How Do Forex Brokers Make Money?

The main goal of any business entity is to make money and forex dealing being a form of a business engagement, its partakers who are mainly the forex brokers are there to make some money. While they might not charge a typical commission, they still make their money whenever a trade occurs. And since the money they make comes from their client’s pocket, it is a good idea to know how they get hold of it. The brokers get compensated in numerous ways which may include the following.

Leverage spreads
Usually there is insufficient money in a spread to make a decent living, so the forex brokers make up for it by providing higher leverages to traders. Not only does a leverage spread give a trader the opportunity to amplify their profits, but at the risk of increasing their losses, but it also permits the broker to leverage the spread to his advantage. For instance, a leverage of 1:100 affords the broker the opportunity to earn 100 times more income on any given forex trade, than he would on unleveraged forex trade.

If the trade moves against you, the leveraged trading becomes very risky affair. However, if you are willing to risk it all, then note that you will also be permitting the broker to benefit from the trade as well.

Currency pair spreads
The most popular income earning method for most forex traders is by far the keeping the spread. A spread can be defined as the difference between the bids and the ask rates. Under this income generating method, the trader creates a spread difference and makes it their trading model, thereby absorbing the costs and moving on to the next trade.

Overnight swap spreads
This is an innovative arrangement that always benefit the forex trader. The overnight swaps are rewarded to them when there is a difference between the currency’s rate of interest is on the positive side, but  if on a negative side, the trader settles the difference themselves. Nevertheless, the broker does not leave everything to chance or luck. Instead they usually offset payments from the other trades they are managing. For instance, if a client is selling a currency and another is buying the same currency, the forex broker will earn an overnight swap spread while the other is paying. The result is that there will be no out of the pocket expense for the forex trader. Moreover, it offers them the added advantage of being able to keep the difference between both spreads.

Payment processing fee
This method is less common than the others. Normally, nobody wants to be charged a fee for withdrawing money from their trading account. Typically, forex brokers doesn’t  earn a lot from an individual transaction, but the small trickle of money that finds it way through this option turns into a large stream of income in the long run, especially if a forex broker processes numerous withdrawal requests. Due to competition, this fees has been done away with by the majority of forex brokers, thus there is no reason why you should do business with a broker who is charging a withdrawal processing fee.

Trading against their clients
This is by far the most common and profitable way of making money for a forex trader. The idea behind it is quite easy to grasp, all that a forex trader does is play a simple little game whereby they take the opposite side of a client’s trade. When the client loses, they gains and the vice versa is quite true. Word of caution, try not trade with broker who trade this way as you will often be the loser; they play their game better than you.

Spotting a broker who is betting on your loss is not easily recognizable, but the following tips may be helpful. These are; a forex broker offering only some minor leverage opportunities, has unusually low spreads, doesn’t charge a withdrawal processing fee, doesn’t charge any hidden fee, and offers an overnight swap rate that is quite fair is almost always making their money by trading against a client.

As a summary, definitely brokers make money when investors trade on the forex market, though their services are very essential for non traders and trader alike. However, it is advisable to be wary of forex brokers who advocates for day trading as these strategies usually makes the investor to lose money when trade changes suddenly as it normally does. Forex trading market is usually very fluid, at the same time, volatile and you can lose large amounts of money in seconds or gain the same in seconds.

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