With the end of each trade, the forex trader sees an update of his account balance, either up or down. Although this seems normal, the novice trader may wonder where this money came from (in the event of a profit) or to whom it went (in the case of a loss). This article explains the flow of funds into and out of a trader’s account.
financial inflows and outflows
In the over-the-counter forex market, the broker either passes trade orders directly (Straight Execution Model – STP) to one of the liquidity providers (Credit Suisse, Goldman Sachs, Bank Nomura, Citigroup, UBS, Bank of America, and many others) or takes the role of The counterparty to the transaction (the market maker).
Where does the money go when an individual forex trader works with an STP broker? Let’s assume that a client places an order to buy a standard lot (100,000 units) on EUR/USD at 1.1120. The order is directed directly to one of the liquidity pools. In case the limit order is executed, the capital required to open the deal is held as margin in the client’s account. If the client uses a leverage of 1:100, the value of the margin held will appear in his account at $1,120.
The value of the share remaining in the client’s account is updated in real time in parallel with the price movement. STP brokers typically get 1:100 leverage from the liquidity providers they deal with. Thus, the liquidity provider will also hold $1,120 from the forex broker’s account.
If we assume that the client closed his long position on the Eurodollar at 1.1130. In this case, the sell order is directed to the liquidity provider to match it with a corresponding buy order. The liquidity provider will release $1,120 + $100 profit to the forex broker, who in turn will release the retained margin, i.e. $1,120, with $100 profit added to the trader’s account. The liquidity provider may or may not play the role of the counterparty to this transaction.
In other words, he may open a new position in the hope of selling it later at a higher price to someone else, and he may instead cover the open short position at a higher price. Thus the transaction cannot be classified as a loss incurred by the liquidity provider.
If we assume that the trader closed this position at 1.1110, in this case the liquidity provider will release only $1,020 ($1,120 – $100 loss) from the forex broker’s account, which in turn will release only $1,020 of the margin held in the trader’s account when opening Deal. Eventually, the forex broker has regained what it lost and will carry on with business as usual.
Let us now assume a similar situation with a forex broker acting as a market maker. When the client places a trade order, the broker reserves the required capital (depending on the leverage used) and confirms the transaction. Depending on the nature of the risk management strategy used by the forex broker
his clients’ orders may be aggregated and then sent to the liquidity provider. An internal matching is made between open buy and sell orders at the same levels on the same currency pair. When the client closes the order, a book change is made based on the net margin value. Again, depending on the mechanism used by the forex broker, his corresponding position may be closed at the same time with the liquidity provider.
Buying and selling currency pairs is similar to buying other physical assets as the actual cost of the product goes through multiple stages before it reaches the final consumer. Retail brokers and distributors take their share of the profits. Similarly, forex brokers charge their profits in the form of the spread which is added to the actual price and then passed on to the counterparty.
When a novice trader is looking for advice from others about opportunities to make money in the forex market, the person giving him this advice will most likely tell him that there are endless opportunities for making profits. In most cases, this answer will be enough for the person seeking advice to dream of buying a Ferrari or a Lamborghini.
But if we ask the same person who gave this advice how much profit he has made so far, we will immediately notice a change in his facial expression. Usually, he will tell us that he doubled his capital but lost it later due to bad luck one day or because the market reversed direction while he was in a deep sleep, and other flimsy arguments.
The forex market undoubtedly provides endless opportunities to make a profit. But it is simply not easy for everyone to take advantage of these opportunities.
Dedication and sincerity in work is one of the necessary factors to make profits in the forex market.
Some deceive novice traders by saying that they can practice on a demo account for a few weeks or months and then jump straight into real trading, which they claim will guarantee them earning money equivalent to that of a doctor or engineer after many years of hard study. The trader should keep his eyes and ears open to what is being said.
Trading is simply more of a lifestyle than an independent career. There is no trader on earth who can confirm that the next trade will be profitable just because his previous record includes a large number of successful trades.
So a lot of things are at stake as long as you decide to trade the currency market full time. This is one of the reasons why seasoned traders advise their novice counterparts to trade initially < part time.
Currency markets are closed during the weekends, which prompts forex brokers to suspend their services by shutting down the trading servers from Friday at 8:00 pm GMT or even earlier.
This provides for two days of mandatory rest per week. It’s rare to find another job that allows you to stay home on weekends all month long. Mandatory rest periods help the trader to regain his physical and mental activity. It cannot be denied that it heals
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