Profit of Forex Participants
As we have already mentioned, a private Internet trader has access to Forex market through the Internet broker or a dealing company. The Internet trader earns money by means of currency speculations, closing positions at more favorable conditions of the currency rate, than at the position opening. For the Internet trader, working at Forex is connected with risk. Depending on the developed trading strategy, the effectiveness of trade at currency market can be different. Not the least factor of success is the trader’s character, his or her ability to control emotions and take reasonable decisions.
The services of brokers at Forex market, on the contrary, can be called a real business. This business is almost not subjected to risks. The principle of margin trading, like it has been discussed in the correspondent chapter, does not let the dealing company’s client lose more funds, then he has on the account and “pick the Internet broker’s pocket”.
We already know that deals at Forex are accomplished at the interbank level. The dealing company has multicurrency accounts in the bank, where it is being served. This bank provides the dealing company with the quotations, and it, in its turn, passes these quotes to its clients. As a rule, these quotes are a bit different- the Internet traders get the quoting rates with a little bit increased spread volume. This lets the dealing company earn from the difference in spread, as at the interbank level the deals are made at more favorable rates. For example, a bank gives a dealing centre a quoting rate USD/JPY 104.75/104.77 with the spread volume equal to 2 points. The dealing centre 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-term position (sells the US dollars) for 1 lot, which is equal to 100 000USD (we remind you that one WWL lot is equal to 10000 $, which is by 10 times less than the standard Forex lot). The Internet 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 US dollars at the interbank rate is approximately equal to 1 000 / 104.77 = 9.54USD. 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 from the client’s position opening. And the same sum is earned by the company at the client’s position closing. The total income equals on the order of 19 USD from one transaction. If a dealing company has thousands of clients, and they are conducting a score of deals each, thus, the daily income of a dealing company can be equal to hundreds of US dollars! As we can see, this is a very profitable business.
But spread can be not the only source of income for the Internet brokers. Some dealing companies take commission fees per deal, or even separate fees for opening and closing the position. Basically, this commission is analogical to the profit from the spread. In our example, the dealing company can give its clients the interbank quoting USD/JPY 104.75/104.77 directly without a spread increase, but can take 19 USD from each client’s operation. The profit remains the same. It should be noted, that some Internet brokers can even take commission along with the spread increase. In reality, it is very difficult to check whether a dealing company is increasing the interbank spread, as quoting rates are constantly being changed and the interbank spread is not revealed to the Internet trader.
The above described method of the dealing company’s profit takes place, when the Internet trader during his work at Forex uses standard 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 USD, and one micro lot- to 1 000 USD. The minimal volume of the deal at the interbank level is 100 000 USD. How are the deals conducted in this case? Here, simple statistics works- about 95% of the beginning Internet traders lose money starting to work at Forex. Usually it happens, as the majority of people at the beginning are looking for “a fast buck”. They do not study thoroughly the currency market theory, its analysis instruments, and the influence of the economic indicator releases on currency rate changes. For such people, working at Forex turns into a roulette game. Just because usually the beginning traders and amateurs work using mini and micro lots, the dealing company does not conduct the deals on such lots at the interbank level. If the Internet trader closes the position on mini or micro lot with losses, then such losses are received by the dealing company as yield. If the Internet trader closes the position for mini or micro lot with profit, the profit is paid by the company. As 95% of novices sooner or later lose their money, the left 5% in order to make the company bankrupt need to earn the profit higher than the amount of losses of those 95% luck hunters. If we suppose, that initial sizes of the accounts of traders are equal, this profit should increase by 19 times, and the possibility of this is negligibly small. Moreover, if he Internet trader is working profitably at mini lots, he passes to usual lots soon, where the dealing company does not pay him from its own funds, but conducts the operations via bank at the interbank level.
The above described type of earnings is not revealed 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 contrary. The truth can be somewhere in the middle. Everybody decides himself, what to believe in. But realizing that the majority of traders lose their money at the beginning is very important. Earning at Forex is possible and this is not a myth. But to accomplish this it is not enough just to click a “gain one million” button. Working at 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 to get it, an open position should not be closed for a long time. It is more profitable for the Internet broker, if the positions of the Internet traders are opened and closed as often as possible. Since, as it was described above, every conducted deal brings the Internet broker profit in the form of commission or spread. Yield from the bank rate as compared to profit from commission and spread is tiny. It should be stated, that dealing companies can not only earn from bank interest rates, but also pay them, and this was discussed in details in the previous chapter.
As we can see, dealing companies are in better conditions than the Internet traders. They have a steady income and their business activity can be called successful. Dealing companies get the profit from spread, commissions, bank rates, loss deals of their small clients, who are working with mini and micro lots. The profit of the Internet traders is usually limited only to profitable deals on the currency rate exchange (currency speculations), and in some cases, bank rates. Nevertheless, working at Forex is very attractive. If we consider this type of activity as a job, but not as a game, we can earn steady high profits. The yield in such case can exceed the profit from financial investments, bonds, investment funds. If you get tempted and start working at Forex without certain knowledge and skills, there is a great possibility that you can lose your money. Now you have a good advice and, in the end, it’s for you to decide.