Who Wins Who Loses

Hello everyone,

I joined this forum a few days ago and I am a beginner.

Started reading about Forex.

Does the broker lose when you win?

Seems to me but correct me if I'm wrong, that a broker is similar to a casino.

They (broker) knows that the majority of traders lose.

Who or where does the money come from when you win?
Brokers account??

Is the broker always taking the other side of your trade? (bet)

Thanks!!

I'm only relatively new to forex too but from what I understand it's like any other derivative/instrument in that the broker 'makes a market'.
In other words the broker likes to have a buyer for every seller and he makes his money from the spread on the transaction.
It's quite a lot more complicated than that (they also have the power to move the market for various reasons that you will soon become aware of) if they have enough capital to fill the orders.
Basically they run a book, like a level 2 screen which has both buy and sell orders and they try and match them up as they come in.

This is a very simple view but think about it for a bit and it will make sense.

Basically, for every winner there is a loser 'on the other side' of the deal.

I'm no expert on brokers, but i think different brokers use different strategies to profit. Like you say they know most of the traders will lose money.

So they control their own mini-market?

What if your in a "major" profit situation and you want to close your trade?

What if the broker does not have enough sellers?

He's controlling his "own" market from what your saying.

I figured the broker makes his money (commission) off the spread.

Do all brokers also have "dealing desks" where they hold your trade execution until they make "x" $$ amount.

and what about an ECN broker?
someone enlighten me on how an ECN works? same questions as who made the thread,
Thank you,
mld

That's the market maker's problem.

ditto
Yes, uless you are with a brokerthat hasdirect contact with InterBank (or what ever it is , I have had a couple of beers )
Yes, and maybe. If they don't make the transaction they don't get the spread. They are a lot more preapared and informed (read better at this) than the average trader, their job is even more serious than we can comprehend as 'non professional' traders, ie, they play to loose nothing!
the bottom line is they makethe market, if you want to play, you play it by their rules. That doesn't mean you can't win though
cheers.

Read three sticky-threads here http://www.forexfactory.com/forumdisplay.php?f=74

A lot of valuable info there.

If brokers control our trades then why do we trade in the first other than try to make money with our investment and why should do we risk our capital?

Are their brokers out there that are not our for their own best interests and the brokerage house they work for?

Anyone here have a broker that they truly believe is honest?

Just asking questions.

Thanks!!

Hi, Steve.

For sure, honesty and trust are crucial elements to the client/broker relationship. No revelation there.

A lot of traders absolutely refuse to work with dealing desk brokers. "Bucket shop" is the favored derogatory term. They insist, with good reason, ECN brokers are the only (relatively) "safe" way to trade retail fx. Trust is still an important factor, even with an ECN, for reasons other than just price manipulation issues.

Btw, those three threads Peke5 pointed to are essential reading

Steve,

You may want to research trading currency futures listed on the CME. Here all orders flow though a centralized exchange. Good luck. lcfxtrader

There's quite a bit of discussion on this, as well as difference of opinion about how brokers operate.

There are some things we know, such as, the broker doesn't run to the interbank every time I trade my fraction of a mini-lot. In fact, any trade on the actual inter-bank market smaller than a few million $ is a nuisance.

So, what do they do with all our little trades? There are only two choices - take the other side of the trade themselves, or match them up with other trades in the opposite direction.

They have to do it in such a way as to minimize their risk exposure.

So, lets assume for a moment they match up ALL trades. As long as trades match evenly, everything's fine, the broker has no risk. When things get out of balance, then the broker assumes the risk of carrying the other side of some of the trades. Then they can either purchase an option, or wait until the trades get out of balance by a few million $ and go to interbank to offload the extra.

Now, on the other hand, let's assume that most new traders DO blow their accounts. The 95% failure figure is another item of endless discussion on FF, however, I would lay my money on newbies' accounts being blown as opposed to growing.

Why would a broker supply service to a $1000 account (platform, bandwidth, customer service, etc.) for the pennies they would collect in spreads? That is a lot of investment and trouble for a little money.

For just a little more effort (programming) they could have all the money. Instead of making maybe $50 in spreads by the time the person blows the $1000 account, they could have the whole $1000 simply by taking the other side of the trades themselves. That's a lot of money for a little more trouble.

Furthermore, if the trades matched up against other newbie accounts' trades, then there is NO RISK to the broker. They simply sit back and let the newbs blow accounts and the money is theirs. The interbank market need never see those orders.

Some say this doesn't happen, but the brokers have to manage the trades somehow, and they are in business to make money, as we all are. It would be a simple matter to keep track of who is profitable and who isn't, and decide whether or not to take the other side of that trader's trades (that's what computers are for). It would be rather stupid not to, could there be any easier money? Further, I think it's rather naive to think the broker wouldn't do this.

Oanda....

I've been asking myself exactly the same question,
so I found this with google.

And I also found a broker who made this the headline of it's ads:
"tired of betting against your broker"
They also were and that's why they formed their
business as an ECN-broker.

What will a market maker broker do, when they realize that you
are running a successful EA ?

hedge the positions somehow ? Encourage you to quit ?
Increase the spreads or delays for you until you quit on your own ?

What, if you tell the market maker broker that you have a degree
in mathematics and programming, will they still accept you as customer ?

And i have my opinion too:

If you a long-term trader (i mean at least 100 pips of TP or about) - and you trade by yourself, not with EA - i can say that no one broker can prevent you. Except cases when they don't withdraw your balance at all.

BUT if you a aggressive scalper with "super-profitable" EA - you will lose with almost any broker. So choose broker that will give your strategy to bring some profits

The broker does not lose anything, whether you make a profit or a loss. Oh yeah, there're way too many school of thoughts on how a broker operates. A broker makes his money from the spread difference or commission..

That is not true, Per se.

Currencies are not Stocks, and there are different Market players.
there is not one loser to one winner, Some Market Participants are not in it for profit.

Central Banks regulate according to Government interest whether the currency is doing what they want. They set rates, money supply etc.

Some pensions, Funds, Corporations, are more interested in offsetting their risk via hedging when holding international assets.

The speculators, including proprietary trading from Banks, Hedge Funds, etc are in it for profit on trading activities, and have the power to move the market Temporarily taking a lot of risk in the process. Think about it.... they move the market = becomes inefficient/imbalanced, another Big hedge or combination of players will Hit them hard to take advantage of that= the market mover gets their ass handed to them.


now the broker provides a service i am not exactly sure how they trade as there is not a lot of literature out there but here is my a priori views on it.

They DO NOT move nor quote prices as they see fit they have to quote Interbank rates (some brokers at times will freeze the platform, delay the feed, or stray from the quotes.....these are practices you should report to NFA or whatever governing body)

ARBITRAGE is what keeps brokers and dealers, Banks etc Honest.
try quoting a rate that strays too far from other dealers and you will get hit, eventually you have to return to spot prices, some shade price a little but it is better to have 2 brokers and get 2 feeds, or check interbank feeds via internet you can spot this.

once you execute your orders, they take the other side, if you are a trader that usually makes profit they might offset it on aggregate, or simply off set their overall exposure through a bank.

i am sure they run statistics on performance and if you are a liability to them they will stop taking the other side, however if you lose consistently, why not just take your money? makes sense to me.

they create a market
they are in it for profit
they cannot be too unscrupulous otherwise they lose clients, get sued, and all that would be capital loss.

The broker always win - be sure!

It's really important which broker you have. There are strategies for example that could theoretically earn a decent profit but due to brokers requote policy, wide spreads, etc it would be impossible to earn profits.

Try to choose the brokers where you have tightest possible spreads, no requote policy, NDD execution model, etc. The new trend is FX exchange model, where trades are delivered straight to a foreign exchange bourse. One of these brokers is Armada Markets for example. I'm currently testing their demo, so far looks pretty OK.

A lot of people talk about ECN brokers. I personally believe that ECN will be history in some years. The future will be with the exchange connected FX brokers.