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How do Forex brokers make money?
Many beginners ask themselves the question: what do Forex brokers earn on? After all, they are not a casino! It is the knowledge of how brokers make money that will help a trader to distinguish a real broker from a scammer. So, let's analyze the ways of earning money from the broker.
Spread. The difference between the buying and selling prices is the main source of the broker's income. The broker has access to the lowest spread and for traders he just increases it by taking the difference for himself.
Leverage. One spread alone, especially for small trades, will not be enough. Then leverage comes to the rescue. Of course, it is an attractive tool for a trader, though it increases not only the profit, but also the potential loss. But it is always profitable for a broker: for example, with 1:100 leverage a broker will receive 100 times more in spreads than with no leverage at all.
Spread on Swaps. When a transaction is carried over to the next day, the broker pays the trader a certain percentage or, on the contrary, withholds it from the amount on the trader's account. However, the swap is not symmetric: as a rule, the broker charges more than he pays. For example, if one trader sells 1 lot of EUR/USD and another trader buys the same amount, the payout to the second trader will be less than the amount charged from the first trader's account. The difference, again, is the broker's earnings.
Transaction processing fees. Forex brokers almost never charge processing fees (the exception is Islamic accounts) and it is often advertised as an advantage. However, some brokers do charge a commission for depositing or withdrawing funds; as a rule they are small fixed amounts (not percentages). Of course, such commissions are only a small part of the brokerage income, but still they are important.
Trading against the trader. This method is considered the most unethical, but it is the most profitable. Brokers who make money on your losses should be bypassed. Look closely: if the broker's spread is very low, the swap is fair, and there are no commissions at all, perhaps this broker will simply take advantage of you!