefits. When ECN brokers receive an order it is passed straight to the interbank market for execution. However, they also allow their own clients to be party to the transaction. We will be reviewing some of the best ECN brokers for your convenience so make sure you read a few of our reviews. ECN trading is very transparent as there is usually a trading system that allows all orders to be seen and for participants to compete against each other. Spreads are always variable and generally very low.
What is an STP Forex broker?
With an STP broker, there is again no dealing desk and clients orders are passed direct to liquidity providers on the interbank market. STP Forex brokers offer variable spreads that are usually quite low. There is also the added benefit of no requotes during news reports.
Now you’ve got a better understanding of the different types of Forex broker let’s help you out with some of the terms you’re going to encounter when picking a Forex broker.
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A brief guide to some of the most common Forex terms
Finding your way around the world of Forex trading is not overly complicated, but there are a number of terms you won’t have encountered anywhere else. Without an understand of Forex jargon, you’re going to find yourself sinking rather than swimming. We’ve already explained what is meant by pips and spreads so it’s time to introduce you to a bit more of the language.
Margin – This refers to the amount of deposit required in order to open or maintain a position. It can either be ‘free’ or ‘used’. Free margin is the amount available to open a position, while used refers to the amount being used to keep a position open.
Leverage – This refers to the ability to gear an account into a position greater than the account margin. You will see that brokers offer different amounts of leverage, ranging from small amounts such as 20:1, right up to larger amounts such as 1000:1. Say, for example, there is $1,000 in a trading account. Leverage of 100:1 will mean that positions of up to $100,000 can be opened. Leverage offers traders the opportunity for making significant gains but can also lead to significant losses.
Exchange rate – This is the value of one currency expressed in terms of another.
Cross rate – These are currency quotes that do not involve the US dollar. But can also refer to currency exchange rates that are not the official currencies of the country in which the quote is being given.
Base currency – This is the basis for the trade and is always the first currency in the pair. For example, say the currency pair is EUR/USD, the base currency is the Euro. In other words, you are buying Euros and selling US dollars.
Quote currency – This is always the second currency in the pair and also known as the counter currency.
Bid price – This is the price at which a broker will buy a specific currency pair from a trader.
Ask price – This is the price at which a broker will sell a specific currency pair to a trader.
Lot – This is the way in which a transaction is measured. Typically, a standard lot is 100,000 units of the base currency. There are, however, a number of brokers who offer trading to take place with one unit at a time.
Going long versus going short – If a trader enters a buy position because they believe the market will rise this is described as entering a long position. If a trader enters the market and decides to sell because the market is going to fall, this is known as entering a short sell position.
Bulls and bears – A trader who believes the market will rise is known as a bull. A trader who believes the market will fall is known as a bear.
Stop loss – In order to keep risks to a minimum a trader has the option of choosing a stop loss order. It protects the trader if the trade goes wrong.
Trading platform – This is an important part of Forex trading as it is what you use to make all your orders, as well as giving you a large amount of useful information. There are a number of different trading platforms available, although the most popular is currently MetaTrader 4. We always make a point of including them in our reviews so it can help in the decision-making process.
You should now be in a much better position to think about the type of broker you want to choose and have a little more understanding of some of the common terms you’re going to encounter when visiting various online broker sites.