A market maker is a person that connects the trader to trading currency pairs and their prices. One may ask who is a market maker, the right answer to the question is a person who takes the opposite side of trades with trading clients. They set prices and can buy or sell currency pairs from traders. Forex trading for beginners can be quite challenging especially if the new trader does not know how market makers work.
Roles of Market Makers in Forex Trading
Market makers set bids and offers within any trading currency pairs. Typically, they are Forex brokers but who have client interest at heart as they trade. Market makers set competing prices with the aim of attracting as many customers as possible. Market makers also commit to accepting deals at prices they have set and within certain constraints. They can take deals to keep in their own books or even to trade with other clients looking for similar deals. Market makers take any exposure resulting in prices they have set to their own books.
When new traders join the Forex trading market, most will make uninformed decisions or even decisions driven by emotions and this can lead to mistakes and huge losses. However, the risk is reduced a great deal if traders go through market makers and follow closely prices set by Forex market makers as they will know where to put their finances and thus limit their chances for losses.
In Forex trading, market makers are large financial institutions. The largest banks and financial firms in the world are known as liquidity providers. They set prices based on exchange rates of various currencies across the globe and make profits on the transaction costs of Forex trading.
How Market Traders Operate in the Market
Market makers set the prices in an effort to execute and provide the means necessary for traders to participate in the Forex market and to make their business profitable. They gain from the venture as they charge spreads, and they will most times assist their clients in risk management. However, you will find that when clear standards for Forex trading are lacking or are shaky, traders need to be more careful.
The Forex trading market is always moving up and down as the value of different currencies rise and fall. Market makers aim to trap as many market participants on one side as possible to ensure their capital is secure without moving and shifting the prices too much. Wise traders will follow market makers closely and only enter trades that they have analyzed carefully being keen to close their bids when the market makers are closing their deals.
Market makers will always look at the following concerns when setting their prices:
- What do they have in their books and what will be their exposure?
- What is the volume of the deal they are quoting in relation to the volume available at the prevailing market?
- What are the rates being quoted for the same currency pair elsewhere?
- What is their forecast for the performance of that currency pair?
When entering the Forex markets, it’s important for traders to have all available information about market makers at their fingertips for higher chances of success.