Many theories are often peddled in forex forum regarding how brokers generate profits. Many misguided traders feel that the brokers “only make money when their clients lose money and that this is why only few people ever make money from trading”. Of course this submission is wrong and we will see why.
Forex Brokers Make Money From Commissions and Spreads
Have you wondered why all your trades start out in negative? It is not slippage as many people erroneously think, you are just paying the amount it costs to open that particular trade. So regardless of the outcome of the trade, the broker already made money. The amount you pay varies from pair to pair.
It is usually between 0-3 pips for the majors and as much as 12pips for the crosses. On some exotic pairs like the USDZAR you get charged as much as 50pips spread. That works out at 50$ a trade for anyone trading with 1 mini lot or $500 for anyone trading standard lots.
When hundreds of traders open positions where spreads work out at 50$ each, you will see where the forex brokers money is coming from. In the same way, many of them also charge commissions for having positions open apart from the spreads.
This could be as high as 10$ for every standard lot traded. If you add the swaps too, it works out to be a tidy amount.
They Make Money From Trading the Markets Too
Many people do not know it but these brokers are among the largest providers of liquidity in the forex market. They enter and exit positions just like everyone else and with their financial expertise and amount of money at their disposal their monthly profits are usually very massive.
Not to worry, they are not trading with your deposited funds as all regulated brokers are under obligation to ensure that clients’ funds are protected in separate accounts.
Partnerships With Other Businesses
If you have ever used any forex brokers in the past, then you must have had instances of emails offering you one product or service. Many of these services are not run by the brokers themselves but by their affiliates. Regardless of whether the broker runs the product by themselves or not, they still make some profits from the venture.
These are the major ways forex brokers make money.