Trading Through A Market Maker Vs. An ECN

The foreign exchange market (forex or FX) is an unregulated global market in which trading does not occur on an exchange and does not have a physical address of doing business. Unlike equities, which are traded through exchanges worldwide, such as the New York Stock Exchange or the London Stock Exchange.
Foreign exchange transactions take place over-the-counter (OTC) between agreeable buyers and sellers from all over the world. Because this network of market participants is not centralized, the exchange rate of any currency pair at any one time can vary from one broker to another. (To get a complete overview of forex, see The Forex Market and A Primer On The Forex Market.)

The main market players are the largest banks in the world, and they form the exclusive club in which most trading activities take place.This club is known as the interbank market. Retail traders are unable to access the interbank market because they do not have credit connections with these large players. This does not mean that retail traders are barred from trading forex; they are able to do so mainly through two types of brokers: markets makers and electronic communications networks (ECNs).
In this article, we'll cover the differences between these two brokers and provide insight into how these differences can affect forex traders. (To continue reading on this subject, see The Foreign Exchange Interbank Market, The Global Electronic Stock Market and Electronic Trading Tutorial.)

How Market Makers WorkMarket makers "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market.
As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
The exchange rates that market makers set are based on their own best interests. On paper, the way they generate profits for the company through their market-making activities is with the spread that is charged to their customers. Spread the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers.
As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. But there are also times in which market makers may decide to hold your order and trade against you. There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations who usually offer a bid/ask quote to other banks, institutions, ECNs, or even retail market makers.
Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.Pros:
The trading platform usually comes with free charting software and news feeds. (For related reading, see Demo Before You Dive In.)
Some of them have more user-friendly trading platforms.
Currency price movements can be less volatile compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.

Cons:
Because they may trade against you, market makers can present a clear conflict of interest in order execution.
They may display worse bid/ask prices than what you could get from another market maker or ECN.
It is possible for market makers to manipulate currency prices to run their customers' stops or not let customers' trades reach profit objectives. Market makers may also move their currency quotes 10-15 pips away from other market rates.
A huge amount of slippage can occur when news is released. Market makers' quote display and order placing systems may also "freeze" during times of high market volatility.
Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution", which means their orders may not get filled at the prices they want. How Electronic Communication Networks or ECNs WorkECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs depending on the pair's trading activities. During very active trading periods, you can sometimes get no ECN spread at all, particularly in very liquid currency pairs such as the majors (EUR/USD, USD/JPY, GBP/USD and USD/CHF) and some currency crosses. Electronic networks make money by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices; therefore, the risks of price manipulation are reduced for retail traders. (For more insight, see Direct Access Trading Systems and the Electronic Trading tutorial.)Just like with market makers, there are also two main types of ECNs: retail and institutional. Institutional ECNs relay the best bid/ask from many institutional market makers such as banks, to other banks and institutions such as hedge funds or large corporations. Retail ECNs, on the other hand, offer quotes from a few banks and other traders on the ECN to the retail trader.
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Pros:
You can usually get better bid/ask prices because they are derived from several sources.
It is possible to trade on prices that have very little or no spread at certain times.
Genuine ECN brokers will not trade against you as they will pass on your orders to a bank or another customer on the opposite side of the transaction.
Prices may be more volatile, which will be better for scalping purposes.
Since you are able to offer a price between the bid and ask, you can take on the role as a market maker to other traders on the ECN.Cons:
Many of them do not offer integrated charting and news feeds.
Their trading platforms tend to be less user-friendly.
Because of variable spreads between the bid and the ask prices, it may be more difficult to calculate stop-loss and breakeven points in pips in advance.
Traders have to pay commissions for each transaction.Which Type of Broker Should I Use?The type of broker that you use can significantly impact your trading performance. If a broker does not execute your trades in a timely fashion at the price you want, what could have been a good trading opportunity can quickly turn into an unexpected loss; therefore, it is important that you carefully weigh the pros and cons of each broker before deciding which one to trade through.
By Grace Cheng, See Grace's Forex blog at www.gracecheng.com,

How to Pick the Right Forex Trading Broker

How to Pick the Right Forex Trading Broker
By Davion WongPublished: November 26, 2007

Picking the right forex trading broker can be a tedious exercise for most traders. There are more than a hundred online brokers today and more are coming on board. Since the foreign exchange market is worth trillions of dollars, it offers lucrative opportunities for brokers to set up their firm online. The challenge is with too many choices, it is hard to decide which is best for you. This piece of information would provide you with the necessary tips to pick an ideal forex trading broker.

Since the foreign exchange market is decentralized, it can be hard to identify fraudulent practices by unscrupulous brokers. When finding a broker, do make sure to follow the following pointers and your chances of finding an honest and reliable forex trading broker are dramatically increased!

1. Always request for references that you can speak with.

2. Do a check with the local regulatory agencies and make sure that the forex trading broker is registered. For US-based brokers, see if they are registered as Futures Commission Merchants (FCM) with the Commodity Futures Trading Commission (CFTC) and registered with National Futures Association (NFA).

3. Compare the account details such as the minimum deposit required, leverage, spreads and so on. Ask them specifically are there any commissions chargeable, lot fees, etc. This is to ensure you do not incur hidden costs. Some sneaky traders deliberately give you an impression that they are the cheapest to use but in actual fact load you on hidden charges.

4. The trading platform needs to be user-friendly. Many traders especially first-timers find it challenging to navigate around the site just to make sense of the charts and currency prices. If there are demo accounts, try them.

5. REQUOTING. This is a big pitfall that many traders fell into before realizing. Low spreads and commissions do not mean much if the forex trading broker decides to "trick" you with requoting. Basically, what it means is that when you transact with a buy/sell call for a currency pair at a certain price, the broker requotes and charge you on the requoted price rather than what you see.

The difference in transacted prices can be as much as 9 pips and beyond. Be wary of those dealers that keep requoting when you are making huge gains! It is common to have occasional ones but when it happens way too often, you should smell a rat. Always choose one that have a "no requoting" policy.

Well, now you are in a better position to find an ideal broker to work with. Be adventurous and start your search now. While forex trading carries risks, it is also a place where people make their riches. Find out from my website which forex trading broker has consistently amazed their users with excellent service and a "no requoting" policy.
Also pick up more powerful tips on currency trading
Learn everything about forex trading from Davion's wildly popular Forex Trading Made Easy blog - from mastering the basics of foreign exchange trading to discovery of new trading tips, strategies, tools and more.
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MACD-HISTOGRAM

MACD HISTOGRAM
The MACD Histogram is useful for anticipating changes in trend.
Overview
The MACD Histogram (MACD-H) consists of vertical bars showing the difference between the MACD line and its signal line • A change in the MACD-H will usually precede any changes in MACD • Signals are generated by direction, zero line crossovers and divergence from MACD • As an indicator of an indicator, MACD-H should be compared with MACD rather than with the price action of the underlying market.MACD-H is used with MACD as a complementary indicator. Thomas Aspray found that MACD signals often lagged important market moves, especially when applied to weekly charts. He first experimented with changing the moving averages and found that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD crossovers and came up with the MACD Histogram.

Interpretation:
The MACD Histogram represents the difference between MACD and it's signal line (usually the 9-day Exponential Moving Average (EMA) of the MACD). Whenever MACD crosses the signal line, MACD-H crosses the zero line.
• If the MACD line is above the signal line, the histogram is positive, and the bars are drawn above the zero line.
• If the MACD line is below the signal line, histogram is negative, and the bars are drawn below the zero line.Sharp increases in the MACD-H indicate that MACD is rising faster than its 9-day EMA and upward momentum is strengthening. Sharp declines in the MACD-H indicate that MACD is falling faster than its moving average and downward momentum is increasing. Divergences between MACD and MACD-H are the main tool used to anticipate crossovers. A positive divergence in the MACD-H indicates that MACD is strengthening and could be on the verge of a bullish moving average crossover. A negative divergence in the MACD-H indicates that MACD is weakening and can act to foreshadow a bearish moving average crossover in MACD.
SignalsThe main signal generated by the MACD-Histogram is a divergence from MACD followed by a zero-line crossover.
• A bullish signal is generated when a positive divergence forms and there is an upward zero line crossover.
• A bearish signal is generated when there is a negative divergence and a downward zero line crossover.In Technical Analysis of the Financial Markets, John Murphy states that the real value of the MACD-H is spotting when the spread between the two lines is widening or narrowing. When the histogram is above its zero line (positive) but starts to fall, the uptrend is weakening. Conversely, when the histogram is below its zero line (negative) and starts to rise, the downtrend is losing momentum. These turns of the histogram provide early warnings that the current trend is losing momentum, and the buy or sell signal is given when the histogram crosses the zero line. Murphy also advocates a two-tiered approach in order to avoid making trades against the major trend. The weekly MACD-H can be used to generate long-term signals. Then only short-term signals that agree with the major trend are used.
• If the long-term trend is up, only positive divergences with upward zero line crossovers are considered valid for the MACD-H.
• If the long-term trend is down, only negative divergences with downward zero line crossovers are considered valid.Used this way, the weekly signals become trend filters for daily signals. This prevents using daily signals to trade against the overall trend.
Many technical tools/indicators are rejected by traders because they provide signals that, while effective and accurate are too infrequent for active trading. Some of these indicators also seem less effective over a longer period of time, one indicator however, that is especially adaptable to longer time frame of the market timer or position investor-
simply for someone looking to exploit temporarily excessiveness weakness and pessimism in a down market----- might be the MACD (Moving Average Convergence/Divergence)
Alexander Elder in his book Trading for a Living, he notes that MACD-Histogram works in a any timeframe, Weekly, Daily, Intraday The signals of the weekly MACD- Histogram lead to greater price moves than the daily or intraday Indicators MACD- Histogram offers a deeper insight in the balance of power between bulls and bears than the original MACD, it shows not only the bull or Bear is in control but also whether they are growing stronger or weaker. It is one of the best tools available to a market technician. MACD- Histogram gives two type of trading signals; one is common and occurs at every price bar.
The other is rare and occurs only a few times a year in any market, but it is extremely strong When the current bar is higher than the preceding bar, the slope is up, it shows that the bull are in control and it is time to buy when the current bar is lower than the preceding bar , the slope is down, it shows that bears are in control and it is time to be short as indicated in the chart below Elder suggest buying the market when the MACD Histogram stop rising and tick up When the MACD Histogram stop rising and tick down Elder advise going short MACD can as well show the extremely overbought and oversold conditions in the market that leads to dramatic moves to the upside or downside respectively.
Personally, I think MACD-Histgrame is the best and most versatile indicator around.
By observing MACD you can tell 4 things about price action:
• the trend of price action - By observing the relationship of the Fast Line and the Slow Line we can tell the direction of the market. If the Fast Line crosses above the Slow Line the trend is up. This is the premise of a moving average crossover system.
• Divergent situations - By comparing neighboring peaks and valleys of the histogram we can identify areas of regular and hidden divergence. If you do not understand divergence , we will come to that later or use your goggle search to look for it
• Momentum - When the market makes a move the Fast Line and the Slow Line separate. The difference can be seen on the histogram. When this movement subsides the lines come back together and the histogram approaches zero. We can observe the histogram rolling over, or rolling up, towards zero. This is an indication that momentum is drying up.
• Market noise - If the market is going sideways there will be no separation between the Fast Line and the Slow Line. The histogram will necessarily be very close to 0. This is a good time to stay out of the market or look for opportunity when price breaks out of the existing range. • Chart Formations - Patterns such as double tops and bottom,round top and bottom and head and shoulder may be more visible,

A butterfly Gartley pattern in 4 Hr Timeframe

The pattern occurs at the MML +1/8 which is a good zone for reversal to occur but watching the GMMA; the long term GMMA have spread indicating long term investor are in control which can keep forcing the price up till the short term GMMA start closing and start crossing back and we have to look for a candlestick pattern for reversal and other indicator for comfirmation. let keep watch.

A perfect Gartley pattern setup

The Gartley bat pattern in 1hr time frame setup that occurs yesterday , the price later reverse at the PRZ and our entry point were when the the Short term GMMA in Red finally cross over the Long term GMMA with the Juice confirming the increase in volatility, when the juice turn green and above an average at the line 12.

Gartley bat pattern

This is 1hr time frame of a bat pattern with the PRZ (Price Reversal Zone) at the Murray Math 8/8; showing that the price is likely to reverse at this level ,which the entry confirmation of this trade still depend on where the price is on the daily and 4hrs MML, I will only watch when the Gruppy short term moving averages cross over the long term moving average(blue) at this point I will go short as the chart is seen below, if the pattern still fail there are tendency I will still long which still depends another indicator such juice to indicate wether there is momentum.

Bunny Cross with other indicators

The bunny cross, juice, camarilla lines, pivot lines setup on 30 mins TF.
The shi Channel given us the trend direction which can as well be confirm with the 4hrs TF
The entry were at the breakout of H4 Long, after the close of breakout candle at 1.3634 a long position was taken immediately, We ignore the bunny entry of th blue line because where it occurs was within H3 and H4, and there may be reversal at H4 long breakout Line.
The juice indicating the increase of momentum by turning green.
We exit immediately as the price touches the upper channel which happen to be our price target.