Understanding ECN Order Flow Trading in Forex

Within the current forex market environment, there exists two kinds of brokerages – Market makers and Electronic Communications Network ECN brokers. Since the forex markets is primarily unregulated, there  exists no central center for forex trading. The ECN system was implemented to provide traders with immediate access to the forex market, allowing them to match themselves with other traders, and conduct transactions.

Forex ECN trading account is for professional experienced traders as well as investors and traders who wish to use the Social Trading service. This type of account offers the highest annual percent accrued on unused funds, and access to deep liquidity with low floating spreads. The trading account is created on the basis of modern ECN technology that provides access to the best prices on the market, stable and guaranteed fast execution with no re-quotes and no conflict of interest.

When a trader is looking to buy or sell currency, they are required to submit an order that mentions the price at which they are willing to buy or sell, and the required volume of currency. When another trader finds the order suitable, a trade can be initiated.

Order Flow Trading really began back early on in the bucket shops and pits of the exchanges.

Pit traders use hand signals and vocal “open outcry” to relay their orders to market makers.

Interesting Fact: The bright colored coats you would see people wearing on the floor would assist in the identification of specific traders or the exchange members for whom they work. The standard red was given to traders (also called locals) and brokers on the floor, but many opted for their own distinct jacket designs worn by their entire group.

What is order flow trading?

Before one can begin to understand how the Electronic Communications Network uses the order flow mechanism, it is first important to know what kinds of transactions the mechanism is used for. Order flow is used between traders looking to perform directional trades. A directional trade is one where a trader assumes that a particular currency price is either going to move up or down. If a currency is anticipated to move up, a buy order is issued. Conversely, if a currency is expected to go down, a sell order can be submitted. 

Order flow, also known as transaction flow can take place when a trader believes that the price of a particular currency is going to change and accordingly places a transaction to be executed. Traders who look to adopt aggressive strategies within the market are likely to place market orders.

A market order will require traders to pay the difference between the available buying price and the selling price. However, if traders are not seeking aggressive strategies, they also have the option of executing a limit order. A limit order, also termed a stop order, allows the trader to define the price at which a transaction must be executed. Both forms of trading fall under the banner of order flow trading. 

Market orders are generally placed by traders who want quick results and are not prepared to wait for other traders. Limit orders require other traders within the market to find a trader’s deal acceptable before execution. If there are no traders willing to complete the deal, then the limit order will become void. Nevertheless, even if a limit order is not executed, it still does influence the overall order flow within the market. 

What is market depth?

When brokers trade via the Electronic Communications Network, they are provided access to important information relating to the volumes of transactions being traded within the forex market. The market depth is defined as the volume of currency available for transaction at a particular point in time in the forex market. Using the ECN, brokers will be able to gauge the best possible ‘Ask’ and ‘Bid’ prices, relevant to their limit orders. 

The market depth will list all the various orders that traders are willing to execute on the forex market. When a limit order is matched with another, a trade will be executed and the two limit orders will be removed from the market depth list. The executed transaction will then be recorded in the forex market’s trade history.  

The importance of order flow trading

Prices of a currency do not move based simply on technical indicators or moving averages. If a currency price is to move, a limit order must be matched with another. When enough limit orders are executed, the currency price will move on the price chart to reflect these transactions. 

As such, understanding order flow trading is about anticipating the manner in which other traders in the market are behaving, and placing yourself in an advantageous position accordingly. Order flow trading is less about numbers and figures than it is about predicting the behavior of other traders within the market, by thoroughly analyzing the various scenarios, prevailing mentalities and expectations within the market. 

While technical analysis may move the price of a currency in some cases, the reality is that it cannot take into account whether the appropriate limit orders will be available for a trade to executed. Using technical analysis may lead to losses because limit orders may expire or be triggered before the market moves in your favor. 

How to Analyze Order Flow in Forex Trading?

There are several ways to analyze order flow in forex trading. One of the most popular methods is to use order flow indicators. These indicators provide real-time data on the flow of orders in the market, allowing traders to identify key levels of support and resistance, as well as potential breakouts and trend reversals.

Another way to analyze order flow is to use volume analysis. Volume analysis involves analyzing the volume of trades in the market to identify areas of high volume and low volume. Areas of high volume are typically associated with key levels of support and resistance, while areas of low volume are associated with potential breakouts and trend reversals.

Metatrader 4/5 order flow trading is useless

The well-known trading platform for traders is MetaTrader 4 or 5. It does not show the real trading volume because you do not get the right data of futures in your trading platform. Besides, most indicators show only the “tick volume”. This is no trading volume. It only analyses the movement. If you compare the real volume with the MetaTrader volume you will see there is a huge difference.

  • MetaTrader volume is only the tick-volume
  • The MetaTrader order flow is depending on the normal chart (without order flow)

ECN vs Dealing Desk Brokers: Which one is better?

Both broker types have their pros and cons, and the right choice for you will depend on your trading style and goals.

ECN brokers offer a direct connection between buyers and sellers, making them a better choice than dealing desk brokers. In contrast, dealing desk brokers execute trades by either taking the opposite side of the trade themselves or passing on the order to a market maker.

Dealing desk brokers are often criticized because they may have a conflict of interest if they trade against their clients, and also because passing orders on to market makers can result in slower order execution. On the other hand, they are typically less expensive to trade with.

There is no certain answer to which broker is better – if you are a high-frequency trader, then opening an ECN account is likely your best bet. But if you’re a casual trader who doesn’t trade often, then a dealing desk broker might be a better option. Ultimately, it’s up to you to decide which type of broker is best for your needs.

Benefits of demo ECN accounts forex:

Trading can be considered as financial risks when a trader is unable to understand the market trend. ‘Success always lies in continuous practice.’ If you do practice in demo accounts, then you will become perfect in demo trading. This opens the door of initial investment to make a trade. Some other benefits are:

  • There is no risk of losing retained money.
  • It enhances your existing skills.
  • It improves your confidence level in great extent.

ECN account forex has several other benefits. In this scenario, it is essential to choose reliable ECN broker.

Things to remember:

  • Reaching a reliable ECN broker is important. This is because brokers consolidate different market participants from all over this industry.
  • ECN brokers cannot do transactions on behalf of the trader.
  • ECN brokers allow traders to invest their capital across the Electronic Communication Networks.
  • ECN brokers charge from traders a commission for every transaction.
  • One can have access to the information of other’s buying and selling positions. This helps in personal execution of the trade.
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