As we have already mentioned, an individual trader gets access to Forex by means of a broker or a dealing company. Traders earn money via currency speculations. In other words, they close positions at a higher price compared to the price of opening. Sometimes, forex trading is like a leap in the dark. The outcome depends on a particular trading strategy. Traders' characters and their ability to control emotions and make wise decisions is one of the keys to success.
Brokerage services in the forex market could be considered as almost a risk-free business. Marginal trading does not allow traders to spend more money than they have in their accounts. Moreover, this principle prevents traders from borrowing funds from a broker.
We already know that deals in the forex market are performed at the interbank level. The intermediary has multi-currency bank accounts. A particular bank provides a dealing company with quotes, which this company transmits to the clients. As a rule, the final quotes slightly differ from the initial ones due to the inflated spread size.
This allows the intermediary to make money on the spread difference as interbank deals are more profitable. For example, a bank provides a particular broker with the USD/JPY quote of 104.75/104.77 with the spread of 2 pips. The broker increases the spread up to 4 pips and offers its clients the following price 104.74/104.78. Just imagine that a trader opens a short deal (sells US dollars) of 1 lot that equals $100,000 (remember that one InstaForex lot stands for $10,000 that is 10 times smaller than a standard lot). Thus, the trader sells US dollars at the price of 104.74 yen for one dollar. Thus, there is the following difference: 100,000*(107.75-104.74) = 1,000 Japanese yen. This sum is converted according to the interbank exchange rate and amounts to $1,000/104.77=$9.54.
This sum is a guaranteed profit of the dealing company. Notably, brokers receive this sum when traders both open and close positions. As a result, the broker receives about $19 from one deal. And if a dealing company serves several thousand clients who conduct dozens of deals every day, then the daily revenue of this dealing company reaches hundreds of thousands of US dollars! As we can see, this is a very profitable business.
However, earning money on spreads is not the only source of income. Some dealing companies require commissions for every deal and they charge additional fees for opening or closing positions. In fact, these commissions are almost the same as profit from spreads.
In the example above, the dealing company may provide its clients with the interbank quote without increasing the spread: USD/JPY -104.75/104.77. However, the intermediary may charge $19 for each deal. In both cases, the income is the same. However, some brokers increase spreads and charge commissions. In reality, it is almost impossible to find out whether the company increases spreads or does not. The fact is that quotes are constantly changing and traders are not informed about the size of the interbank spread.
The above-mentioned source of income is possible only if traders perform deals using standard forex lots. If traders use mini or micro lots, the dealing company cannot transfer such a small sum by means of a bank at the interbank level. One mini lot stands for $10,000 while 1 micro lot equals $1,000.
The minimum deal size at the interbank level is $100,000. In this case, approximately 95% of beginning traders lose money. The main reason for that is the intention to earn easy money.
They do not pay close attention to the market situation analysis as well as market tools and influence of economic indicators on currencies’ exchange rates. Thus, trading on Forex turns into roulette. Usually, such traders prefer mini or micro lots. That is why dealing companies do not perform such small deals at the interbank level. If traders close their positions on mini or micro lots with losses, the sum of loss is received by dealing companies as revenue. However, in case of success, traders’ profit is paid by the company.
Traders’ actions cannot lead to the bankruptcy of a broker due to the fact that 95% of newbies lose their money. At the same time, the remaining 5% of experienced traders cannot earn so much money to bankrupt the company. For example, all company’s clients have the same sum in their trading accounts. In this case, profit of those 5% should be increased by 19 times. In other words, it is almost impossible. Moreover, if traders have good results trading mini lots, they will soon switch to standard lots. Thus, the company does pay from its budget and conducts currency operations by means of a bank.
Most companies do not inform their clients about the source of income that we have described earlier. Most of them claim that the movement of money occurs at the interbank level, and the lot size does not matter. However, common sense and logical reasoning have led us to the opposite conclusion. Notably, most traders lose their money at the beginning of their trading career. In fact, it is really possible to make money on Forex. Of course, it is risky and requires a lot of knowledge, skills, and experience.
A bank’s interest rate could be used for additional income of the dealing company. We have discussed this in the previous chapter. However, the income is quite small. Traders should keep their positions opened for a long period of time to bring money to a dealing company. Nevertheless, it is more profitable when traders constantly open and close deals – the more, the better. Thus, revenue from bank interest rates is smaller than one from commissions and spreads.
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, unsuccessful 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 cases can exceed the profit from financial investments, bonds, and 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. We have provided you with a bulk of professional information. Now, it is up to you to decide what to do.