This is how broker makes money. They make money when any trader buy currency or sell it. The different between the buying and selling amount is not only the profit but also a portion is broker’s commission which is broker’s profit. To understand how your broker is making money you should spend more time in practicing in the demo account of your broker. And then start trading with small lots. It will safe for you.
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Broker is the medium between the trader and the forex market. There is no doubt that forex being the largest financial market requires good medium and reliable broker to ensure safe and timely trade executions.So each broker is making money in the whole transaction process where we exchange one currency for the another. Spread is one such mode of earning for the brokers.
Yes Pips or spread are the big source of earning for brokers, They charge on each trade we have to pay pips price to broker either we are in profit or loss. Our profit starts when we cross pips value as on major currency pairs 2 to 3 pips on other pairs like gold it is higher spread. As much trader select big lot broker will be more in profit .
No, no, no, no. This is all totally wrong. @Sureshhey you have been lead astray by common marketing deception perpetuated by the posters in this thread. Lets start with your original post.
Your broker (and I mean the everyday retail bucket shop we all must trade with unless you have some stupidly large investment account already) makes no money from the spread. The price quoted are exactly that, a quote price for referencing. Your broker makes money because you and I are quite capable of losing it ourselves with bad decisions. Lets dive into it a bit more.
First you need to understand is that you are a buyer, never a seller. You are buying a sophisticated over the counter (OTC) derivative commonly know as a contract for difference (CFD). Forget currency, forget pairs, forget “markets”, forget all the other mumbo jumbo you might have been told.
A derivative is a contract that “derives” it’s value from an underlying asset. In our case spot currency rates. OTC means a contract privately negotiate between two parties. You and your broker. No-one else. This private negotiation is disclosed in your brokers PDS. You accept these terms and conditions when you open an account with your broker.
In the terms of this contract you are defined as the “buyer” and your broker is the “seller.” Your broker is selling you the contract. You will either buy a Long contract or a short contract. You agree to pay the difference in value of the underlying asset upon closure of the contract. If that difference is negative your broker agrees to pay you. When you enter a long contract that difference is calculated as the Open price - Close price. For a short contract it is Close price - Open price. In essence if you buy a long contract and the price moves up you profit, if you buy a short contract and the price falls you profit.
If the price moves the other way, your broker profits. Thats how they make their money. No difference to a bookie or a casino.
Now there is plenty written elsewhere about Buy price (Ask), Sell price (Bid) and spread. They exist in the underlying market for that asset you are speculating on. Your broker makes no money from the spread. It is simply the difference between the asking price and the bid price. However the ask and bid price is referenced to the opening and closing price of the contract you just entered into. A long contract your opening price is the bid and the close is the ask, a short contract visa versa. This ensures your broker can offset the risk of entering into a contract with you. Much like the zeros on a roulette wheel manages risk at a casino.
Undoubtedly this response will raise more questions than answers. There are those out there that could dive more deeper into the subject than I can. Hopefully they will come along, correct me where needed and expand all of our knowledge. Maybe I’ve just opened Pandora’s box. So I’ll stop there and wish you good night and await any replies.
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Mr. @_Bob is right.
about the spreads he is partically right. the spreads do generate income for the broker, as well as the fees. the true fact thou is that bucket brokers could easily trade with 0 spread and 0 fees/commision because their main income comes from the losses of the unexperienced participant who wants to “trade”. the only reason they do not offer 0 spread and 0 commision fees is that they would be revealed instantly as bucket broker. their life insurance is to pretend they are serious brokers who really wants you to succeed in order for them to generate revenue from commissions and fees of your trade. they pretend to be your partner but the hard truth is no they are not. their main job is to sell you a dream and keep you entertained and keep you sticking around to trading and when you brake your account their continuing work is to make you send more money in. you may think this is not ok? it is… government approved and legal.
its a good thing and it is a natural thing. the bucket brokers feed on the retail clients without experience and the real market player feed on the buket brokers. nature itself.
Yes people get sold CFD`s but to be honest in most cases they dont get sold anythin at all. the hard truth is that the bucket broker only mark the entree and the exit of the trade and “buckets” the difference- thats where the name comes from as well. you have absolutely no guarantee of anything. if anyone is or becomes a successfull trader who makes decent profits then the first thing you will notice is that the “trade execution” becomes choppy. when you usually easily opened 600 contracts on somethin in the early days… all out of the sudden you see that position beeing broken down in 3 pieces, you get 200 contracts and a hour later another 200 contracts and a hour or 2 later another 200 contracts so it takes you 3-4 hours to open a rather small position of 600 dow jones contracts where as in the early days you opened and closed it within half a second.
you as well will notice the closing of postions becomes choppy when you are in profit and instant when you are in losses.
but why so choppy? since you trade OTC anyways, as broker beeing your counterpart, they could open and close it instantly? yes they could. but they want to push you away, out of their brokerage. they want to stick to the losing clients/trader and drive away the successfull ones since they earn on the losses of their “traders”.
anyways, good luck, you have a long road to go and your sucessrate is less than 0.001% - dont believe the 98% crap they say that wholly 2% of traders make money. no- its a myth meant to keep you around and give you the feeling that you are a special kind that belongs to only 2% of the successful people. the truth is over the long run 99.999% lose.
Edit: you can get propper real accounts starting already with as little as $10.000.
avoid any broker who offers you to ope accounts with $50 or gives you any bonus on your first deposite. and brokers offering some sort of “school” or “teaching you how to trade” are pure bucket broker. real brokers expect you to know how to and expect you to know what you are doing.
edit2: you can get as well real accounts with your own bank. banks are by no means any more expensive than a broker. in fact the real brokers of the big guys are banks. prime brokers are always big banks like morgan stanley, goldman, deutsche bank etc.
you need a “direct bank”. in the UK you can ask lloyds, they offer cheap service. besides the usual suspects of course. avoid banks that deal with little clients. little clients: people who work for their living. go to the banks who are known to be private banks or business banks oriented toward business clients. deutsche bank offers very low cost for trading and they are everywhere, no matter where you are located.
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Bob is completely right about all of this, Sureshny.
If you’re still here, you need to read and re-read his post, and ignore what was said before it, which was just repeating widely believed forex marketing myths and posted by people whose understanding of the forex market isn’t far advanced from your own.
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Welcome to the forum bro, many thanks for sharing your thoughts here.
I just want to add that we talk of our broker as a bucket shop and that it appears to be a bad thing. It is not. There are a good number you can trade with. You just have to read their PDS. The more they disclose, the better they are.
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“FOREX.com does not charge fees on forex trades. We are compensated via the spread, which is the difference between the bid and ask.”
https://www.forex.com/en-us/support/faqs/pricing-and-fees
Maybe member @FOREX.com ( Verified Broker Support and Analyst) can clear up some of the confusion in this thread…
Maybe Jason can.
But it doesn’t change the fact that the bid and ask price is that of the underlying asset. In turn they use this value to enter into or exit from the contract. They don’t make money by this but it allows them to manage risk. They make money when we make dumb decisions about when to enter and when to exit.
Example loss between 1.0812 and 1.0810 = 2 PIPS
Thats not 2 pips its 2 points! 10 points is 1pip
so 2pips is from 1.0812 to 1.0832
Is this right?
I thought a pip is the smallest increment whereby a change in exchange rates can be measured. Since most pairs are counted to the fourth decimal, a drop from 1.0812 to 1.0810 would constitute a loss of 2 pips.
Maybe you mean that, in a standard lot, the value of a pip in USD is $10…?
10 Tiny little points = 1 PIP[quote=“philip338, post:32, topic:130260”]
so 2pips is from 1.0812 to 1.0832
[/quote]
Correct
10 pipettes make 1 pip, but pipettes are the fifth decimal place, whereas the example is only drawn out four places.
What the heck is a Pip?
The unit of measurement to express the change in value between two currencies is called a “pip.”
If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.
Doesn’t that just pee you off the Bugger’s,
You can still use math to manage your risk
though if you ever found yourself at a night out at the casino… never lost at roulette the few times i have played it,
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Not correct, that’s 20 pips.
2 pips would be 1.0812 to 1.0814
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Thanks for the reply guys. I will read it
Correct[/quote]
It isn’t correct. It’s wrong!
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What a disaster of a thread !
I have just read the whole thing and am seriously disheartened at the total lack of knowledge expressed as “Facts” to you.
Read, study and believe what you have been told in this thread by @_bob , @LaughingCharlie , @MrDE.
@eddieb seems to be correct also and @Trendswithbenefits submission is fine.
Make a note of the other names and treat anything they say with suspicion in future.
Is correct, as is the rest of his post.
Is correct, but if I can say it in a slightly different way ?
The spread (Lets say 2 pips for example purpose) is the “Bookies edge” (“Bookie” = “Broker” )
Now when you enter a bet, you are committed to paying the "spread, win or lose. with many platforms, the moment you enter the bet you are immediately in a losing position of 1 pips (example only). So if your bet moves 50 pips in your favour, you win 48 pips (See where the “Other pip” is taken later.
If the Bookie wins the bet and the trade has moved 48 pips against you (You are already “losing” 2 pips remember?) then the bet gets closed and you lose the 50 pips value.
So now you are in this bet and price is moving your way 
“Price” gets to your “Take profit”, but the bet does not get paid ! (see later) - Or Your bet is losing and "Price gets to one pip away from your “Stop loss”, but the bet gets closed and you have lost 50 Pips.
WHY ?
Because if you are in an up bet, you effectively have a “Sell” order in place as a “stop-loss”. This will get filled at the “Bid” price. Think of the Bid in an up bet (when price is going down) as a grabbing hand trying to grab your money ! This grabbing hand is extended 1 pip in front of “Price” and grabs your money for the bookie.
If you are in an upbet and price reaches your “Take profit”, you have a “close order” in place which behaves like a “Sell” order and gets filled at the “Buy price” - think of the "Buy price " as a sulky child trailing behind and trying to avoid having to “pay you”. The “Price” is well past your “take profit” before the sulky child will finally hand over your meagre winnings!
The exact reverse happens in a “Down bet” the “grabbing hand” is the “Ask price” (when price is going up) and the “Sulky child” when price is going down.
Sometimes the “Bookie” seems to “accidently” incorporate “quirks” into his software, to extend the “grabbing hand” and an example seems to be shown here ;
https://forums.babypips.com/t/whats-with-the-long-tails/119718
So you lose 2 pips on winning bets AND you lose 2 pips on losing bets.
Effectively if your trading neutral and winning 50% of your bets, each winner has to overcome a disadvantage of FOUR pips to cover the losers, before you even start to enter “Profit”.
That means that short - term traders, only seeking a few pips have massive “costs” due to the “spreads”, whereas long term traders can almost ignore “spreads”, except for incorporating an allowance in the positions of “stops” and “Take profits”, to allow for the “Grabbing hand” and the “sulky child”.
Now changing to “PIPS” - The position of the “Pip” value is the second decimal place on JPY bets like AUDJPY whereas it is the Fourth decimal place on all other instruments like EURUSD etc.
So for JPY bets the numbers will look something like ; 89.123, Satrt at the decimal point and count 2 to the right - so the fuull pip value is the “2” the “3” is the “Point value”
On other instruments such as EUR USD like ; 1.23456 , start at the decimal point and count 4 to the right - so the “Pip value” is defined by the “5” and the “6” is the “Point value”
That is about all I have to say, sorry for the lengthy post
I hope that helps
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Many thanks for all the effort behind your post just above, Falstaff. The thread really was, as you say, something of a disaster!
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Thank you for those kind words @LaughingCharlie. It is good to see good information coming from knowledgeable people like those I mentioned. There are still a few here who actually care that the Facts are presented as accurately as possible to those who really need our help. 
And Just to add to the confusion.
Spot Currency Units
When you think of spot currency, stop thinking in terms of notional, you have to think in terms of Units. That is how the Market Makers come up with fractions, Standard, Mini, and Micro Lots, Nano Lots, not Dollars, or Pounds or Yen. 100,000 units make up a standard Lot.
On the matter of Spreads.
Spreads are how Market Makers make money on retail traders who are successful, obviously they have a bigger take in the short run if the trader blows up. On an Institutional platform, you are charged a fee, and the spreads “float”. In other words, you will see anywhere between .2 and 0. This is a natural function of the market.
Finally please remember this.
Series 3 Exam Prep “Every major futures exchange operates a clearinghouse that acts as the counterparty to all buyers and all sellers”. Sooo, there is that. The fact that your Market Maker in Spot Currency acts as counterparty to your trade is nothing unusual or nefarious.
The Ever Elusive VIPER
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