When You Lose Money in Forex Where Does it go?
When a trader loses money in the forex market, the money does not go to any particular person or entity.
Instead, the money is considered a loss and disappears from the trader’s account.
When a trader loses money, the losses are simply deducted from their trading account balance.
Similarly, when a trader makes a profit, the gains are credited to their trading account.
In the forex market, losses are a part of the game, and traders must be prepared to handle them. Forex trading is a decentralized market, and there is no central exchange or clearinghouse to manage transactions.
Where do forex brokers come in? Do they make profits when you lose? And do they make losses when you profit?
Is someone else losing when you are winning and vice versa? Is Forex a Zero-sum game?
Example: What Happens When You Lose in Forex Trading
You can compare “a trade” to a real estate investment. How?
Forex is a business where you buy a currency because someone else is willing to sell to you and vice versa. but in real estate, you buy properties.
Let’s assume you purchased a piece of land and its value changed (decreased or increased), and then you sell it.
Where did the money go if the asset lost value and you sold at a loss? And where does the money come from, if asset value increases and you sold for profit?
let’s say you bought the land for $500, and then the value depreciated and you then sell for $400. You have lost $100.
Now let’s say the buyer waited a while and found another buyer that then buys the same land for $600. he would have made a $200 profit.
The question then is; where did your $100 loss go to?
One can compare forex trading with real estate in this context using the above example.
Do your losses goes directly to another trader who is on the opposite side? or does it go to the brokers?
Do Your Losses Go to Forex Brokers?
No, when you lose money in forex trading, the money does not go to the broker. Instead, forex brokers earn money through spreads or commissions, which are fees charged for executing trades on behalf of traders.
The spreads represent the difference between the bid and ask price of a currency pair and are how brokers make money on each trade. Brokers may also charge commissions or other fees for their services.
When a trader loses money in forex trade, the money is simply considered a loss and deducted from the trader’s account balance.
The broker does not benefit from the trader’s losses, but rather from the spreads and commissions they charge on each trade.
What about market-making brokers?
Forex brokers who act as counterparties to their clients’ trades and create a market for them are called market makers. This means the broker takes the other side of the trade when a client buys or sells a currency pair.
The broker may then choose to offset the client’s trade by matching it with another client’s trade or hedging the market exposure.
Market makers are responsible for setting the bid-ask spreads and may manipulate prices to their advantage, as they are interested in seeing their clients lose money.
However, most reputable market-maker brokers have safeguards to prevent price manipulation and ensure fair trading conditions for their clients.
Traders must do their due diligence and choose a reliable broker, regardless of whether they are a market maker.
Some people say forex trading is a zero-sum game. But that is not true in every situation.
Is Forex A Zero Sum Game?
Depending on the situation, Forex can be a zero-sum game and might not be. Because one trader’s gain does not necessarily equal another trader’s loss in all situations.
A zero-sum game is a situation where, if one party loses, the other party wins, and the net change in wealth is zero.
Zero-sum games can include just two players or millions of participants.
For example, poker is a zero-sum game, and in a poker game, all the players compete against each other for a fixed amount of money on the table. If one player wins, then the other players lose the same amount.
The total gains of all the winners are equal to the losses of all the losers. Another example is sports betting, where the winnings of one bettor come at the expense of the losses of another. In both cases, the overall outcome is a zero-sum game.
An Illustration – Why Forex is not Always a Zero-sum Game
In forex trading, we buy and sell currencies. For example, if you place a BUY trade on GBPUSD. It means you bought the base currency, which is GBP and sold the counter currency, which is USD. (Which means someone sold you GBP, and the same person bought your USD)
So, let’s name the person that your USD is “Alex”. When you close your BUY order of GBPUSD, it means you sell back your GBP and buy back USD.
Now let’s assume you gained profit from the transaction of GBPUSD. Does Alex make a loss?
- Yes, it is possible that after you close your buy trade of GBPUSD, then Alex immediately closes the sell trade and makes a loss.
- No. It is also possible that Alex still makes profits if, after you closed your BUY trade, he didn’t close his SELL trade immediately. This would mean that when you closed your buy trade which translates into a SELL, someone else BUY the same pair from you, not Alex.
Therefore if Alex waited longer and then closed his trade later on, he would be transacting with someone else, and it could be a profit.
Now when you closed your BUY trade, it would have meant a loss if Alex closed immediately as well. But Alex thought? What if I hold on and do not close my sell trade?
Therefore, when you closed your BUY trade, someone else, not necessarily Alex, needed to BUY from you before you could close your BUY trade. (Which means you sold back what you Bought).
Now Alex is not closing yet because he is thinking? The pair will still go down or bearish.
This means that the other order you closed was BOUGHT by someone else, not Alex.
Assume Alex was right ✅, the market came back down, and he also made his profit.
And mind you, when Alex closed his sell order, it meant someone else SOLD to him because he just bought it back when the value decreased, which means he made profits.
Summary – When You Lose Money in Forex Where Does it go?
So where does your money go when you lose? Simple answer; Someone else makes a profit from it.
but sometimes, the trader who has profited from your loss can also turn your loss which is currently his profit into his loss and make it someone else’s profit. its a cycle