How do forex brokers make money? How do they lose money? These are very good questions. and yeah, a good question deserves a good answer.
To understand how forex brokers lose money, one must understand how they make money and vice versa.
I will answer the following questions in this piece.
- How the forex broker business started
- What is a Market Maker Broker and how do they make money?
- What Are ECN Brokers and How do They Make Money?
- What is an STP broker and do they make money?
- How fore brokers lose money
How the forex broker business started
There was a time when trading the foreign exchange markets was restricted to big banks, hedge funds, and high net-worth individuals simply because of the capital requirements for trading.
What about people who do not have the opportunity of huge funds but still want to trade because they have heard that forex trading can earn them money and maybe make them rich.
This set of wanna-be traders could not afford 1 million dollars. But they want to be among the traders that make money from the largest financial market.
That was when a new breed of forex brokers emerged.
Why? As soon as retail forex traders knew that they can invest their $10,000 or less in the forex market with these new brokers, things started getting interesting for both parties.
As a result, new forex brokers were born year on year, spending enormous capital on advertisements here and there just to make sure they get retail traders to trade with them.
Do you now know why we all see new forex brokers year on year?
LoL, I think you know the answer.
Many of the forex brokers out there operate under the ‘‘market maker’’ model, and these are the guys who have NO interest in seeing you succeed as a trader. Yes, that is the ugly truth. They are called brokers to make you BROKE.
What is a Market Maker Broker and How Do They Make Money?
Don’t forget that brokers are in the forex world to make the forex market available to smaller investors like you and me. That is where the term market maker comes in.
To do that, they need to do something you will be surprised to hear. They must be able to fill every order that you place on your trading platform, and they do this by taking the opposite position of every trade that you make. Yes, the opposite of your trades.
Market maker brokers take the opposite side of your trade. Yes, market makers earn when a client loses. In short, your loss is their gain; their gain is your loss.
They take the opposite side of your trade, and it is not illegal at all. This is the way they run their business.
Ok, let quickly talk about the other type of forex broker business model called an Electronic Communications Network (ECN). This type of broker does not want you to fail.
The ECN Broker and How It Makes Money
Remember that the goal of any broker is to provide market access and liquidity?.
And you remember the market maker broker does this by taking an opposing position to every trade you place, but an electronic communication network broker gives direct interaction with liquidity providers and with other electronic communication network participants.
It means (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).
How do they make money?
ECNs brokers profit from commission fees charged directly to the clients, regardless of the result of any trade, they are seen as being completely impartial – and ECN has no incentive for a client to lose money.
It will surely want you to succeed so that it can earn profits and commissions from you for a longer period. That is ECN for you. your success is their success.
An example of a broker that provides an ECN account is the FBS Broker
I feel what you are feeling right now. You don’t want to trade with market makers because they trade against you. Meanwhile, you don’t want to trade with an ECN broker because you require large capital to start trading.
Well, you need to decide what fits your situation.
Let me tell you about another type of broker called the STP broker
What are STP Brokers and How DO They Make Money?
STP (Straight Through Processing) broker is a broker that is not a market maker, and also STP brokers are not liquidity providers, so 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 can 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.
Difference Between STP and ECN Brokers
ECN broker provides real-time Depth of Market 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 as STPs do.
ECN brokers charge a commission for providing a marketplace where traders can trade against each other on an equal basis, and they don’t care about which of their traders wins and which of their traders lose as it doesn’t affect them.
On the other hand, an STP broker wants all its traders to do well because they keep on making money by charging through the spread.
Now having all this information. Let me answer the last question:
How Brokers Lose Money
Do Brokers lose money? Yes, but very small losses compared to profits.
Time to tell you the ugly truth some brokers won’t want you to know.
Your forex broker will already assume that you will lose money over the long run when you trade with them.
Yes, they have the numbers, they know the percentage of traders that crash their accounts every day.
Since they know 97% of traders lose money, it then makes sense to make some meaningful business decisions with such data.
So now they have a journal, where they keep track of their entire traders. They decide whether an account will belong to the group of (97%) of traders that lose money or the group (3%) that makes money.
So, market maker brokers trade against you to make money. When you win they lose. But they know you can’t win for a long time before you crash your account again. LOL!!!
Summary – How do Forex Brokers Make Money?
most times, forex brokers make money each time forex traders lose money in forex.
They also make money via spreads and commissions.
What are you gonna do with this information in your hands? follow my blog and make sure you subscribe to my newsletter as I continue to reveal info that can get you to a destination on unending profits in forex trading.
Here, see the best way anyone can use to invest in forex right now.