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.
See also: Is Forex Trading a Scam?
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.
Don't miss: What Is Forex Trading and How Does It Work?
How do forex brokers make profits – 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.
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.
Check this article out: 6 Trading Mistakes that Will Cost You Money and How to Avoid Them
So who are the reliable and reputable forex brokers on the market? We at Trading Education have a few recommendations, check them out here.
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