Best Forex Scalping

One should think that a Forex broker is always happy for business, but when it comes to scalping, some broker models are better suited than others.

There are a couple of reasons why some brokers do not allow scalping on their trading platforms. A broker that applies the traditional market maker brokerage model generally operates a commission-free trading structure and usually makes its money from spreads and spread mark-ups. Some also act as counterparties to losing trade positions. Therefore, when scalpers keep making small profits on their trades, it will also lead to small losses for the broker.

What is a Market Maker?

Many trading beginners ask themselves the question: What does market maker mean? The name is relatively self-explanatory. A market maker provides prices for a currency pair to simulate a market. Put simply, a market maker fulfils three tasks:

1. It provides supply and demand rates for specific currency pairs.
2. He undertakes to accept, within certain limits, deals for the courses provided.
3. He assumes the initial risk of the position in his accounts.

What exactly is the particular framework that has been mentioned here? This is a minimum or maximum position size and a time frame in which the deal must be executed. The third point of the list implies that in this type of Forex trade, the market maker is the counter-position to the trade. At this point, the task of the market maker differs from that of a broker: The trade is not carried out with a third party, but by the market maker itself. Concerning the risk that the market maker assumes, the market maker may cover the counter-position of the deal with another bank, provided that this counter-position can be found at an advantageous price.

How quickly and with what risk this comparison is carried out is at the discretion of the market maker. This achieves profit through a two-way business: if there is enough cash flow on both sides, the market maker can simply record the spread between Ask and Bid price as profit. Since huge volumes of currencies are exchanged daily in this fashion, this spread is usually sufficient as a profit. Of course, the market maker can also decide to take a position in such a transaction himself. This is done by:

1. the market maker entering into a trade with another bank (i.e. another market maker) or
2. provoking corresponding course position trades in a certain direction.

The methodology of the market maker – how are prices determined?

The Market Maker Forex Trading banks look at different market data when they set their prices.

That includes:

1. Comparable courses offered elsewhere
2. Their own exposure – how many positions of which sizes are already recorded in their books
3. Their expectations regarding the future exchange rate of the respective currency
4. Available volume of comparable prices as well as the available volume for the target price.

Retail FX pricing

Trades between the big banks form the core of the FX markets, at least in terms of the trading volume. Constant transactions between banks are the cornerstones of pricing in the foreign exchange market. And although the bulk of the Forex market’s trading volume is attributable to this interbank market, a large proportion of traders have no direct access to it.

One of the essential foundations of the interbank market is the credit relationships between the largest banks. They carry out their transactions based on these agreed ratios, typically in huge volumes. The standard sizes of such transactions alone exclude private or retail traders from the interbank market.

There was a time when the Forex market consisted exclusively of large banks, wealthy institutions and extraordinarily wealthy individuals. As I’m sure you’re aware, times have changed. Today, retail traders can very quickly and conveniently participate in the Forex market – usually through Forex companies that directly or indirectly access the prices of the major market makers. Progress in technology has helped to support this trend. Today there are several trading platforms available that allow you to access the Forex market. The MetaTrader (MT4 and MT5) has proven to be one of the most popular trading platforms.

As a result of technical developments, there is hardly any difference between institutional and private traders when it comes to access to Forex and CFD trading. Retail traders trade at competitive rates and spreads and enjoy the ease of use that is in no way inferior to the industrial giants.

But how do Forex companies offer their prices to private traders?

In answering this question, we must pay close attention to our terminology. Some of these companies are sometimes referred to as market makers but do not really perform all the functions of a true market maker.

The way these FX companies operate varies from case to case, but the quotes are usually obtained from the same sources: The big banks that act as brokers for these companies. Some companies operate effectively as brokers – they hedge their exposure immediately through their liquidity provider – while others take it into their own books.

The most important aspect here is that these companies do not set their own prices, which means that they are not true market makers. For each particular currency, an aggregated rate is typically offered, representing the best bid/ask ratio the company can offer in the market concerned.

An alternative method to offer traders access to the Forex market is via an electronic communications network (ECN).

An ECN collects the bid and offer prices of various banks, institutions and other traders together in an order book. If you place a trade in such a network, a partner with the best possible available price will be found as the counter-position. ECN networks typically operate very quickly, transparently and with very narrow spreads.

ECN brokers are commonly very supportive of scalping and allow this trading method. The ECN broker model benefits from scalping as the greater number of trades taken by scalpers will lead to more commissions being earned from both trade entries and trade exits. ECN brokers are also more suitable for scalpers since execution speeds are typically faster and the risk of slippage is almost eliminated.

ECN allows automatic trading systems to access quotes and execute trades with virtually no delays immediately. However, this also potentially leads to rapid fluctuations in courses, which can make it more challenging to use them effectively. This trading environment is again ideal and desired by scalpers, but requires a greater level of experience and knowledge of the markets.