How Do Forex Brokers Make Money

How Do Forex Brokers Make Money



How Do Forex Brokers Make Money?
It is​ one of​ the​ most talked-about advantages of​ trading on​ the​ Forex—the commission-free trades! Unfortunately,​ while we would all like to​ think that Forex brokers are just out there executing trades for the​ fun of​ it,​ the​ simple truth is​ that everyone needs to​ make money—even the​ brokers .​
While they may not charge a​ traditional commission,​ brokers on​ the​ Forex still make their money whenever trades take place .​
Brokers actually are compensated in​ a​ number of​ ways,​ including:
• Buying/Selling Currencies
• Earned interest on​ deposited funds
• Converting and holding currencies
• Rollover fees
It is​ in​ the​ buying and selling of​ currencies that brokers make the​ majority of​ their money .​
They make this money in​ something known as​ the​ spread,​ or​ the​ difference between the​ asking and bidding price of​ the​ currency pair .​
the​ ask is​ the​ price a​ retail Forex trader would pay for a​ position .​
the​ bid price refers to​ the​ amount that an​ investor could then sell the​ position at.
The smallest unit of​ measure in​ Forex trading is​ known as​ a​ pip and it​ is​ equal to​ .0001 (except for the​ Japanese Yen,​ which is​ .01) .​
the​ difference between the​ ask and bid price is​ typically only 3 or​ 4 pips and this is​ what the​ broker makes when buying and selling currencies .​

A broker is​ actually a​ middleman and never actually charges anyone directly .​
Instead,​ a​ broker purchases a​ position from a​ larger investment institution and then sells it​ to​ the​ retail Forex trader while pocketing the​ difference between the​ two amounts .​
For instance,​ a​ broker might set the​ ask price at​ 1.250 and the​ bid price at​ 1.246 .​
If the​ investor were to​ sell the​ position immediately,​ then the​ most they could sell it​ for would be the​ bid price of​ 1.246—or a​ loss of​ 4 pips .​
Since the​ typical Forex transaction is​ conducted in​ $100,​000 lots,​ that means that the​ broker made $40 in​ that currency exchange.
The spread will vary depending on​ the​ broker and the​ currencies being traded .​
Typically,​ the​ spread averages between 3-5 pips .​
Unfortunately,​ brokers are necessary tools in​ the​ Forex trading game if​ for no other reason than the​ sheer size of​ the​ transactions .​
There is​ approximately 1.8 trillion dollars exchanging hands on​ the​ Forex every day and these transactions are conducted in​ $100,​000 lots (there are also $10,​000 mini-lots and even micro-lots) .​
Thus,​ it​ is​ typical for Forex transactions to​ be highly leveraged with most traders only putting up $1,​000 (or 1/100) in​ capital .​

Forex brokers will tend to​ be partners or​ somehow associated with investment banks and similar institutions .​
These backers actually guarantee the​ loans used to​ leverage Forex trades—and without them—none of​ us could trade on​ the​ currencies markets unless we were willing to​ risk more than the​ 1% demanded by most brokers .​

Yes,​ the​ brokers do make money when investors trade on​ the​ Forex but they do provide a​ genuine service .​
Just be careful to​ avoid trading too often because although the​ pips are small—they can disappear quickly especially when investors try to​ compensate for a​ loss by turning around and investing before doing their homework .​
Therefore,​ be wary of​ any Forex broker that advocates any form of​ day trading or​ the​ like—it’s a​ very,​ very dangerous strategy to​ use in​ the​ most volatile and fluid market the​ world has ever known!




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