If you have figured out your forex trading strategy by now, then you are not quite sure yet. Now comes the part where you choose the type of brokerage that will work perfectly with your plan.
Essentially, a forex broker will keep an eye on the market for you and act as your partner in setting your orders.
There are two main types of forex brokers. Understanding the differences between them is important on your path to dominating the market. Failure to understand the advantages of each can cost you a lot of time and/or money.
MM: Market Makers
It is important to understand market makers because they are the ones who set the asking and buying prices. As your trading partner for buying or selling, you grant them the authority to handle your funds.
Market maker institutions act as exclusive liquidity providers, offering services not available at any other brokerage firm. Simply put, they sell for you and they buy for you. Think of them as a place that does all the work for you.
Understanding how MM is profitable is simple. When you finally decide to buy, you buy from them. They in turn will go to other brokers, buy at a slightly better price, and sell to you. The difference in the exchange rate is their profit. Think of it as an exchange for the work they do that you would otherwise do yourself.
Advantages of MM.
- 1. they have fixed spreads, freeing you from the anxiety of market fluctuations.
- 2. your orders are guaranteed because they work for you as a partner.
- 3. they are usually user friendly, easy to access and understand. Software and platforms are easily available.
ECN: Electronic Communication Network
On the other hand, electronic communication networks place your orders in a bid and list all the asking prices. These asking prices come from many market participants, if their sell orders match your order.
If there is no match, then your order will not be pushed. ECN is not obligated to execute your order; instead, it is up to you whether you would agree to an offer/price otherwise.
Advantages of ECN.
- 1. the prices are more aggressive, so scalping is ideal here.
- 2. You can also play the role of MM, mediating between deals and earning yourself a profit on the rate difference.
- 3. Because there are many sources, buy/sell prices are better and more diverse than MM prices.
Which one you choose to put your attention on depends entirely on what kind of strategy you have and whether you intend to trade conservatively or aggressively. Different brokers cater to different needs and the services they give make them different. These two are just the main kinds, and now you can look for that broker that favors the type that you think is best for you.
The advantages of both help many forex traders with different thinking to apply their strategies. Most of them maintain a strong account in both areas in order to maximize their potential. Learning to play in both areas is a step towards bringing a successful forex trading career.