Hi I would just like to thank everyone on this site for such awesome answers. I can’t believe how much misleading information there is out there tell I read the posts here.
So my question is does the broker also profit from leverage. What I mean is if I open a position of 0.10 lots my profit bar is already -3.25 then when I open a position of 1 lot which is 100,000 units which I can only open if I leverage. My profit bar now starts off at a - 28.65 this charge is now more because I used leverage to open a bigger position which gives the broker more profit. Which is my question do brokers profit from leverage.
Brokers don’t profit [I]directly[/I] by giving you leverage, [I]per se[/I].
They can profit indirectly, in two main ways …
(i) It probably encourages overtrading (which is good for the traders’ counterparties, of course, as you rightly suggest above), and …
(ii) The world is full of lightly-regulated/unregulated counterparty market-makers pretending to be brokers, often in “offshore” locations which they’ve chosen (a) because of the lack of regulation and (b) to serve as an impediment to anyone who might otherwise want to sue them, who promote themselves relentlessly to very naive and gullible newbies likely to be of a gambling mentality because they’re attracted by dangerously high leverage and bonus offers; those are exactly the type of traders, typically with very inflated impressions of how quickly they can make money by forex-trading, that those “brokers’”’ business model depends on attracting, and they do so very successfully, with high leverage as part of the promotion-package.
Edited to add: in effect, therefore, the high leverage facilities offered are part of the method by which counterparty market-makers identify the customers (I nearly said “victims”) they most want to attract, because their funds/deposits are the lowest-hanging fruit in the market.
Yes they profit in the way of charging overnight swaps. Leverage is a kind of additional money you borrow and you move position to the next day (not closing it intraday) then brokers debit your account with swaps.
However you can avoid paying swaps when trading on swap-free account. Although alternative commission is applied.
According to Clint on this website who I think is truly amazing. I don’t think there is any borrowing going on. So anyway if I have a swap free account can we say that the spread or commission they charge is for the service they provide or is the spread or the commission profit from the leverage they provide.
Commissions are main source of income to the ECN brokers however market makers might manipulate the spreads and make money. Leverage gives an opportunity to trade for big lot size. And big lot size would lead to high commissions. So, brokers indirectly earn from leverage.
In your case when you open a position and profit bar is already negative that can be due to spreads which is difference between Bid and Ask price and when you increase the lot size loss also increases.
TBH I don’t see much relation between leverage and swaps as swap is charged only if you hold position overnight. Higher leverage allows you to open bigger positions witch also brings you more profit as well as higher risk = lexys is right about overtrading if you cannot control yourself and get greedy (or desperate). @AbdulRahim: I believe the difference in PnL that you have noticed is due to the different lot size of both trades. The negative result you get immediately after opening of the trade most likely comes from the spread (+ the commission or mark up which the broker charges). If you broker offers different leverage levels why don’t you check if you get different result right after placing the same trade. For example, place 1 lot position on EURUSD with leverage 1:100 or 1:200 and then ask your broker to increase the leverage of your account to 1:400 and place the same trade again. Of course make sure you do all the tests on a demo account so you don’t waste your money while studying your broker’s set up.
Cheers
Thanks that sounds like a good idea. I didn’t know that brokers did that, increase or decrease your leverage. I thought it was fixed for everybody. You’re right about lexys.
hello AbdulRahim,
in regards of your question, lexys gave a straightFRW answer.
Brokers offer leverage in order to entice traders to trade more. That is, to open more positions with small lots or open bigger (bigger lots) trades. In general, the main idea is to trade more since statistically a trader who trades more and more eventully he/she will lose. High leverage is also helping stop outs during high volatile markets/prices where spikes can send you off the market. I hope you heard that : “the higher the leverage - the higher the risk”, since with a high leverage you are trading with “fake” money & far far away from your “real” investment $$$.
@AbdulRahim: Usually the leverage should be fixed and also visible anywhere on the broker’s webpage or broker’s platform and also I believe the brokers do not have right to just change the leverage without customer’s request or without any information in advance like for example some brokers did before Brexit and US-elections. However, if you have any doubts in regards to the leverage of your broker better contact him first to clear up this topic.
Cheers.
That was [B][U]margin requirements[/U][/B], not [I]leverage[/I], that they changed. They do have the right to do so, and it’s usually even specified in their terms of service that they do.
Thanks guys. There’s one thing I really need to get to the bottom of – so I understand that the broker never puts money into your account, but then how can we be making profit off “fake” money? how does this all work, what is actually in my spot contract?
These mysteries, and others, are accounted for by the reality that when you “trade forex” through a counterparty market-maker (of the type which probably 99% of this forum’s members use), you’re not [U]really[/U] “trading”, per se. What you’re doing is having a “side-bet” with a counterparty who isn’t necessarily executing your trades in an underlying market at all. (They may be off-setting their own [I][U]net[/U][/I] liabilities in an underlying market, in some cases, but you’re not a party to that contract anyway.)
When you “buy” one lot of EUR/USD “through” a counterparty “broker”, there isn’t necessarily one lot of EUR/USD changing hands at all. The reality is that there’s a financial position between the “broker” and yourself, in which your account with them is treated [B][U]as if[/U][/B] you were dealing in currency.
(This isn’t true of genuine brokers, of course: they execute trades on a client’s behalf in an underlying market, in exchange for a commission.)
You get short term loans from brokers. in order for you to buy lets say 100.000 Euro to sell for dollars you actually must have 100.000 Euros… easy as that. what brokers do is simply provide you with the big portion of that money. You have a 10.000 account but want to trade 100.000€ = youre lacking 90.000.
So what the broker is doing= he gives you a short term loan that you can open and quit at any time. for this loan the broker is asking security (margin) and a fee (commission + rolls), spread serves as contract costs (costs to place your trade idea on the open market).
therefore you are able to trade 100.000€ while you only have a fraction of that money in real. thats caled LEVERAGE.
leverages are often expresed as base values like 1:10, 1:50 or 1:500 but the fact is that you choose your leverage your own evertime you open a contract (open a trade) without really knowing it= the reason for this is because all your money on the account serves as margin (credit security) and if you have a trade open with 1 microlot but 10.000 account balance then your leverage is very small.
market maker or genuine broker plays no role for your question as they basicly do the same thing just with the difference in the end details as Lexy explained. (market maker= you bet against your own broker = conflict of interest ----- genuine broker= actually wires your trade to a external market maker = no conflict of intereste between broker and trader)
about your question if the broker profits by giving you leverage: yes he does in several ways.
1st. and most important. with leverage brokers are reaching the middle class people. a person with 10.000 in savings is actually not able to participate in any fruitfull way in trading stocks or currencies. the potential returns of 5% a year is not worth the effort (500 surplus a year) but leveraged people who know how to are able to create a significant a,mount of money with those 10.000. (500 leveraged 1:10 = 5000 — 500 leveraged 1:50 = 25.000). therefore the sheer existance of most brokers depends on leverage and they would never earn any money if the dont offer leverage
2nd. leverage does not only leverage your account but aswell the commitions you are paying for the contracts and the spreads resulting in higher profit and RoI
3rd. rolls are always a negative game for the trader/customer. brokers have the model to always earn on rolls even if you get money paid out, theres a lot of other traders who pay roll. a leveraged roll aswell leverages the credit income (roll = credit cost for trader) to the broker. <- example: broker lends from bank 100.000 to loan it to you, the broker pays around 1% interest rates a year for this 100.000. you pay interest by paying leveraged rolls if you take this 100.000 as loan. the broker pays 1000€ a year interest to the bank for this 100.000 loan but you pay with ypour rolls (if you have a contract open for a year without brakes) a roll fee of combined 3-4000 (figurative number).
Okay so a market maker takes the other side of your trade (bet) and a genuine broker (ECN) passes it on to be logged to the real market ( a genuine trade). I remember reading a post by clint that even these so called ECN brokers play the same role as a maker maker and act as a counter party scary. I may need to get back to this question a bit later as I go through the posts again.
So we can say that which ever type of broker it is they both benefit indirectly by giving you leverage please answer true or false.
There still seems to be different views on the broker giving you a loan or borrowing you money or not. Is there anyone out there who actually has worked in a brokerage firm who could confirm which one is it.
if you came here to try to make a point based on your religious/political views then simply spit it out. dont waist time. youve got the same thing explained 5 times by now. if you still dont get these simple things and 100 years old tactics/practices/mechanics -and call it “imagined money” or whatever, then this might not be the right industry for you.
To your point 1: you missunderstood something
Point 2: true
point 3: whats the difference between loan or borrowing? its the same thing just with type A you dont pay interest, with type B you pay interest. you dont need to ask anyone who worked for a broker, it is al simple old mechanisms that work since a 100 years. its open to public just google it.
it explains you all types of brokers under: Types of brokers you will find everything conected to the name of broker. you may choose “stock broker” and there you will find a undersection with the definition of different types of brokers and how they function. for more details you klick the blue highlighted words in the texts which you will find, maybe ECN broker maybe Market Maker, counterparty broker etc. etc.
a lot to read if you want to truly know it very exactly.
now my question to you: why do you care for these details? you think if you find something that doesnt fit you, or that is in your believes/eyes wrong, that you going to change the entire industry to your will?
whats the point of these questions? it will not teach you anything about trading or anything usefull, unless you plan to work for a broker. if you plan to work for a broker then dont worry, the broker will teach you the part of what you should know to do your job good.
or are you a customer support for some broker and someone asked you exactly this question and you did not know what to answare and now youre trying tofind the right answare?
@lexys: Thanks for the correction, I didn’t express myself correctly. But that is because I see margin and leverage in a way as the same thing: Margin 1% = 1:100 leverage, 2% = 1:50, etc. However, you are right - correct is Margin requirements and brokers actually can change it at any time without any prior notice (I didn’t know that). So conclusion: always read the terms of service carefully before opening of live account. @TURBONero: LoL man! If I am a customer of some broker and see my questions around the forums I am getting out of there. This can’t be serious. You made me laugh.
just like what lexys and turbo said… indirectly yes the broker does gain something from the process or any service offered, they can concatenate for it through other means, simply by gaining more traders etc, more traders means more spreads and so on… its a complicated yet simple equation really. but we traders basically do what we have to earn/gain so we use what can be used either way
