Learn How to Beat the Forex Market Maker
What is a Market Maker in Forex?
What is a market maker? The term “market maker” is generally used to denote a broker who is the counterparty to all of the trades you make with them. These brokers make the market by entering the opposite side of the trade. This is in contrast to ECN- or STP- style brokers who actually have connections to other banks and brokers and find the best price and who also find a counterparty to your trade.
It is obvious from the way they are set up that the market maker broker wants you to lose. This leads to a lot of the theories that losing traders often provide to explain their losses. Some believe that brokers purposely have it out for them and manipulate the prices so that their stops are triggered.
While it’s common to hear traders complain about how the broker (often a market maker) cheated them out of a trade, this probably does not happen as much as they would have you believe. This is not to say that there are not scam brokers that do, in fact, manipulate the markets or mysteriously close trades for no apparent reason.
How do Market Makers in Forex Work Against You?
A market maker sets bid and ask spreads and prices for each currency pair they offer.
These prices can reflect:
- the prices being quoted on similar exchanges;
- what exposure the broker has in this currency pair at the time;
- how they feel the currency pair will perform in the future;
- the present liquidity of the currency pair.
Market makers do not quote a price that is not in their best interest. If a currency pair is balanced between buyers and sellers, they may be content to profit off the spreads. But if a situation arises where they are overexposed, they will set prices and spreads that balance out their risk. It is difficult to come up with a true “market maker method” or Forex market making strategy because every time you win, the market maker loses.
Benefits of Forex Market Making
As undesirable as they may seem, market makers make up a large part of the Forex market and they do provide significant liquidity that keeps things moving. Their marketing and promotions bring new traders into Forex who would otherwise not be familiar with it. A few of these traders may become successful traders after learning the craft.
Market Maker Trading Strategies
ECNs are much better choices for those wishing to utilize high-frequency trading strategies or scalping. So, anyone wondering how to beat a market maker should stay away from these strategies while trading on a market maker platform.
The banks and liquidity providers are also maker makers in a sense as they also trade the Forex market. However, their primary business model lies in making money from fees and their operations are so large that manipulating is not realistic. They just simply use their massive power to trade without moving the markets too much too fast. While market makers are always rooting against you, the large liquidity providers are too big to be concerned with you.
Conclusion
While market makers do offer some benefits to the Forex ecosystem as a whole, they do have conflicts of interests that may put their clients’ trades in jeopardy if the broker happens to be too exposed on one side or the other. Unlike an ECN- or STP-type broker, a market maker loses when you win, and wins when you lose. Some of these are trustworthy brokers content to make money from fees that arise from the natural course of trading. But some cross the line into manipulation. Market makers are not likely to be a good fit if you heavily rely on scalping or high-frequency trading strategies.
