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For Beginners
For Beginners

For Traders
For Traders

Chapter 13 Forex participants’ profit

Forex participants’ profit

As we have already mentioned, a private online trader has access to the Forex market through a broker or dealing company. A trader earns money by means of currency speculations, i.e. by closing positions at more favourable conditions of the currency rate compared to the ones at opening. Sometimes Forex trading is like a leap in the dark. Depending on the developed trading strategy, the efficiency of trades can differ. An important success factor is the nature of a trader, his ability to control emotions and take reasonable decisions.

The services of brokers on Forex, on the contrary, can be called a real business. This business is almost not subjected to risks. The principle of margin trading does not let the dealing company’s client lose more funds than he has on his account and pick the broker’s pocket.

We already know that Forex transactions are conducted in the interbank level. A dealing company has multicurrency accounts with its bank. The bank provides the dealing company with the quotations for it to supply these quotes to its clients. As a rule, the final quotes are a bit different from original as traders get the quoting rates with a slightly increased spread volume. This lets the dealing company earn from the difference in the spread since in the interbank level the deals are made at more favourable rates. For example, a bank gives a dealing center a quoting rate USD/JPY 104.75/104.77 with the spread volume equal to 2 points. The dealing center increases the spread to 4 points and passes to its clients the quote USD/JPY 104.74/104.78. Assume that a trader opens a short position (sells the U.S. dollars) of 1 lot, which is equal to $100,000 (we remind you that one InstaForex lot is equal to $10,000 - by 10 times less than the standard Forex lot). A trader sells dollars at the price of 104.74 JPY for 1 USD. We receive the difference here 100,000 * (107.75 – 104.74) = 1,000 JPY, which in conversion to the U.S. dollars in the interbank rate is approximately equal to 1,000 / 104.77 = $9.54. This sum is a regular yield of a dealing company, which is not exposed to any risks. It should be noted that this is just a profit gained from opening a position by a client. And the same sum is earned by the company at the client’s position closing. Totally, a broker returns about $19 from one transaction. If a dealing company has thousands of clients who place dozens of orders every day, the daily income of a dealing company can come in at hundreds of thousands of U.S. dollars! As we can see, this is a very profitable business.

But the spread is not the only source of income of Forex brokers. Some dealing companies take commission fees per deal, or charge separate fees for opening and closing a position. Basically, this commission equals the profit from the spread. In our example, the dealing company can give its clients the interbank quote USD/JPY 104.75/104.77 directly without a spread increase, but can take $19 from every operation of a client. The profit remains the same. It is worth noting that some brokers can even take commission along with the spread increase. In fact, it is almost impossible to check whether a dealing company is increasing the interbank spread or not, since quoting rates constantly change and the interbank spread is not unveiled to a trader.

The above-mentioned way of making profit by a dealing company takes place when a trader uses standard Forex lots. If mini or micro lots are used, the situation is a bit different. A dealing company cannot make a transaction for such a small sum via bank at the interbank level. The volume of one mini lot is equal to $10,000 and one micro lot is $1,000. The minimum volume of the deal in the interbank level is $100,000. But how are the deals conducted in this case? The answer is simple - about 95% of the beginning traders lose their money. It usually happens due to the fact that the majority of newcomers are fortune hunters. They do not analyze thoroughly the currency market, its instruments, and the influence of the economic indicators on currency rate changes. This group of people turns trading on Forex into roulette. Usually this kind of traders trade mini or micro lots. This is exactly why a dealing company does not conduct the deals on such lots in the interbank level. If a trader closes the position of mini or micro lot with losses, these losses are received by the dealing company as yield. If a trader closes the position for mini or micro lot with profit, the profit is paid by the company. A situation when traders bankrupt a broker is impossible due to the fact that 95% of novices sooner or later lose their money and the rest 5% of experienced traders have to make so much money enough to exceed this huge sum of losses. If we suppose that initial size of all trading accounts is equal, the profit amount of those 5% traders must be increased by 19 times, and the probability of that is negligible. Moreover, if a trader succeeds with mini lots, soon he goes on with standard lots, where the dealing company does not pay him out of its own pocket, but conducts operations via a bank in the interbank level.

The above-described type of earnings is kept low key by dealing companies. The majority of them claim that all transactions are made at the interbank level, with no difference in lot size. But common sense and logical reasoning lead to the opposite. The truth might be somewhere in the middle. Everybody decides what to believe in. But realizing that the majority of traders lose their money in the beginning is very important. Earning on Forex is possible and this is not a myth. But it is not enough just to click a “gain one million” button. Trading on Forex is a risky thing, which requires certain knowledge, skills and experiences.

An additional source of income for a dealing company can become bank rates, described in the previous chapter. But the profit from it in general is insignificant, and in order to get it, an open position should not be closed for a long time. It is more profitable for a broker when positions of traders are opened and closed as often as possible. Since, as it was described above, every conducted deal brings a broker profit in the form of commission or spread. The yield from the bank rate as compared to the profit from commission and spread is tiny.

As we can see, dealing companies are in better conditions than traders. They have a steady income and their business activity is quite successful. Dealing companies get profit from spread, commissions, bank rates, loss deals of their clients who trade mini and micro lots. The revenue of traders is usually limited only to profitable deals on the currency rate exchange (currency speculations), and in some cases, bank rates. Nevertheless, Forex trading is very attractive. If we consider this type of activity as a job, not as a game, we can earn steady and high profit. The yield in such case can exceed the profit from financial investments, bonds, investment funds. If you give in to the temptation and start trading on Forex without having sufficient knowledge and skills, there is a great chance that you will lose your money. Thus, you have been counseled enough and now it's up to you what to do!