Hello dear traders,
I have some questions about the Forex Market.
I will be very happy if someone could give some information about these issues which i find confusing.
Thanks and happy trades.
q: When I have a winning trade, my account increases its value in currency but who is paying the money?
Where does the money come from and how?
The losers!
:mad:
Depends. One thing is for sure: When you earn money in forex, somebody else has to pay it.
Most small speculators trade with a market-maker retail broker. As it is a known fact that most small traders lose, the market-maker broker usually makes a nice profit, and can pay out the few winning trades easily, as he has a constant influx of profit by the losing trades. Here the answer to your question would be ‘your profit comes from the losses from the other traders of your broker’
It is not unheard of that some few successful traders get phone calls or letters from market-maker brokers where they are told that ‘your trading strategies do not comply with our company’s philosophy’. Translation: ‘We don’t like people here who make too much profit.’
It is something different trading in the ‘real’ market. There you have actually market participants who want to lose money. How can that be? These are usually commercial hedgers, for example companies who want to insure themselves against unexpected currency movements.
When you are trading at the regulated markets, you could say that you are managing a small insurance company. Hedgers want to buy insurance, and you offer them a contract where you take the risk. When you manage your trades well by evaluating the risk correctly, then your insurance company is profitable. When you manage your trading business unwisely by taking too much risk, your business gets unprofitable. The money you earn here is a kind of an ‘insurance premium’ that the hedgers pay you.
[QUOTE=grxlwpf;76047]It is not unheard of that some few successful traders get phone calls or letters from market-maker brokers where they are told that ‘your trading strategies do not comply with our company’s philosophy’. Translation: 'We don’t like people here who make too much profit.'
QUOTE]
Is the above statement true? Anybody who has been trading FX for awhile confirm this?
I don’t want to disclose any names here. But yes, I know personally somebody who received such a letter from his broker. I participate in a trading forum where other people also reported similiar incidents.
I wouldn’t overestimate such occurrences. Usually, these things happen with rather … dubious brokers.
Another trading strategy which retail brokers don’t like is high-frequency scalping. There is a quite reputable broker who serves mostly european clients who openly says that he will cancel the account of people who do scalping or newstrading.
I think with a slower trading strategy like swing or position trading nothing should happen if you are with a rather reputable broker. When you want to do scalping or newstrading, you should do rather extensive research for a suitable broker.
Another addition to the question ‘who pays my forex profits?’:
You have perhaps heard of the so-called ‘carry trade’. There is even a section in the babypips school on that topic. You borrow money from a low-interest currency (the japanese yen, prominently), and buy money from a high-interest currency (very popular in the last years: the australian dollar).
The classical economic reaction of the japanese central bank would be to raise their interest rates (because more people are demanding japanese yen, higher demand means higher prices, eg. higher interest to pay for the item ‘yen’). The japanese bankers don’t raise their interest rates because they want to stimulate their economy.
For the carry trade, who pays you your profit? The ultimate answer would be: The populace of Australia (they pay you the surplus interest), and the populace of Japan (by being denied proper interest on their money)
And yet another possibility who pays the forex profits (I’m just in an answering sprint…)
There are a lot of market participants who constantly exchange currencies because they need so. We traders try to exploit the changing prices over time.
An easy example:
Lets imagine Franz, a german guy, who wants to go for vacation hiking in the Rocky Mountains.
He goes to his bank and exchanges 500 Euros into US Dollars, cash, for his vacation.
The bank now has an increased demand in US Dollars. They go to the interbank currency market (the FOREX), and buy there EUR/USD.
The seller by chance is my forex broker, who just at that moment hedges his clients EUR/USD positions at the market.
One of these clients is me, who has just opened a short position in EUR/USD.
Now after two weeks, Franz comes back from his vacation. Lets assume he has the same amount of US$ in his pocket (he was at the ATM machine).
He goes to his bank and changes the cash back into Euros. Unfortunately, EUR/USD has fallen in the mean time, so he only gets back 450 Euros.
The bank now has a surplus of US$. They go to the Forex, there they sell EUR/USD, by chance its again my forex broker…
And at that moment, I’m closing my EUR/USD short position, with a profit of 50 Euros (not counting spread/commissions).
Who has paid me these 50 Euros? It was Franz!
Of course, pocket money for vacations is only an extremely small portion of the currency market. There are numerous big participants: A french company who deliveres machinery to Japan, getting payed in Yen, which they want to change into Euros. An US mogul who wants to buy Australian real estate. Just to name two examples.
And the money all these guys lose by exchanging money, the successful forex traders win.
Interesting point raised here. But what if, I using my $10,000 virtual monies to practice trade, so who is paying for my “profits” made from the “practice” virtual cash? 
This statement is totally untrue. Perhaps some small time unscrupulous brokers located in Cyprus may say such utter nonsense to you but major ones that we all know about would never say such nonsense to their best traders/customers. It is in their best interest to have successful account holders who will continue to trade with them. Get to the basics of how successful brokerage firms make money shall we? And stop eating up BS thrown out there by failed traders. And there is no such thing as “stop loss hunting”.
I got to disagree with JohnnyFX. FXCM sent me a email and closed my account for scalping which is not a fair trading style to them.
As for who pays you its banks or a central bank. Very rarely do they match up traders on different side of a coin. You trade against a broker or a bank.
You can only effectively scalp with ECN type brokerage firms. FXCM is the worst along with FXDD. I do not use IBFX but I have friends who use them effectively since IBFX only has a 5 minute minimum hold requirement not a PIP requirement like all other brokers do. So eventually, all of them expecially FXCM notorious for doing crappy things to people who scalp them for 5 PIPs or less will kill you. InterbankFX just requires you do at least hold your trades for at least 5 minutes. They don’t tell you YOU CANNOT DO 5 PIP TAKE PROFITS and then close your account like all other pisser brokerage firms. Better yet, find a commission based brokerage firm instead that allows scalping without PIPs or time limit boundaries.
And this should tell you that FXCM is an unscrupulous firm no matter how much they tout their capitalization and how much other wealthy traders tout them. FXCM sucks. And they are also grossly incompetent. They are still struggling with MetaTrader 4 almost after 1 full year. If people get letters like that from your brokerage firm, that is a telling sign on them, rather than on you. They are in fact saying, that they suck and they hate successful traders. Stay away.
InterbankFX just requires you do at least hold your trades for at least 5 minutes
i don’t think ibfx has a 5 minute minimum anymore. most of my trading is scalping and i use them exclusively. they have always honored my trades and I have never received any kind of notice about my trading style and im certain ive closed alot of trades in under 5 minutes.
i just did a trade for prob. 20 seconds and +7 pips no problem.
The last I read, which was a while back, was 90 seconds for IBFX. I have violated that rule myself many times with no problems. I don’t know the current policy if any.
FXCM might be a large firm, but I don’t think they use order offsetting in the real market. The reason I think this may be true is because of all the bad experiences I have read from them time and time again. If they don’t hedge their imbalance in the market, then the only way they can make money is not by spread but by losing accounts.
So even though they are a huge firm, I would stay away. I use IBFX and am very happy with my bucket shop.
This is absolutely true and that happened with me but with unknown broker called Fondex.
I really liked they offer ctrader platform with %5 stopout suitable (most ctrader brokers use %50)
I deposited $1000 and started trading, I make my account balance $175000 in 3 days and last trade I lost all my money after they manipulated my account and take $15000 of spread
I found that my spread was almost 8 or 9 the normal and I sent to the sales director who told that the CEO of the company changed my account settings because he is scared of the way I trade and make profits, and asked me to withdraw the balance in my account and stop trading with them.