Do you know how your retail forex broker makes money?
Surprisingly, unlike stock brokers and futures brokers, forex brokers do not make money on the spread. I sometimes hear this question from traders “what happens if my broker goes bankrupt?” Forex brokers have gone bankrupt in the past. Refco and FXLQ are two retail forex brokers who have gone bankrupt, however most retail forex brokers make a ton of money, and here’s how they do it:
Forex brokers pool all traders into two categories: “A traders” and “B traders” – each new trader who opens an account is placed automatically into the “B trader” group.
The simple difference between the “A traders” and the “B traders” is this: “A traders” make money and the “B traders” lose money consistently. Your forex brokers will take the other side of your trade. This means that the broker is assuming the risk on the trade. If you make money on the trade your broker pays you the profit. So, when you have a winning trade, your broker loses. Only after a sustained run of successful trading will a trading account be placed into the “A group.” These traders who make it into the “A group” have this to look forward to: brokers start slipping your account, so that you find it difficult to get a true market order, and brokers will hedge your positions in the interbank market (the “real” forex market where banks trade currencies) so that your profits do not significantly eat into the broker’s profits. Brokers must hedge the “A traders” to make sure that these “A traders” do not send the firm bankrupt.
Brokers by default will assume that each new account belongs to the “B group” – the group comprised of traders who consistently lose money. Why does a forex broker decide that a new account should belong to the “B group?” Because most accounts belong to the “B Group” – estimates differ, but nearly 95% to 99% of all forex accounts lose money. Whats worse is that a significant number of those accounts lose nearly ALL of the money.
I know what it feels like to lose money trading forex, I did it for years before becoming profitable. Now I use simple trading strategies – most of which use simple trading strategies such as support and resistance. My students and I have been making many pips for years. If you would like to join us, or think that trading forex for a living may be something you would be interested in, take a look at the Personal Trading program, I would love for you to join us over in the “A group.” If you have any questions about trading forex, you may always reach me via email at [email protected]
