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Thursday, September 11, 2008

Two Kinds of Forex Broker: Which Forex Broker is Right for You ?

There are two major types of Forex brokers, and which one is best for you can depend on your specific trading strategies. There are Market Makers (MM) and Electronic Communications Network (ECN) in the Forex market, and knowing the difference between the two is extremely important if you want to be a successful Forex trader. Market Makers (MM) are brokerage firms that set both the asking price and the bid price. This means that an MM sets up every part of your trade. No matter if you are buying or selling, the MM is your trading partner and taking the other side of that trade, therefore ensuring that your trade will go through. Electronic Communications Networks (ECNs) take the bid and ask prices from several different market participants (such as individual traders, banks, MMs) and then the bid and ask prices are displayed as bid/ask quotes. When you place an order to buy, it's matched with a sell order set at the same price. If there is no match, then your order simply will not take place because you will have no partner to trade under those terms. Unlike the MMs, the broker in an ECN does not take the other side of the trade, and is under no obligation to do so. The partner ends up being whatever trader wants to go the other way with the same currency pair. Three positives of an MM: 1. Most market makers have set spreads. 2. Market makers normally have user-friendly, downloadable trading platforms that include free charting software3. MMs, since they are your trading partner, tend to guarantee that your orders will almost always be filled.Three positives of using an ECN: 1. The bid/ask prices are normally better because there are multiple sources used to derive them.2. You can make trades within the spread itself and take the role of an MM.3. Prices are more volatile, which is better for scalping. Many traders who use diverse styles of trading will have accounts with both types of brokers. In fact, I have accounts with both. Knowing the differences between these broker types will help you know how to have the best set up for each type of trading strategy your system calls for you to use. For some the MM is a better choice, while for others an ECN clearly reigns supreme. Once you intimately know the pros and cons of both types of Forex brokers you'll be one step closer to being ready to learn to make a killing in the Forex market.
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