A forex broker, also referred as a currency trading broker, or retail forex broker is an intermediary who purchases and sells a specific asset or assets for commission. This kind of broker acts as an intermediary or linkman between you the trader and the interbank network. The interbank is the systems of banks trading with each other.
As a forex trader, the broker you cooperate with will provide you a value from the banks whereby they are having lines of credit as well as access to forex liquidity. Most forex brokers utilize multiple bank options for pricing in order to figure out the best choice available which they can offer their particular clients.
There are different kinds of forex brokers including market makers, Straight-through Processing (STP) forex brokers, Electronic Communications Network (ECN) broker, and No Dealing Desk broker among others. A broker also can either be regulated i.e. one who is registered by the monetary regulatory of their particular country or unregulated i.e. one who does not comply with any regulations but behaves in any way they see fit.
Whether you are a beginner, intermediary or even professional trader, it is vital you research carefully on the various forex broker alternatives before you consider any since different brokers have varying terms and conditions of services.
How Forex Brokers Make Money
1. Currency Pair Spreads
Currency pair spreads is considered the largest source of earning for forex brokers. Spread is the difference between the bidding and asking rates. Forex brokers often have access to low spreads and add mark-up to spreads prior to passing the prices to their respective traders. In case traders end up losing on the spreads that are added, their particular broker earns that money.
2. Overnight Swap Spreads
Overnight swap spreads is where a broker pays the all-night swaps to their trader in case the difference between interest rate in a pair of currency is positive in trader’s position and gets paid from the account of the trader if the difference is negative.
Spreads on smaller positions are very low to be considered a significant earning source for the forex brokers. Therefore, most brokers will always choose to offer their particular traders with high leverage. As a trader, your broker offering you high leverage is of course advantageous since it multiples your trading volume. However, be informed that high leverage can play both parts, i.e. increasing your profit as well as loss potentials on the same rate.
When a broker offers you high leverage like on FXDailyReport.com list, for instance, where as a trader you trade bigger lots which become with 1:100 leverage available, the broker will earn 100 times higher on the spreads than what they could have earned without this kind of leverage.
4. Trading Against Traders
Though most people consider this to be disreputable, forex traders in some instances can choose to make cash by trading against their clients. With most brokers, trading against their particular customers is the most profitable method of earning income they use. As a forex trader dealing with a broker, if you receive spreads that are too low, you notice the leverage is not significant, overnight swaps are somewhat fair and you are not charged commissions for trading and payment processing, you should know that your broker is definitely trying to make money by trading against you.
5. Payment Processing Commission
Online forex brokers hardly charge commission per trade expect in some special occasions which they market as a feature. However, these brokers have the tendency of charging payment processing fees. Payment processing fee is a commission deducted on your account by your broker once you make any deposit or withdrawal.
Payment processing fees are fixed in currency measures and are often quite small. However, despite these commissions being too small and hence unable to form a notable part of the profit of the broker, they are usually enough for compensating at least a portion of the forex broker’s expenses.
As you have seen, there are various techniques that brokers can use to make money. As a forex trader, since there are different kinds of forex brokers with varying services, make sure you research on the various broker options available before cooperating with any so that you can secure a broker that will always help you minimize losses and maximize profits when trading forex.