How do forex brokers make money

None of them have achieved this through full-time forex or stock trading and with retail brokers.

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How Forex Brokers Make Money, how do forex brokers make money.

Unfortunately, you can’t make any money through forex trading and any other kinds of trading when you HAVE TO make money and you have financial problems. To learn how to trade forex, become a consistently profitable trader and hopefully a millionaire, first you have to have a source of income that supports your currency investment. Brokers who come to the investor with a good offer may deserve a try. So reputable https://dowmarkets.Com/online-platform/s offer quite a variety of account types. The expectations and targets of investors living in different parts of the world may be different. Therefore it is essential for the competition to offer appropriate types of accounts for all types of investors.

How forex brokers make money

Solid experience of work on forex is preferable, but all comers including forex-newbies may come and share their opinion as well. Mutual help and dialog – the main goal of communication at forex-forum, devoted to trading. While some forex traders will be able to get rich trading forex, the vast majority will not. Historically speaking, several hedge fund managers have been able to get rich trading forex.

None of them have achieved this through full-time forex or stock trading and with retail brokers. Unfortunately, you can’t make any money through forex trading and any other kinds of trading when you HAVE TO make money and you have financial problems. To learn how to trade forex, become a consistently profitable trader and hopefully a millionaire, first you have to have a source of income that supports your currency investment.

While they are learning to become consistently profitable forex traders, they create a good source of income through the other systems we introduce (learn more here). Trading through a bank account will have a lot more advantages compared to trading through forex brokers. This is how they’ve become millionaires or billionaires.

It is true that you will never make make money through forex trading. I lost thousands of dollars to these forex scams and would like others to follow this advise not to trade forex. I allow this publication to use my email address as a reference as one of the victim cheated by mt4 webs. Slippage is a trick made by the market maker brokers.

The starting balance also affects our income potential. If risking 2% per trade that income estimate doubles (assuming a profitable strategy is being used). Double the starting balance, to $8000, and the income in dollars doubles again. How much money you’ll need to trade forex is one of the first issues you have to address if you want to become a forex trader.

But there is a big difference between whether you can start trading forex with $100 and whether you should. And just because many forex brokers allow you to start with that amount or even less doesn’t mean you should accept the offer.

62% of retail investor accounts lose money when trading cfds with this provider. You should consider whether you understand how cfds work, and whether you can afford to take the high risk of losing your money. Since they are in a sell position here, it is in their best interest for the euro to depreciate in value, or to see you lose on the trade. Well, since they will have an opposing position open for every trade that you make, they will actually lose money every time you have a winning trade.

The cost of trading forex

Brokers who come to the investor with a good offer may deserve a try. So reputable https://dowmarkets.Com/online-platform/s offer quite a variety of account types. The expectations and targets of investors living in different parts of the world may be different. Therefore it is essential for the competition to offer appropriate types of accounts for all types of investors.

Some brokers may claim to offer commission-free trades. These brokers probably make a commission by widening the spread on trades. I know many traders who do this, or make more than that per day consistently…but I also know even more traders who lose money everyday. To make 1% or per day, we risk 1% of our account on each trade, and make about 4+ trades per day.

How strictly these boundaries are enforced, especially when there is little chance of clients ever even becoming aware of any transgression, again varies from business to business.

Most traders shouldn’t expect to make this much; while it sounds simple, in reality, it’s more difficult.

Education and training for beginners you broker provides you with demo-accounts, training courses and workshops, video tutorials, news, charts and market analytics so that you can practice your trading skills.

However, the swap you actually pay is different from broker to broker.

In other words, the higher the trading volume, the higher the cash value of the commissions being charged. A commission is similar to the spread in that it is charged to the trader on every trade placed. The trade must then attain profit in order to cover the cost of the commission. In order for a trader to make a profit or avoid making a loss on a trade, the price must move enough to make up for the cost of the spread.

Making money on highly-leveraged currency trades is harder than it looks and, at a minimum, requires developing an expertise metatrader 4 that many novice traders fail to acquire. I am a firm believer in only risking 1% of capital (max 3%) on a single trade.

Every broker has to decide whether a new account will belong to the group (95%) of traders that loses money, or the group (5%) that makes money. Leverage is a good facility that helps us trade large amounts of money with a smaller account, and make bigger profits compared to the time that there is no leverage.

So if you tell me that you only have $100 of disposable funds, that makes me nervous. It tells me that your financial situation might not be as secure as it should be to be able to support the risks involved with trading. This means the excitement from your first real profit will fade when you realize it’s only $4. Not only that, but it took four trading days or almost 100 hours to do it.

Let them earn the commission you’ll be paying them once you start trading. The best way to start forex trading, in my opinion, is to learn all you can before https://dowmarkets.Com opening a live account. Search the internet and learn from those who have found success. That way, you will be far less likely to repeat their mistakes.

Julius, price action isn’t a strategy as much as it is a style. There’s no harm in using multiple trading strategies, but it is a good idea to learn one or two at a time. I still can open 10 $ account and see now if I am succesful with real money. And as you said we should not trade with scared money – 10 $ account will solve this problem.

If so, you will want to trade (or spread bet) the EUR/USD currency pair. The forex market is the largest and most liquid market in the world, representing every global currency with trading conducted 24 hours a day, five days a week. The first is simply to avoid specialized forex traders entirely and to trade with a general stock brokerage active in the U.S. And therefore regulated by the U.S.

As your profit is their loss, then they have to do their best not to let you win. One https://dowmarkets.Com/online-platform/ of the ways is that they slip the price when you want to take or close a position.

So what is each type of commission’s bottom line effect on your trading? Given that all brokers are not created equal, this is a difficult question to answer. The reason is that there are other factors to take into account when weighing what is most advantageous for your trading account. Three forms of commission are used by brokers in forex. Some firms offer a fixed spread, others offer a variable spread and still others charge a commission based on a percentage of the spread.

Forex brokers often don’t charge a commission, but rather increase the spread between the bid and ask, thus making it more difficult to day trade profitably. ECN brokers offer a very small spread, making it easier to trade profitably, but they typically charge about $2.50 for every $100,000 traded ($5 round turn).

How forex brokers make money

A lot of people started trading on forex from all across the world. If knowledgeable enough and a pinch of luck, a person can make quite a bit of money. Brokerage firms are a big part of the industry. They help people use popular platforms and perform operations on a daily bases. Generally, it is always recommended to trade with a broker, however, make sure the institution is trustworthy and operates within the regulations as scamming is quite common in the industry. This can be done through viewing reviews, checking licenses, seeing where the company is registered and under which regulatory body’s jurisdiction do they operate.

Why do we need brokers?

Technically speaking, one can always opt-out of working with a broker and start trading on their own using any currency at the bank, however, the rate at which the exchanges happen will be horrible and the usage of leverage is out of the question. So in conclusion you could trade without a broker but the gains will be measly and the process – much more painful.

A forex (FX) broker is basically a medium between an individual retail forex trader and the forex market. The trading is done between banks at various prices, which changes from a bank to a bank. When someone starts trading they open a forex trading account which gives the ability to start purchasing and selling currency pairs. If you buy a EUR/USD currency pair, this means that you are waiting for the USD to lose the value per euro over time. If the euro becomes more valuable in comparison to USD you make a profit.

A forex broker offers a way to get into the banking network to purchase a currency pair. Before FX brokers, people needed to have large amounts of money to invest and special relationship with the banks to be able to trade in foreign currencies. This is a thing of the past though.

There are good and bad brokers so one has to make sure to select a correct one to trade with. This can be done by looking at the myriad of different bonuses and services, which brokers are offering. Some leading brokers like axiory, for example, are usually offering fair bonuses with timely withdrawals and deposits and are regulated by trustworthy regulatory bodies like the international financial services commission (IFSC). The conditions are always proportional to what the trader can handle judging by their skill levels and when the bonuses are available, they come in a fair manner as a lot of other broker services set up such requirements that most of the traders are losing their investment as well as the added bonus, while axiory, works on the betterment of the system where the amount of trading required is proportional to the skill level and the investment amount making it easier for the traders to utilize the bonus as well as set conditions to their benefit. The latter is an extremely important aspect to pay attention to while selecting a broker.

How do brokers make profit?

To keep it as simple as possible, the broker makes money by keeping a cut from the performed trade. The difference in the relationship between currency pairs is calculated in pips. A pip measures the amount of change in the exchange rate for the currency pair. When one makes a trade, the forex broker charges for a few extra pips before actually placing the bet. This means that when the market is trading at 1.3000 EUR/USD as a buying price, the broker will put you in at 1.3002. If the trade is closed, the broker collects the profit between the market price and the amount you paid. In broker terms, this is called spread and is exactly how the spread works in forex as a whole. So to put it in a more simple manner the spread is defined as a price difference between what the trader puts to purchase or sell an asset and the broker added fee or pip.

An obvious question is why would a broker pick such a small item to make money on? Well, this is connected to how the forex market works in general and the forex leverage. The forex leverage means borrowing a certain amount of money to invest in something. In the case of FX, the money is borrowed from the broker. Forex in general offers high leverage. This means that the trader can build-up and control a much higher amount of money than they initially invested. Since brokers give access to leverage, say for example 10:1, this means that if the trader is on the market at only $100, they can control as much as $1000. This may result in high-risk high reward case scenarios, but, the end result means that each pip is valued a bit higher than what it seems like and the broker earns much more money in the end. Keep in mind that the leverage we used is just an example. It may be anything from 10:1 to 400:1 depending on the broker. Overall, the most leverage doesn’t mean the best broker. Sometimes CFTC forex trading rules call for a specific amount of leverage like in 2010.

The broker is absolutely safe from your losses. In the end, even if you as a trader do not end up making a profit the broker will still be making their winning on the difference between what you pay and the actual market price. This may sound scammy but in the end, we have to remember that brokers are providing a service, which is easy access to the financial market and the ability to trade currency pairs with leverage. A lot of these brokers will even help the newer traders acquire some basic skills to start trading. This is a business model where a successful trader will always stick around meaning that they will generate more and more money for the broker in the long-term.

How do forex brokers make profits

When it comes to your forex trading account you know that nobody cares so much about it more than you do.

This is why you must be able to figure out who you should trust and who is reliable and safe enough to put your account in their hands.

This one stresses the need of finding and choosing the right forex broker, which is an essential decision you have to make if you are planning to test the forex market opportunities and try to make a profit.

While this is no guarantee, working with the right “middleman” in the form of a reliable forex broker is one of the factors affecting your potential chances of enjoying profits from trading.

However, when it comes to trading forex, not many people consider the question: “how do forex brokers make profits?”

One thing is sure enough, forex brokers make profits and they do not do whatever they are doing purely because of their passion for trading or as an act of kindness to the forex trading beginners.

However, before you even consider putting your hard-earned money in an account, you would like to know and understand where and how money flows throughout the system. And when it comes to a market with a daily volume of $5 trillion in trades, you are definitely interested in how do forex brokers make profits that are clearly not just a couple of quid.

Considering the fact that every forex trader has to go through the “middleman” forex broker to execute trades and that no matter if the trader is losing or gaining profits, the forex broker will be able to earn money through a handful of charges, let’s have a further look at the topic and find out how do forex brokers make profits so you can better understand where your money is going.

What does a forex broker do?

As a so-called “middleman” or the intermediary traders go through when trading, the forex broker is the one taking orders for buying and selling currencies and then executing the orders. Normally, a forex broker will operate on OTC or over-the-counter market that is not a subject to the same regulations as other foreign exchanges and thus the forex broker will usually not be a subject to some of the rules that preside over securities transactions. The over-the-counter market is also not a subject to a centralised clearing mechanism.

With that being said, you should always make sure and be careful that your counter-party doesn’t default. Always make sure to investigate your counterparts and their capitalisation before investing your money and opening a forex trading account.

Take your time to make a thorough research and choose the most reliable forex broker so you can have the peace of mind that everything will be ok and you will not be surprised with hidden fees and charges or be put in a situation you don’t want to be in.

How do forex brokers make profits – broker fees

Some forex brokers make profits by charging a commission per trade, while others will charge the spread between the bid and the ask prices. This is the main, most common and popular method forex brokers make profits.

As you probably know by now, the spread is the difference between the bid price and the ask price for the trade, or the difference between the price you will receive for selling currency and the price you have to pay for buying a currency.

This difference between both prices is the broker's spread. The spread your forex broker offers can be fixed but it also can be variable.

The latter option means that the spread depends highly on market moves when major market events and changes occur.

This could be either a good thing for you but also not that favourable. It is well known that the forex market is a highly volatile market and when a market gets volatile, you can often end up paying significantly more than what you have expected initially.

This is a major advantage of fixed spreads because you already know how much you are going to be charged to facilitate buying and selling.

Always pay close attention to the pricing of the spread too because a forex broker can have a different spread price for buying a currency and for selling the same currency.

If you think you will be charged with either a commission per trade or for a spread on a trade you better think twice.

Some brokers can charge you for both so make sure to check that before agreeing on a forex broker but keep in mind that this is happening less and less often nowadays due to the high demand of low pricing of service. Another important thing to check out is whether a broker who claims to offer commission-free trades is not making a commission by widening the spread on trades.

How do forex brokers make profits – alternative sources

how do brokers make profits from alternative sources

However, when forex brokers make profits they can also utilise some other ways and approaches including:

Leverage – high leverage is a powerful tool for multiplying trading volume and by this widening the positions thus having a larger source of higher income. Simply think of it, a quite big lot available with a 1:100 leverage means that the broker will be able to earn 100 times more on spreads.

Overnight swap spreads – in this case, forex brokers pay the overnight swaps to the forex trader if the difference between the interest rate and the currency pair is positive in the trader’s position. If the difference is negative, the broker gets paid from the trader’s account. However, these payments are not necessarily symmetrical and they often work that way that the broker can get an advantage.

Payment processing commission – payment processing commissions are not something every forex broker will charge you but some of them do. These are a deduction only when you deposit or withdraw money. Keep in mind that if you agree on paying this commission it should be usually quite small and fixed in currency units, not in percentage points.

Trading against the trader – this is the most unethical way a forex broker make profits, however, it happens so and some brokers take advantage of this scheme for making a significant profit. Make sure that by all costs you are avoiding brokers who make money by trading against you and earn when you lose. How to spot such brokers? If the spreads are too low, the leverage is close to nothing, the overnight swaps are fair, and you are not charged with commissions, you have most probably walked into such broker’s snare.

Finally, some forex brokers may charge you extra when it comes to customer service, additional tools, education. Some brokers will charge you extra for signals, others will “sell” in-depth analysis, and often enough, brokers will offer private educational classes, training, webinars, educational materials, etc. For those willing to pay more. However, if you understand the basics of forex trading, how the market operates, risk and money management, these education and training options are rarely needed. However, in case you are not familiar with the forex trading basics, or you want to gain more knowledge, develop more skills, and simply become a better-educated forex trader, you can always benefit from free forex trading courses. Just have a look at trading education’s ultimate forex trading course that we provide you with for absolutely free! It takes registering on our website only and you will have unlimited access to the forex trading course for free. In addition to that, you can also enjoy unlimited access to webinars, a plethora of forex trading articles, quizzes.

In conclusion

So whenever you are wondering: “how do forex brokers make profits?”, the answer is that there are many ways a broker can utilise to earn an income. Some of these ways will be completely legal and ethical, while others may be designed to take advantage of customers and offer close to nothing as a service and experience.

It is your main responsibility and aim as a forex trader to make sure you investigate the broker, what they are offering as a service, what and how they are charging, so you know that you are getting a good deal in pricing and you can work with the assistance of a responsible and reputable professional. At the end of the day, the forex market is risky enough to worry about unethical brokers, non-transparent prices, hidden charges and fees.

So who are the reliable and reputable forex brokers on the market? We at trading education have a few recommendations, check them out here.

Do you find this article helpful? Make sure to give it a like and share with anyone who you think may benefit from reading more about this topic!

How do forex brokers make their money?

Like it or not, forex brokers are an integral part of any trader’s life. That’s why it’s important to understand how they operate, how they make their money and how to protect against bad broker practices such as stop-hunting.

In the following lines, we’ll dig deeper into what forex brokers are, what their main types are and how they make their profit. We’ll also explain whether forex brokers trade against their traders, and if so, how to identify such a broker.

What are forex brokers?

A forex broker is a company that provides traders with access to the foreign exchange market. In essence, forex brokers are a middleman between forex traders and the market. They offer a range of services, including trading platforms , which are used to buy and sell foreign currencies.

Once you send an order through your trading platform, your broker tries to match the order either with its internal pool of traders or forwards it to external liquidity providers to find the best opposite order. Each time you place a sell order, it has to be matched with a corresponding buy order, and vice-versa.

Forex brokers, also known as retail forex brokers, account for a relatively small amount of the daily forex market turnover. According to a BIS research, retail forex makes up around 5% of the total $5 trillion market.

Main types of brokers

There are two main types of forex brokers: dealing desk (DD) brokers and no dealing desk (NDD) brokers. NDD brokers can be further divided into STP, ECN and ECN+STP brokers. All mentioned types of brokers have their own advantages and disadvantages, which are explained below.

Dealing desk

Dealing desk or DD brokers, also called market makers, provide liquidity to their clients and create the market for them. They’re called market makers because they’re the main source of liquidity for their traders. Most of the time, dealing desk brokers take the opposite side of their client’s position. If you’re selling, they’re buying from you, and vice-versa.

Since dealing desk brokers create the market for their clients, they have the full discretion to set both bid and ask prices of a currency pair. Dealing desk brokers don’t have necessarily to provide interbank rates, but the large competition among brokers makes sure that the offered rates don’t differ much from interbank rates. Also, dealing desk brokers often offer fixed spreads.

No dealing desk

No dealing desk brokers don’t pass their clients’ orders through a dealing desk.

They simply act as a middleman between their clients and other liquidity provider, either internal or external ones. Once you place a trade with a no dealing desk broker, the broker will first try to match your order with its internal liquidity pool. If there are no matching orders, the broker will forward your order to external liquidity providers, which can include banks, mutual funds, hedge funds, other brokers etc.

Since no dealing desk brokers don’t know at which price your order will be filled, they usually offer variable spreads with a small markup that compensates them for their services.

The following graphic summarises the main difference between DD and NDD brokers pretty well.

Dealing desk vs. No dealing desk

No dealing desk brokers are further divided into stps, ecns and a combination of both (ECN+STP.)

- STP – straight through processing (STP) brokers, as their name suggests, forward your order immediately to external liquidity providers which have access to the interbank market. Once they find the best matching order, they’ll add their spread and fill your order at the external provider’s price + the broker’s spread.

- ECN – electronic communication network (ECN) brokers are true NDD brokers as they represent the bridge between retail traders and the interbank market. ECN brokers simply provide a sophisticated network that connects various market participants together, such as hedge funds, banks, other brokers and retail traders. All mentioned market participants trade directly with each other, and the ECN broker charges a small commission for its services.

- ECN+STP – finally, some brokers offer a combination of STP and ECN services. Those brokers are called ECN+STP brokers.

Here’s a table to make the difference between the main types of brokers crystal clear.

Comparing the different types of brokers

How do forex brokers make money

Now that you know what forex brokers are and their main types, let’s take a look at how they make their money. In essence, the major source of a broker’s income is the spread, followed by other sources of revenue such as commissions/fees, trading platforms and additional services.

Spread – the spread is the difference between the bid and ask prices of currency pairs. Whenever you go long on a currency pair, you’ll get the ask price. Similarly, if you decide to close your long position or want to go short on a currency pair, you’ll get the bid price. This difference between the bid and ask price is your broker’s profit. While some dealing desk brokers offer fixed spreads, most of the time spreads are variable and depend on the current market conditions. If there are important and unexpected news in the market, spreads can widen significantly and increase your trading costs. During normal market conditions, spreads tend to be quite low with most brokers, reaching around 1 pip for most major pairs. For day traders, the new york / london session overlap usually has the lowest spreads during the day.

Commissions/fees – besides the spread, some brokers may also charge you a fixed commission or fee per trade. This is especially true with ECN brokers. However, commissions and fees tend to be quite low due to the high competition among forex brokers. For example, a broker may charge you a $1 commission for a pre-specified lot size, such as 1 lot or 10 lots.

Trading platforms – the next major income for forex brokers are trading platforms . While many brokers offer free in-house developed and third-party trading platforms, some of them may also charge you for additional features. If you’re a professional trader, you may look at the offer of forex trading platforms provided by your broker and look for features that could help you in your daily trading. The main point to consider is that the offered feature increases your profitability and efficiency more than the cost of the service. Beginner traders, on the other hand, are likely fine with the range of features offered with free trading platforms.

Additional services – finally, some brokers may offer additional paid services. For a small cost, you may get access to a larger range of tradable instruments, professional market research, trading signals and market depth information, to name a few.

Do all brokers make money when you lose?

As we already said earlier, some brokers take the opposite side of your trade as they are creating the market for you. Those brokers are called market makers . However, is it bad or illegal to be a market maker? Many traders have this question, so let’s cover it briefly.

Absolutely not! Market makers provide a service that people need.

There’s nothing wrong with being a market maker and taking the opposite side of a trader’s position. Market makers operate in the following way:

The transaction is fully legal. If you don’t agree with the offered exchange rate or transaction costs, you could always look for other brokers as this is a very competitive business. In addition, since most traders lose money while trading, a market maker doesn’t have to cheat you to make an extra profit from you.

Naturally, the problems start if a market maker decides to cheat you, either because of greed or fear. There is a certain conflict of interest involved in a market maker’s transaction, since your profits are the broker’s losses and vice versa.

Stop-hunting has been a very popular practice among market makers to make extra profits by artificially moving exchange rates to hit levels where a large number of stop-loss orders are placed. Fortunately, stop-hunting has become increasingly rare, especially among regulated market makers.

Being a market maker is simply a service that traders need and an operational type of forex brokers – there’s nothing wrong in being an honest market maker per se.

Still, not all brokers make money when you lose. If you don’t like the idea of having a conflict of interest with your broker, you can always look for no-dealing desk brokers (stps, ecns or a combination of both.)

What to look for in a forex broker?

When opening a trading account with a forex broker, there are certain things you need to pay attention to. We recommend you read our guide to choosing broker . We’ve also listed the most important below.

Regulation – always open an account with a regulated broker . Brokers are regulated and licensed by the country’s regulatory authority where they’re registered. Regulation ensures that the broker adheres to and enforces strong industry standards and that your funds are safe. Regulated brokers are happy to list their license number and regulatory authority on their website.

Broker type – is the broker a dealing desk broker or a straight through processing / electronic communication network broker? You should know the type of your broker in advance to avoid any surprises down the road.

Trading costs – trading costs are an important consideration when choosing a forex broker. Due to the high competition, most brokers offer very tight spreads, especially on major pairs. Are the spreads fixed or variable ? Are there any additional commissions or fees on opening trades? If you’re a day trader or scalper, trading costs can easily eat up a significant portion of your profits.

Trading tools – what trading tools does the broker offer ? Besides free trading platforms (such as metatrader), most brokers offer free market analysis, market sentiment indicators and webinars nowadays.

Customer service – last but not least, a broker should offer world-class customer support , reachable around the clock. If your trading platforms stops working or you are unable to open, manage or close trades, the first step you need to do is to contact your broker’s support.

Understanding your broker is a crucial part of your trading success

As a trader, you’ll be dealing with your forex broker on a daily basis, paying transaction costs and contacting their customer support from time to time.

There are two types of brokers out there: dealing desk broker (DD) and no dealing desk broker (NDD). Dealing desk brokers are also known as market makers , as they create the market for their clients and often take the opposite side of the trade. While there is nothing wrong with (regulated) market makers, some of them are notorious for bad broker practices such as stop-hunting.

If you don’t like the idea of being in a conflict of interest with your broker, you can look for no dealing desk broker which forward their clients’ orders to third-party liquidity providers. Whichever broker you choose, make sure to do your analysis and to pick the right broker for your trading needs.

How do forex brokers make money?

Let’s face it. It will be more profitable to run a forex broker than trading in the market. Why? The return on investment can be comparably higher than the profits made from trading. In our previous post we have introduced the two main business models of brokers; straight through processing and market making. Now, we will use those business models in order to provide you with a clearer idea of the profits brokers make.
First and quickly, we will touch on how market maker brokers profit from offering their services. Well, this is simple they profit when clients lose money and lose when clients profit. Overall, due to the law of averages, human emotion, a high percentage of inexperienced traders and other factors the overall majority of traders lose money. So, provided a market maker has a good pool of clients they will always profit from the losses of clients, and those losses will typically always exceed any profits other clients make. This is a very simple concept to understand but what is not so simple are the ways an STP broker makes money as it is often not so clear and requires some explaining. For that reason we have addressed six ways an STP brokers can profit, as follows.

Spread mark-up

Let’s assume that we have a pure STP broker that covers all its clients’ orders directly with lps (liquidity providers). In this case the profit for the broker comes from the mark up that they have added on to the “raw” spreads they receive from their lps. To understand this better let’s use an example. If a broker offers a spread of 0.8 pips on EURUSD then they must have a deal with their liquidity provider for a lower spread for example of say 0.2 pips. In this example if a trader open and closes 1 lot of EURUSD then irrespective of any profit or loss they make the broker will make a fixed 0.6 pips profit. If the pip value of 1 lot EURUSD is $10 then the broker will profit $6 ($10 pip value * 0.6 pips). You should also be aware that brokers often pay some commissions on volume but for this example we will keep it simple.
Is that the only way STP forex brokers make money from clients’ trades? No, it’s not so let’s dig deeper a bit more to see how the brokers can produce more profits for themselves.

Swap fees

In our previous example we mentioned spreads on the EURUSD. But what will happen if your position remains open during the night. Your account will probably get charged with a swap fee or you could receive a swap fee back depending if the direction of your trade is in your favour. If you look a bit closer and look at the swap fees you will notice that there is a spread between the swap fee paid and the swap fee charged depending if your position is long or short. In some cases brokers charge swaps in both directions, which doesn’t reflect true market conditions. If you question your broker they are likely to tell you that they pass on the swap rates they receive from their lps, which may or may not be true.

Transaction fees

Another thing to notice is that in order to trade with a broker you obviously need to deposit to and withdraw from your trading account. Some brokers might cover the transaction fees but some others will not. If you have used a lot of forex brokers then it highly likely you came across a deposit or withdrawal fee one day and you were wondering why the hell you received less money than you sent. If you contact your broker it is likely they will tell you that the amount was charged from an intermediary bank (when you have used a bank transfer) or the PSP (payment service provider). Some brokers cover these costs, while others pass them on, sometimes for a profit. Also, it common for brokers to establish special agreements with their banks and their psps so they can receive a small percentage back from the transaction cost, which you could call a rebate. A profit on every single transaction going through a typical sized broker can add up to quite a tidy revenue stream.

Proprietary trading

Another way for STP brokers to profit is to trade for themselves, which for a forex broker is often referred to as “proprietary trading”. In the event that you are a very successful trader and you are working with a true STP broker then they can simply follow your trading strategy and trade a higher volume with their LP. If for example you trade 1 lot, which profited $100 the broker can easily place 3 lots for the same position and make you $100 as well as $200 for themselves. Similarly, STP brokers can trade by doing the opposite of unsuccessful traders and also reap profits.

It is clear to most traders that a broker using the market maker model profits directly when clients lose but it is also possible for STP brokers to have secured a profit sharing agreement with a LP, which is a market maker. So, ultimately depending on the liquidity deals in place it is possible for an STP broker to still profit, indirectly, when their clients lose money.

Infrastructure licensing and white label agreements

Another point worth mentioning is that many forex brokers have developed their own internal IT systems such as a CRM (customer relationship management system), back office, payment processing, reporting or any other systems that are required to better facilitate the operation of a brokerage. Therefore, brokers often license these parts of these systems out to third parties under licensing deals, allowing new brokers to enter the market without huge upfront development costs, under a recurring license fee. Some brokers even have their own trading platforms or resell the platforms of third parties under white label deals.

To sum up, forex brokers have many revenue streams even if they are using a pure STP broker model. Got any comments please let us know we would love to answer your questions.

How forex brokers make money

In the foreign exchange market, traders and speculators buy and sell various currencies based on whether they think the currency will appreciate or lose value. The foreign exchange, or forex market is high risk and sees more than $5 trillion traded daily. Traders have to go through an intermediary such as a forex broker to execute trades. No matter the gains or losses sustained by individual traders, forex brokers make money on commissions and fees, some of them hidden. Understanding how forex brokers make money can help you in choosing the right broker.

Role of the foreign exchange broker

A foreign-exchange broker takes orders to buy or sell currencies and executes them. Forex brokers typically operate on the over-the-counter, or OTC, market. This is a market that is not subject to the same regulations as other financial exchanges, and the forex broker may not be subject to many of the rules that govern securities transactions. There is also no centralized clearing mechanism in this market, which means you will have to be careful that your counterparty does not default. Make sure that you investigate the counterparty and his capitalization before you proceed. Be vigilant in choosing a reliable forex broker.

Forex broker fees

In return for executing buy or sell orders, the forex broker will charge a commission per trade or a spread. That is how forex brokers make their money. A spread is a difference between the bid price and the ask price for the trade. The bid price is the price you will receive for selling a currency, while the ask price is the price you will have to pay for buying a currency. The difference between the bid and ask price is the broker’s spread. A broker could also charge both a commission and a spread on a trade. Some brokers may claim to offer commission-free trades. These brokers probably make a commission by widening the spread on trades.

The spread could also be either fixed or variable. In the case of a variable spread, the spread will vary depending on how the market moves. A major market event, such as a change in interest rates, could cause the spread to change. This could either be favorable or unfavorable to you. If the market gets volatile, you could end up paying much more than you expected. Another aspect to note is that a forex broker could have a different spread for buying a currency and for selling the same currency. Thus you have to pay close attention to pricing.

In general, the brokers who are well-capitalized and work with a number of large foreign exchange dealers to get competitive quotes typically offer competitive pricing.

Risks of foreign exchange trading

It is possible to trade on margin by depositing a small amount as a margin requirement. This introduces a lot of risk in the foreign exchange market for both the trader and the broker. For example, in january 2015, the swiss national bank stopped supporting the euro peg, causing the swiss franc to appreciate considerably versus the euro. traders caught on the wrong side of this trade lost their money and were not able to make good on the margin requirements, resulting in some brokers suffering catastrophic losses and even going into bankruptcy. Inexperienced traders could also get caught up in a fat finger error, such as the one that was blamed for the 6% dip of the british pound in 2016.

The bottom line

Those contemplating trading in the forex market will have to proceed cautiously—many foreign-exchange traders have lost money as a result of fraudulent get-rich schemes that promise great returns in this thinly regulated market. The forex market is not one in which prices are transparent, and each broker has his own quoting method. It is up to those who are transacting in this market to investigate their broker pricing to ensure that they are getting a good deal.

How do forex brokers make money?

Brokers make money in one of two ways.

The first way is adding spreads and commissions onto your trade to make a profit.

The other way a broker makes a profit is to ‘make a market' and profit from you losing. In other words; the market maker broker takes the other side of your position and profits from your loss.

Difference between market maker, ECN / STP brokers

ECN and STP brokers make money when they charge you either a commission or the spread for each trade you place.

They are taking your trade and it is being automatically processed through to their liquidity providers such as banks.

The group of banks sends back a price, the broker adds a spread onto the price they offer to you and the broker profits from the spread they charge to you as the trader.

The no dealing desk model has three types of brokers:

STP – S traight- T hrough P rocessing

ECN- E lectronic C ommunication N etwork

DMA – D irect M arket A ccess

Most retail traders prefer to trade with the ECN (electronic communication network) model broker.

The ECN model of trading technology allows traders to quickly and efficiently enter orders against others in the markets who are sending in competing bids and offers. The system then sorts the orders and your trade is completed with transparency.

Market makers

The market maker broker is not operating in the same way as an ECN / STP broker.

The market maker is taking your order as the trader and trying to match it with their book of orders. The market maker is making the market and creating the quotes you are given. They are able to see your targets and also your stop loss.

The market maker is the counterparty to your trade. If you win, they lose. If you lose, they win. There is a conflict of interest.

If you choose to go down the market maker broker path, then do a lot of research to ensure you are trading with an incredibly reputable broker.

What broker model should you choose?

It is up to each individual trader which broker they go with, but there are some incredibly crucial factors that you need to consider when choosing a broker.

There are also some basic standards that your broker should meet and these are discussed in the trading lesson; recommended forex broker & charts which goes through exactly what your broker should provide.

How forex brokers make money

The cost of trading forex

How strictly these boundaries are enforced, especially when there is little chance of clients ever even becoming aware of any transgression, again varies from business to business.

Most traders shouldn’t expect to make this much; while it sounds simple, in reality, it’s more difficult.

Education and training for beginners you broker provides you with demo-accounts, training courses and workshops, video tutorials, news, charts and market analytics so that you can practice your trading skills.

However, the swap you actually pay is different from broker to broker.

Where do you think the brokers EARN their profits from?

Written by guruthesizzle

Public theory # 1

Less than a decade ago in 1999, retail or individual forex trading simply did not exist. Trading the foreign exchange markets was pretty much restricted to big banks, hedge funds, and high net-worth individuals simply because of the capital requirements for trading. The minimum trading size was usually $1,000,000 USD.

However, as information began spreading about the profit potential that forex trading holds, more people wanted in, even if they could not trade on the traditional interbank market because they did not have huge sums of money to work with.

There was a growing need for forex market access for those investors who had around $10,000 to $50,000 to invest or less, and so the retail forex market was born. New forex brokers began (and still are) springing up rapidly to meet this high demand, yet this aspect of forex trading is still highly unregulated.

Many of the forex brokers out there operate under the ‘market maker’ or bucketshop model, and these are the guys who actually have NO interest in seeing you succeed as a trader. Why? Do you ask?

Well, it is their job to make forex market access available to smaller investers (hence the term market maker). In order to do that, they need to be able to fill every order that you place on your trading platform, and they do this by taking the opposing position of every trade that you make.

Well, since they will have an opposing position open for every trade that you make, they will actually lose money every time you have a winning trade. Imagine that you bought the EUR/USD pair because you think the euro is going to appreciate. Well, in order to provide market access to you, the broker will have to take a position where they are selling EUR/USD in order for your trade to go through.

Since they are in a sell position here, it is in their best interest for the euro to depreciate in value, or to see you lose on the trade. And keep in mind that your forex market maker will never, ever reveal this to you, as they count only a small minority of traders actually fully understanding their business model, and thus the majority of traders will fall victim to it.

The other type of forex broker business model is called an electronic communications network (ECN), and it is more trader-friendly simply because the broker does not have a vested interest in seeing you fail. In order to understand how this type of setup works, remember that the goal of any broker is to provide market access and liquidity.

A forex market maker does this by taking an opposing position to every trade you place, but an ECN broker does this buy routing your trade order through their communications network and matching it with another trade (for example, if you placed a buy order on a certain currency pair, the ECN would match you up with another trader selling that same pair).

ECN brokers are really your best choice, as it is much easier to make money using a broker that offers this type of trading setup. Because they have no vested interest in seeing you lose money and instead only care about providing a network where they can match your orders with other traders, you would never have any problems withdrawing your profits as you might have with a market maker.

Public theory # 2

Trading forex is great – online access to your account so you can trade anywhere in the world, very high leverage which enables you to make a significant amount of money from a very small account, the trades are commission-free and even the spreads in forex are extremely tight.

Given that you, the forex trader, has a number of advantages, have you ever wondered how your retail forex broker makes money? And why are there so many retail forex brokers out there? After all, forex broker advertisements are everywhere and the competition seems to be very stiff. So how, exactly, does your forex broker make money?

The answer might surprise you. Your forex broker assumes that you will lose money over the long run when you trade. Given that 95% of forex traders lose money, it is a very safe assumption. Every broker has to decide whether a new account will belong to the group (95%) of traders that loses money, or the group (5%) that makes money.

If I gave you a coin and said that it would land on heads 95% of the time, I think you would probably want to keep the coin so that you could use it to win some bets with your friends and 2) always assume the coin would land on heads.

This is precisely what your forex broker does. Every new account is assumed to belong to “group B” – those traders that will lose money. Since 95% of the traders belong in this group, your broker is only too happy to assume that you belong in this group.

After some time, if you have consistently made profits, your broker will re-assign you to “group A” – these are the lucky 5% of traders who consistently make money. After you have joined this group your broker will lump your trades with all of the rest of group A and hedge against your trades. So, for example, if all traders in group A have bought the EUR/USD your broker will place a trade in the interbank forex market to offset any profits group A make on this trade.

Basically, your broker puts up with group A traders but is really interested in gaining group B accounts. This is because if a trader in group B loses $7,000 – that is, he completely blows up his $7,000 account, then the broker gets all of that money. The broker does not make money on the spread; the broker makes money on the losing accounts.

This is also why brokers are constantly advertising for new customers. The brokers need “fresh blood” to keep making money, many of the traders in group B will give up on trading or move to another broker.

Public theory # 3

Like any other business in the history of business, your broker’s raison d’etre, is to make as big a profit as possible. There are about as many ways to go about this as there are brokers. For those who are in it for the long haul, however, it is generally best to adopt a set of practices which are deemed fair by their clients: certain boundaries are set, and operating beyond them can cost a brokerage its reputation, and along with it its clients.

Straying outside these boundaries, therefore, is not considered as being in line with the long term goals of the business. How strictly these boundaries are enforced, especially when there is little chance of clients ever even becoming aware of any transgression, again varies from business to business. For the sake of simplicity, in this article we assume that everyone in the business is squeaky clean, as if every client could peek into the broker’s back office at any time and dissect every trade. This is obviously not the case, and many brokers do take advantage of this opaqueness, but the details of that are best left for another discussion.

So without further ado, let’s get into the details of how forex brokers function. Somewhat removed from the top-tier interbank market, retail forex brokers are there to provide a service that would otherwise not be available, that is, giving an investor with a $10,000 bankroll the chance to speculate in the up-until-recently very exclusive forex market. There are generally considered to be 2 types of brokers providing access at the retail level: electronic communications networks (ecns) and market makers. Ecns are generally somewhat more exclusive, requiring larger deposits to get started, but are seen as providing more direct access to the interbank market. As we will see, there are certainly advantages to this, but some disadvantages as well. Market makers, on the other hand are more often than not, the counter party to their clients’ trades, creating somewhat of a conflict of interest, whereas ecns profit from commission fees charged directly to the clients, regardless of the result of any trade, they are seen as being completely impartial – an ECN has no incentive for a client to lose money.

In fact, one could argue that an ECN stands to profit more if a client is successful, meaning that s/he will stay around longer and they will be able to collect more commission fees from them. A market maker, on the other hand, being the counterparty to a client’s trade, makes money if the client loses money, providing an incentive for some shady practices, particularly in an unregulated market. The extent to which this happens varies among individual brokers. There are also some benefits to trading with a market maker (see our ecns vs. Market makers article) some brokers also provide a service that doesn’t quite fit into either category – they route different orders differently, depending on complex algorithms, or on a dealing desk, that analyze each order and attempt to fill it in the way that will be most beneficial to the broker’s bottom line. They can offset some client orders against one another, effectively creating an in-house market, they can choose to be the counterparty to a client’s trade (trade “against” the client), or they can offset their position with a hedge through a higher-tier counterparty. Note that the market maker is mainly concerned with managing its net exposure, and NOT with any single individual’s trades. They are NOT gunning foryour stop losses specifically, but may be gunning for clusters of stops.

If you have already read the first article in the series, structure of the forex market, you will recall that market mechanics are responsible for the variation in bid/ask spreads, and also for slippage. So it seems the two biggest novice traders’ pet peeves are not so much a function of who their broker is, but rather their lack of understanding of the way the forex market operates. A broker that offers a fixed spread tends not to fill orders during periods of low liquidity because this would expose them to undue risk, and as much as their job is to cater to their clients, remember they are in business primarily to make money for themselves. Some brokers also offer guaranteed order fills, such as “guaranteed stop losses”.

Again, if there is no counter party to take the trade, they have to expose themselves to risk in order to fulfill this guarantee, so don’t be surprised if you see such a broker quoting different/delayed prices around important trend lines or support/resistance levels. Be especially aware of brokers who offer both guaranteed fills AND fixed spreads. When a broker offers something that seems too good to be true, you would be wise to question how exactly their business model is able to support such a risky practice. As a general rule, a broker will help you only when your interests are aligned with theirs. On the other hand, brokers provide a very valuable service, without which you wouldn’t have the opportunity to profit from the forex market, so please think about how it all comes together before blaming your broker for everything

Now a better theory & option (my choice and preference)

Ever heard of a 3rd type of broker….. An STP broker?

Many traders do not feel comfortable trading with “market makers”, as brokers that are market markers have the option of holding on to the other side of their client’s trades which, if they actually choose to do this, would mean that they would profit from their client’s losses and lose money when their clients won. Of course most market makers do not actually do this; market makers usually only seek to match their client’s trades with the trades of other clients in order to profit from the spread and then hedge whatever they cannot match in the market. But nevertheless, many traders are not comfortable with market makers as a forex broker actively betting against their clients would be a huge conflict of interest were it to happen.

One solution for those not comfortable with trading with market makers would be to trade with a true STP broker instead. An STP (straight through processing) broker is a broker that is not a market maker, STP brokers are not liquidity providers and therefore all trades placed with an STP broker are immediately passed directly to their liquidity provider(s). As a middleman, an STP broker will profit from the difference between the spread that they charge their clients and the spread that they are able to get from their liquidity provider(s). STP brokers are called straight through processing brokers because all the trades placed with them effectively pass straight through them and into the hands of someone else.

Trading with a true STP broker is usually a good idea for novice and intermediate traders. The spreads that STP brokers charge are usually very competitive and not normally any higher than those that market makers charge their retail clients, as STP brokers can route their orders to the liquidity provider with the cheapest spread/best price at any given time. And it is in an STP broker’s interests that their clients succeed and make money so that they keep on trading, for novices traders, having a broker that they can be sure is 100% ‘on their side’ is a huge plus.

STP brokers should not be confused with ECN brokers . In order to be a true ECN broker, a broker must provide real time depth of market (DOM) information in a window on their trading platform showing every single order to allow traders to see exactly where the liquidity lies. ECN brokers do not simply pass orders straight to a liquidity provider like stps do, ECN brokers charge a commission for providing a market place where traders can trade against each other on an equal basis, and they don’t actually care about which of their traders wins and which of their traders lose as it doesn’t affect them. An STP broker on the other hand actually wants all it’s traders to do well as that is what is in an STP broker’s best interest.

For those novice and intermediate traders looking for an STP broker I recommend etoro. As etoro is a true STP broker. Etoro provides traders with an unlimited practice/demo account and guaranteed stop losses on their live accounts so that there is no risk of DEBT. Making them an ideal broker for novices and intermediate traders to develop their trading skills.

SO, IN SHORT

STP brokers like ‘etoro’ does not have any interest in your loss (which most people doubted so far). Rather they want you to do good for their own benefit… and in this process, they want you to open and close (settle) most positions you can, generating them more positions to pass (lots), in turn giving them their own better SPREAD MARGIN

And to get the most out of this, etoro came up with COPY feature and promote the best trader so hard, that most noob copy them and the whole amount generate most total lots traded for them, rewarding them with maximum spread benefits… as when a GURU holds a position it’s not a single lot for them, its multiple lots combined together as a result of 1000’s of traders’ copied equity in the same position through a single rate (easy for them to achieve better spreads from their liquidity providers)

And this is the reason they have a fixed PIP spread on all pairs… so when they have a bigger combined position, they get most lucrative liquidity spread, and they make the most out of it… at the same time when they don’t get a better spread from their liquidity provider, they still can generate some margin for themselves as the final spread they sell to individual trader is fixed….

So basically their interest in you is to settle the positions, as many as you can, in profit…. Period

And when they say they have TECH problems when the server throws you out, rates get frozen, etc… is the FACT mostly beyond their own controls at times…. As they only rely on liquidity providers (multiple of them, synced together with their system) and a failure of one to accept/provide will result in these occasional blockages… they just pass you on… they don’t deal with you…

So i can say it aloud that they are NOT CHEATING anyone…

I hope this will HELP you all understand the standards of etoro better and how they make profits in reality….

So, let's see, what was the most valuable thing of this article: how forex brokers make money how forex brokers make money solid experience of work on forex is preferable, but all comers including forex-newbies may come and share their opinion as well. At how do forex brokers make money