Who is making profit in the forex market? | Forex Factory

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Who is making profit in the forex market?

  • #1
  • First Post: Sep 12, 2015 5:24am Sep 12, 2015 5:24am
This is a question I have been thinking about for a while. But I don't know the answer to it. (Maybe it's because I am still a rookie)
Who earns money in the forex market?

When I make a profit of 40 pips. Does this automatically mean that someone else lost 40 pips? Or 4 other people together lost 40 pips...
Is it possible that everyone who is trading the market is making overall profit?
Or is the total profit+losses of all traders (banks, funds, retail traders... etc.) + broker commission= 0
  • #2
  • Edited 7:01am Sep 12, 2015 6:50am | Edited 7:01am
Quoting Pipsalon
is the total profit+losses of all traders (banks, funds, retail traders... etc.) + broker commission= 0

Yes; this ... if you allow for commissions/dealing-costs, the forex market is a "zero sum game", which means - exactly as you've asked above - that the total for that equation is zero.


Quoting Pipsalon
When I make a profit of 40 pips. Does this automatically mean that someone else lost 40 pips?

If your "broker" is actually a counterparty market-maker (i.e. is only pretending to be a broker, as is the case with most of the "brokers" routinely used by this forum's members), then they lost the 40 pips, albeit while typically gaining that or a little more than that from their other customers. Indirectly you're betting against their other customers, and they arrange their bid/ask prices, on a good day, to ensure that their losing customers cover the cost of paying out their winning customers, while pocketing the "spread" themselves.

If you use a real broker (someone who executes a trade on your behalf in an underlying market to which you don't, yourself, have access - and in the case of forex that's the interbank market) then there isn't a way of knowing who lost the 40 pips, and it doesn't matter. Importantly, it doesn't matter to the broker, either, so they have no incentive for you to lose.

As many people gradually or suddenly learn, sometimes to their considerable cost, this can be hugely significant, because the last thing anyone making their living through trading would want would be for their "broker" to have an incentive for them to lose, while also holding all their deposited funds and both making up and interpreting all the rules, policies and procedures governing all their trades.


Quoting Pipsalon
Is it possible that everyone who is trading the market is making overall profit?

No; that isn't possible: free markets have to have losers, as well as winners.
  • #3
  • Sep 12, 2015 7:12am Sep 12, 2015 7:12am
Quoting Xela
{quote} ...
Which brokers are NOT MMs in your opinion? How can you tell?
  • #4
  • Sep 12, 2015 7:45am Sep 12, 2015 7:45am
The forex market is a ''zero sum game''

This means that trading forex is the same principle as playing a poker game?
A good poker player wins $50, two other poker players lose 25$ each and the broker (poker client) takes some commission from all of them.

Or is the FX market more complicated? With people that have other interests in the markets?
  • #5
  • Sep 12, 2015 8:15am Sep 12, 2015 8:15am
Quoting Pipsalon
The forex market is a ''zero sum game'' This means that trading forex is the same principle as playing a poker game? A good poker player wins $50, two other poker players lose 25$ each and the broker (poker client) takes some commission from all of them. Or is the FX market more complicated? With people that have other interests in the markets?
Yes EXACTLY that. A zero-sum game. You win ONLY at the expense of other players(traders). And the broker, provided they are ECN brokers and do NOT trade with you, make commissions from ALL of the traders.
Make your losses in demo. Earn your profits live.
  • #6
  • Sep 12, 2015 8:24am Sep 12, 2015 8:24am
The whole MM situation is fairly complicated and many brokers who offer ECN accounts are disguising the fact that whilst they are an ECN broker they are only directly connected to Liquidity providers who in turn may well be operating some form of MM model. My understanding is that MM will normally be the counterparty to your trades but at the same time somebody on their books is likely taking an opposite trade so ultimately they just sit in the middle(and hopefully take both of your money). I was led to believe though that MM hold different books of traders and that if your trading larger volume or are very consistent you will ultimately 'A-booked' and fed directly to their providers or in the case of joker brokers quietly asked to leave because they cant cope with you. ( not before they try and keep your money though probably). MM are not all bad if you go with the bigger players but ultimately if you have the funds go for a proper broker.
  • #7
  • Sep 12, 2015 8:45am Sep 12, 2015 8:45am
Quoting shellsnail
{quote} 90% of the daily volume traded is speculative. Speculative flows are zero-sum. (Most at least... If you consider speculative volume for hedging purposes then maybe some can be positive sum) 10% are from companies and individuals. Transactional purposes. These are potential positive sum games. Because the person exchanging dollar for euros to go on a holiday is happy to get the deal done at any reasonable rate and you the trader is happy to earn a profit on the deal. I am using the economic definition of positive sum and zero sum games. A...
The 10% of potential postive sum. Does this include transactions in other markets? For example: A European pension fund wants to buy shares from a company in the US. To buy the shares the fund has to change € into $. After a couple of years the share prices have risen and the pension fund has made a nice profit including dividend from the shares. It sells the shares and changes $ into €.
  • #8
  • Sep 12, 2015 8:50am Sep 12, 2015 8:50am
Quoting Xela
{quote} If you use a real broker (someone who executes a trade on your behalf in an underlying market to which you don't, yourself, have access - and in the case of forex that's the interbank market) then there isn't a way of knowing who lost the 40 pips, and it doesn't matter. Importantly, it doesn't matter to the broker, either, so they have no incentive for you to lose.
When using broker you don't really know if they are just doing what you think. I read about one "real" broker having told their investors how much money they made through liquidations (last quarter or whatever). One has to use some imagination how they can make money if they don't have a conflict of interest in their positioning. Surely if they were a true agency broker all the time then all client losses no matter what would go to someone else than them?
  • #9
  • Sep 12, 2015 8:57am Sep 12, 2015 8:57am
Quoting tmcwil5517
{quote} Which brokers are NOT MMs in your opinion? How can you tell?
LMAX and Currenex are real ECNs. It's not always easy to tell which is which, but as a rule of thumb all popular brokers among retail traders are market makers... examples: FCXM, forex.com, FX Pro, Alpari, Exness,IronFx, FXDD, Swiss Quote, Dukascopy...etc ( I don't wanna hear any newbies telling me that Dukascopy and Swissquote are banks.. they're not!! Swiss regulators require that forex brokers-market makers or not- to get a license to operate in Switerzland, and since Switzerland doesn't have a specific license for forex brokers, they apply for a bank license although they've got nothing to do with it)...If you want my honest opinion, Never trade with a retail broker (ECN, market maker, bucketshop or whatever.) Go get MT4 bridge and trade directly with a tier 1 bank or a prime broker/liquidity provider. Sorry for interrupting, Xela. I just want to get the word out...RETAIL BROKERS ARE THE BIGGEST SCAM EVER. I know I'll receive criticism now from retail-broker fanboys, but I don't care, I've been in this business for years and I know what I'm talking about...Regards
Simplicity is the key to brilliance.
  • #10
  • Sep 12, 2015 9:06am Sep 12, 2015 9:06am
Quoting Inceptionist
I just want to get the word out...RETAIL BROKERS ARE THE BIGGEST SCAM EVER.
Please elaborate.
  • #11
  • Sep 12, 2015 9:26am Sep 12, 2015 9:26am
Quoting Atokys
{quote} Please elaborate.
Ever wondered why did retail forex brokers multiplied in numbers during the past few years?

You search on the internet for 'forex brokers' and you'll find hundreds of them...That's because it's cheap to be a forex broker; you can get a white label contract from any broker of your choice, that would usually cost around 30-40K, they provide you with the branded MT4 so that your clients would never know that it's just a white label, the obvious clue of a white label is if the original broker got a license no., they'll pass this license no. to their white lable partners to put on their websites, so you can check the license no., if it belongs to another broker, you know by then that your broker is a white label. There is another way to become a broker and it's even cheaper...You go to a forex consultancy firm, get the small broker package ( usually costs you around 10K-20K), you get the MT4 bridge and you either choose to use the B-book (market maker) and bet against your clients, or you can choose the A-book option ( passing clients' orders to your liquidity provider) and you just earn the spread...Most brokers would choose the first option for obvious reasons...It's cheaper and way more profitable to bet against your clients, you can make a fortune betting against clients' orders..First, you earn small spreads from them, and second you can arbitrage your clients' orders thru slippage and delayed orders (can be done with the Virtual Dealer pluging in MT4), If you're gonna pass your clients' orders to your Liquidity provider, you'll need to sign a commercial contract with them, You need to deposit big amounts of money at the beginning to be considered as an institutional client and also they require high monthly trading volumes and they also charge commissions. From a broker's POV, it's way easier to be a bucket shop, bet against your clients because you know that most traders fail at trading any ways and you can earn from their losses.. and the few of them that can make money on a consistent basis, you can screw them with the Virtual Dealer plugin in the MT4 ( Re-quotes, Off Quotes, widen spread, serious slippages...etc)
Simplicity is the key to brilliance.
  • #12
  • Sep 12, 2015 9:28am Sep 12, 2015 9:28am
Quoting Inceptionist
{quote}Go get MT4 bridge and trade directly with a tier 1 bank or a prime broker/liquidity provider.
Prime brokerages requires several million $ to open an account and that's an amount very few of us traders are able to afford. I think this is where retail brokers come in. They basically stand in between us and the prime brokers. They collect all of our small amount deposit and pool them together to form the million $ required to open account with those prime brokers and basically trade against us or trade against us and turn around hedge with those prime brokers while providing us the MT4 bridge.

If you have the min. required amount to open an account with those prime brokerages, you can become a retail broker yourself.
Make your losses in demo. Earn your profits live.
  • #13
  • Sep 12, 2015 9:28am Sep 12, 2015 9:28am
Forex is not a zero sum game. If you win 10 trades for lets say 10 pips then lose 10 trades for 10 pips. Your account will be smaller than when you started due to spread/commission. You would have to have a winning rate of 52-53% just to be able to break even. The house always wins.​
  • #14
  • Sep 12, 2015 9:37am Sep 12, 2015 9:37am
Quoting Inceptionist
{quote} Ever wondered why did retail forex brokers multiplied in numbers during the past few years? You search on the internet for 'forex brokers' and you'll find hundreds of them...That's because it's cheap to be a forex broker; you can get a white label contract from any broker of your choice, that would usually cost around 30-40K, they provide you with the branded MT4 so that your clients would never know that it's just a white label, the obvious clue of a white label is if the original broker got a license no., they'll pass this license no....
If the cause of retail traders failing is still their own imprudence then its not really a scam.
  • #15
  • Sep 12, 2015 9:39am Sep 12, 2015 9:39am
Quoting Inceptionist
{quote}you get the MT4 bridge and you either choose to use the B-book (market maker) and bet against your clients, or you can choose the A-book option ( passing clients' orders to your liquidity provider) and you just earn the spread...Most brokers would choose the first option for obvious reasons...It's cheaper and way more profitable to bet against your clients, you can make a fortune betting against your clients..First, you earn small spreads from them, 2nd you can arbitrage your client orders thru slippage and delayed orders (can be done with...
Most brokers do both, A-booking AND B-booking. They do the B-booking against the losing clients so they earn trading profit+spread. For the clients who happen to be winning traders, they do the A-booking, they pass their trades to the liquidity providers/prime brokers and earn the spread (via widening slippages) + commissions. So they make money regardless how the clients trade.

So for us traders, IF we trade against a retail broker, I guess the only way to win for life is to scalp profitably so that way the broker won't dare to b-book you but at the same time won't kick you out because you are generating spread + commissions for them. The worst for the retail broker I guess are traders who don't trade frequently, don't overtrade but have high profitable ratio on their trades. For those traders, the brokers will just fire them because the broker can't make money off B-booking them nor can they earn enough via commssions + slippages via A-booking.

The retail brokers' job is NOT there to provide a service to the retail traders. They are there to make money off traders before the traders do. If the traders can still make money after getting fleeced by the broker, great if not, too bad. They don't give a crap about traders. For each trader that closed his/her account, there are thousands more waiting by the door to try to get in.
Make your losses in demo. Earn your profits live.
  • #16
  • Sep 12, 2015 9:42am Sep 12, 2015 9:42am
Quoting Forexia
{quote} Prime brokerages requires several million $ to open an account and that's an amount very few of us traders are able to afford. I think this is where retail brokers come in. They basically stand in between us and the prime brokers. They collect all of our small amount deposit and pool them together to form the million $ required to open account with those prime brokers and basically trade against us or trade against us and turn around hedge with those prime brokers while providing us the MT4 bridge. If you have the min. required amount to...
I agree with you...trading with a prime broker requires more money, but it's way way better and safer than retail brokers, I know because I've tried it myself...There's a suggestion though...Since most retail traders wouldn't have big amounts of money to start trading with a prime broker, You can start like a small investment fund or a partnership with other retail traders, stacking your funds together, go to the prime broker and start trading safely...regards.
Simplicity is the key to brilliance.
  • #17
  • Sep 12, 2015 9:48am Sep 12, 2015 9:48am
Quoting Atokys
{quote} If the cause of retail traders failing is still their own imprudence then its not really a scam.
The scam part is that market makers don't wanna play fair...If you're losing they're happy, If you're winning they'll give you slippage, re-quotes, delayed orders and they'll arbitrage your orders too...They don't mind everyone losing, but they don't wanna lose a dime...I don't think this is a fair play.
Simplicity is the key to brilliance.
  • #18
  • Sep 12, 2015 9:50am Sep 12, 2015 9:50am
Quoting Inceptionist
{quote} you can screw them with the Virtual Dealer plugin in the MT4 ( Re-quotes, Off Quotes, widen spread, serious slippages...etc)
so is cTrader better option ?
  • #19
  • Sep 12, 2015 9:50am Sep 12, 2015 9:50am
Quoting Inceptionist
{quote} I agree with you...trading with a prime broker requires more money, but it's way way better and safer than retail brokers, I know because I've tried it myself...There's a suggestion though...Since most retail traders wouldn't have big amounts of money to start trading with a prime broker, You can start like a small investment fund or a partnership with other retail traders, stacking your funds together, go to the prime broker and start trading safely...regards.
That's what I am thinking too. I think we should form like a trading club where a group of traders all pool our funds together and just open an account with the prime brokers which really DOES operate in a more truer ECN fashion allow access to multiple dealers. The only problem is fund division. It's going to be ONE account with the prime broker with funds from multiple traders. Who's gonna trade it and how do we decide profit/loss for each trader that contributed? On a pro-rata basis?

Who's the prime broker that you traded with? And how much is their required min. to open an account? Would you mind sharing?

Thanks
Make your losses in demo. Earn your profits live.
  • #20
  • Sep 12, 2015 9:53am Sep 12, 2015 9:53am
Quoting Inceptionist
If you're winning they'll give you slippage, re-quotes, delayed orders and they'll arbitrage your orders too...They don't mind everyone losing, but they don't wanna lose a dime...I don't think this is a fair play.
I can imagine one of those unregulated brokers doing this but the ones that are licensed by a country's monetary authority seem a lot safer and better.
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