Many traders come across the concept of ECN but don’t know what it is and how it works.
In this guide, we will give you a complete picture of ECN in Forex trading.
What is ECN?
ECN or electronic communication network connects traders with liquidity providers (banks, brokerage firms) and other traders from anywhere in the world.
The whole process is done through an ECN account, and the broker, which provides an ECN account, is called an ECN broker.
For opening an ECN account, you have to place an application with the broker providing the account. Most brokers offer an ECN account with a minimum deposit of $200.
How ECN works?
ECN eliminates the role of a traditional middleman in trading. Traders get access to different market participants. Having an ECN account provides traders with the best bid/ask price in the market.
The execution of orders takes place automatically. In this way, traders can be sure that the broker they are using has nothing to do with their trading. That’s why ECN brokers are also called non-dealing desk brokers.
To give you a better perspective of forex ECN, here’s is an example:
Let’s say you have placed an application for the purchase of 100 lots of EUR/CHF. The ECN system will search for a response application of any other participant for the sale of 100 lots of the same currency pair. When it finds it, your transaction will be completed.
Advantages of forex ECN
Now that you know what ECN is, it’s time to tell you there are numerous benefits of ECN. They are:
- Minimum spreads and commissions for transactions
- Transactions in ECN, as a rule, are executed at a decent speed, there are no requotes, and slippages are minimal.
- All transactions made in the system are as transparent as possible.
- All participants are supplied with a full range of information necessary for trading.
- Since the system has many counterparties, you cannot worry about the lack of liquidity.
- ECN brokers do not limit the work of traders. This allows its participants to open any transactions with different durations.
Are there any disadvantages?
There are some drawbacks that a trader needs to know before opening an ECN account. They are:
- A trader should be prepared for the fact that in addition to the spread, it will also be necessary to pay a commission for providing access to ECN.
- A continually changing spread is an integral consequence of trading through ECN. This can create certain difficulties when using expert advisers and trading robots because when testing historical data, a fixed spread value is used. Such a disagreement can lead to the fact that robot trading with a fixed value of the spread will make a profit. And if it’s floating, it will bring a loss, especially using strategies like scalping.
Summing up, we think that ECN forex is a great system for trading because it cuts through the hassle of dealing with the middleman. You have full control over your account, and that’s what every trader wants.