If you have already figured out your forex trading strategy by now, you are not in the clear yet. Now comes the part where you get to choose the type of brokerage firm that will fit in seamlessly with your plan. (How To Chose Right Forex Broker?)
A forex broker in essence, is the one that will keep an eye on the markets for you, and acts as your partner in setting up your orders.
There are two major kinds of forex brokerage firms. Knowing their differences is important on your way to dominating the market. Not understanding the advantages of each can set you back a lot of time and/or money.
MM: Market Makers
What is important to understand about Market Makers are the fact that they are the ones who set the asking price and the bid price. As your trading partner in buying or selling, you grant them authority in handling your money.
An MM institution acts as an exclusive liquidity provider, giving services that is otherwise not found on any other brokerage set-ups. In simple terms, they sell for you as well as buy for you. Think of them as a place where they do all the work for you.
Understanding how MM makes a profit is simple. When you finally decided to buy, you buy from them. They in turn will go to other brokers and buy at slightly better rates to sell to you. The difference in rates is their profit. Think of it as the exchange from the work they have done you would have otherwise done yourself.
The advantages of MM:
- They have set spreads, freeing you from the anxiety of the fluctuations in the market.
- Since they work for you as a partner, your orders are assured.
- They are usually user-friendly, easy to access and understand. Software and platforms are easy to get.
ECN: Electronic Communication Networks
Electronic Communication Networks on the other hand, place your order in a bid and lists all the asking prices for it. The asking prices comes from many market participants, if their sell order matches your order.
If there is no match, then your order will not push through. ECNs are not obliged to fill your orders; rather, it is up to you if you will agree on the ‘ bid/price.
The advantages of ECN:
- Prices are more aggressive, so scalping is ideal here.
- You can also take the role of an MM and mediate between trades, making a profit for yourself in the differences of rates.
- Because there are many sources, bid/ask prices are better and more diverse than MM prices.
Choosing which one to put your focus on depends entirely on the kind of strategy you have, whether you plan to trade conservatively or aggressively. Different brokers fulfill different demands, and the services they give set them apart. These two are just the major kinds, and now you can seek out that broker that leans on the type you consider will best work out for you.
The advantages of the two help a lot of diverse-thinking forex traders apply their strategies. Most traders maintain a strong account on with both types of brokers in order to maximize the potential they have. Learning how to play on both sides of the field is a step closer to bringing about a successful career in forex trading.