February 19, 2021 | AtoZ Markets – While trading in forex, a lot of people don’t think about how brokers earn from this. But this is a fundamental thing to know before depositing as traders must understand how and where the money flows throughout the system. No one will care about a traders’ account more than themselves. Thus, remember that when choosing who to trust in this industry.
Knowing how forex brokers make their money can help traders choose the right broker. Many brokers have a handful of charges they use to profit from their clients. Getting familiar with these options will help in determining where the money is going.
Several broker fees will charge a commission per trade. Others charge the spread between the bid/ask prices. Forex brokers make money by keeping the spread or charging a set fee per round turn. On the other hand, some brokers charge both, but it is less common these days as the business’s commoditization demands lower pricing. Sadly, there are a few scrupulous forex brokers have previously mentioned that they have commission free trades. However, they typically charge more in the spread to make up the difference.
The spread varies – sometimes it is fixed, sometimes it is variable. For a variable spread liquidity pool, the amount of spread will depend on the number of orders out there. In case there is a major announcement like the Nonfarm Payroll Numbers from the United States, the spread will often widen.
With that, people might end up paying more in spread in a volatile market than what they expect. And this is the major advantage of a fixed spread. Here, people will know what they are going to be charged with to facilitate buying and selling.
More Sources of Income
Several forex brokers are charging extra for ‘bells and whistles’ in customer service and education. For instance, some will offer signals, in-depth analysis, or private educational classes and webinars for people who are willing to pay more to have a larger account. Thus, if traders understand trading and proper money management techniques, these things are very much needed.
One more way forex broker earn money is financing the loan.
As traders buy or short a currency with margin, they are taking out a loan. And this can become dicey and complicated. However, it’s enough to say the forex broker with massive amounts of orders can get paid interest in the true Interbank market – something that traders won’t participate in.
Despite what retail traders hear, they won’t get nowhere near the true Interbank market. And this is because order must be larger to function in that arena.
Usually, forex brokers will work with a liquidity provider that shops up the said orders in smaller chunks, letting people trade back and forth. The true Interbank market consists of the largest banks globally, and they cannot be bothered with a small trade worth $500 – for example.
There is a prevailing myth that endures for many years, saying that brokers are out there ‘stop loss hunting,’ meaning they are moving the prices on their servers to wipe out some traders in one shot. And this is because the marketplace before was full of unscrupulous dealers doing such things. Overall, if traders stick with a regulated broker, they won’t face this issue.