Chapter 13. Income of Forex Participants

As we have already said many times, a private Internet trader enters the Forex market through an Internet broker or dealing company. An Internet trader earns money through currency speculation, closing positions in more favorable exchange rate conditions than when opening them. For an Internet trader, working on Forex is a risky business. Depending on the trading strategy developed (we will talk about trading strategies in the Forex University section), the efficiency of work on the currency market can be different. An important factor of success is also the trader’s character, his ability to control his emotions and make balanced decisions.

 

The services of Internet brokers in the Forex market, on the contrary, can be called a business. There is practically no risk in this business. The principle of margin trading, as it was mentioned in the corresponding chapter, does not allow a client of a dealing company to lose more funds than there are on his account and “get into the pocket” of an Internet broker.

We know that Forex transactions are made at the interbank level. A dealing company has multi-currency accounts in the bank it serves. This bank provides quotes to the dealing company, and the latter, in its turn, provides quotes to its clients. As a rule, these quotes differ – Internet traders receive quotes with a slightly increased spread size. This allows the dealing company to earn on the difference in the spread, because at the interbank level deals are made at more favorable quotes. Let’s give an example. Let’s assume that the bank gives the dealing center a quote USD/JPY 104.75/104.77 with a spread of 2 points. The dealing center increases the spread size up to 4 pips and provides its clients with USD/JPY 104.74/104.78. Suppose an Internet trader opens a short position (sells US dollars) with a single lot size of $100,000. The Internet trader sells dollars at the price of 104.74 Yen per dollar, but in fact at the interbank level the transaction is made at the price of 104.75 Yen per dollar. We get the difference of 100 000 * (107.75 – 104.74) = 1 000 Japanese Yen, which in terms of dollars at the interbank rate is approximately 1 000 / 104.77 = 9.54 dollars. This amount is a stable income of the dealing company, which is not connected with any risk. It should be noted that this is only the income from opening a position by the client. The same amount the dealing company earns on closing a position. It turns out about 19 dollars of income from the transaction. If a dealing company has thousands of clients, and they make dozens of deals per day, the daily income of the dealing company can be hundreds of thousands of dollars! As we can see, this is a very profitable business.

But the spread may not be the only source of income for Internet brokers. Some dealing companies may charge a commission per transaction, or even separate commissions for opening and closing a position. In principle, such a commission is similar to the spread income. For example, in our example, a dealing company can provide clients with the interbank quote USD/JPY 104.75/104.77 directly (without increasing the spread), but charge $19 per client for each trade. The same profit is obtained. It should be noted that some Internet brokers can take a commission and increase the interbank spread. In fact, it is difficult to check whether the dealing company increases the interbank spread or not, as quotes are constantly changing, and the interbank spread is unknown to the Internet trader.

The above-described method of income of a dealing company takes place if an Internet trader uses standard lot sizes in his work on Forex. If mini or micro lots are used, the situation is somewhat different. The dealing company cannot make a transaction for such a small amount through the bank at the interbank level. The size of one mini lot is equivalent to 10 000 dollars, and one micro lot – 1 000 dollars. The minimum size of a transaction at the interbank level is $100,000. How are the deals made in this case? There is a simple statistic here – up to 95% of beginning Internet traders lose their money when working on Forex. As a rule, this happens because most people, starting to work on Forex, are looking for easy money. They do not thoroughly study the theory of the currency market, the tools of its analysis, the impact of economic indicators on currency rates. For such people, working on Forex turns into a game of roulette. Precisely because only beginners and amateurs work on mini and micro lots, as a rule, the dealing company does not conclude transactions on such lots at the interbank level. If an Internet trader closes a position on a mini or micro lot with losses, the dealing company receives such losses as profit. If an Internet trader closes a position on a mini or micro lot with profit, the dealing company pays this profit. Since 95% of novice traders sooner or later lose their money, the remaining 5%, in order to ruin the dealing company, need to make a profit greater than the losses of the same 95% of fortune hunters. Assuming that the initial account size of each trader is the same, this profit should increase by 19 times, and the probability of this is negligible. Moreover, if an Internet trader works very successfully on mini lots, he soon moves to standard lots, where the dealing company no longer pays him income from “his pocket”, but performs operations through the bank at the interbank level.

 

The above described alternative way of earning is not advertised by dealing companies. Most of them claim that all transactions are made at the interbank level, regardless of the size of lots. But common sense and logical reasoning lead to the opposite. It is possible that the truth is somewhere in the middle. Everyone decides for himself what to believe in and what not to believe in. But it is very important to realize that most beginning traders lose their money. It is possible to make money on Forex, and it is not a myth. But it is not enough to click on the “make a million” button. Working on Forex is a risky business that requires certain knowledge, skills and abilities from an Internet trader.

The banking interest described in the previous chapter can become an additional source of income for a dealing company. But the income from it, as a rule, is insignificant, and in order to get it, the open position should not be closed for a long time. It is much more profitable for an Internet broker if positions are opened and closed by Internet traders as often as possible. After all, as it was described above, each completed transaction brings income to the Internet broker in the form of commission or at the expense of the spread. The income from bank interest is negligible compared to the income from commissions and spread. It should be noted that dealing companies can not only earn from bank interest, but also pay it out, and this was discussed in detail in the previous chapter.

As we can see, dealing companies are in a more favorable position than Internet traders. They have a stable income, and their type of activity can be safely called a successful business. Dealing companies receive income from spread, commissions, bank interest, unsuccessful transactions of their small clients working with mini and micro lots. The income of Internet traders is limited only by successful deals on currency exchange rates changes (currency speculations) and, in some cases, bank interest. But in spite of this, working on Forex is very attractive. If you consider this type of activity as a “job” and not as a “game”, you can get stable high income. The yield in this case can exceed the yield from investing in securities, bonds or mutual funds. If you give in to temptation and start working on Forex without having sufficient knowledge and skills, you are very likely to lose your money. Now you have some good advice, and it’s up to you to decide what to do in the end!