19 Jan The 1 Dirty Secret, Forex Brokers Are Keeping From You
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A forex brokerage is an entity that connects retail forex traders with the forex market. The Forex market is traded on the “interbank” which is a fancy way of saying banks trade electronically with each other at various prices that may change from bank to bank.
A forex trading account is something like a bank account where you can purchase currencies and hold them. Currencies are specifically purchased in pairs.
If you buy the EUR/USD, you are holding for the US Dollar to become worth less per Euro over time. The Euro must become worth more money in dollars, for you to make a profit.
A forex brokerage offers you a way to get into the mix with the banking network and purchase a currency pair to hold in an easy manner. Before there were forex brokers, people wishing to trade in foreign currency needed to have a large amount of money and a special relationship with a bank to buy foreign currencies.
Forex brokers make their money by taking a slice of the pie when you make a trade. The change in the relationship between two currencies in a pair is measured in pips. When you make a trade the forex broker charges you a few pips before actually putting your trade on the market. The market might be trading at 1.3100 EUR/USD as a buying price, and when you enter your trade, the broker may put you in at 1.3102.
If you immediately close your trade, the forex broker collects the profit between the “market price” and the price you paid. This is called the spread.
You might wonder why the forex broker would pick such a small item to make money on. The easy answer is that most people don’t think about a few pips of difference when they are trading.
This makes the fee feel “transparent.” The way a forex brokerage makes money is that they allow you access to forex leverage. When you use leverage, you can control a larger amount on the market than what you have in your account. If you are trading 10:1, you can control $1000 on the market with only $10 in your account. Not only does this increase your chance for profit (or loss), but it also makes each pip worth significantly more money, which makes the spread you pay, worth more money. Whether you win or lose while trading, the forex broker will continue to make a profit on the difference between what you pay, and they actual “market price” that they are paying. The main job of a forex brokerage is to provide you easy access to the forex trading market and make some money in the process. Many of them will even help you learn a bit about how to trade. There are many forex trading brokerages out there, some big, some small, but they all work in a similar fashion. Not to mention that they are regulated by the NFA (in the U.S.).
–Article Source: www.thebalance.com/what-is-a-forex-brokerage-1344933
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