How does a forex broker make money?

The spread

Every instrument has two prices: the bid (the price at which you can sell) and the ask (the price at which you can buy). The gap between them is the spread. A trade opens already in the red by exactly the spread: it's an entry fee charged not as a separate line but through the price itself. A spread “from 0.0 pips” on Raw accounts doesn't mean free trading: the same fee is simply moved into the commission there.

The per-lot commission

A fixed amount charged per traded volume, for example $X per lot per side. This is the most transparent kind of fee: it doesn't depend on how wide the spread happens to be at the moment of the trade. The standard pair of figures for comparing accounts is the spread on a commission-free account and “spread plus commission” on a Raw account. Broker cards on this site show both.

The swap

A charge (occasionally a credit) for holding an open position overnight. It doesn't apply to intraday trading, but over positions held for weeks it becomes a noticeable cost. There's a dedicated article on it below.

Conversion and non-trading fees

If your account currency differs from the currency you fund with, deposits and withdrawals go through a conversion at a rate the client doesn't choose. The same category covers account inactivity fees and withdrawal charges: some brokers have none, others do, and it's visible in each broker's terms.

Client losses

The most important line on this list. If a broker doesn't pass a trade to the market but becomes the other side of it, the client's loss stays with the broker. Earning on the spread and commission creates no conflict of interest: the broker benefits from your turnover, not from your loss. Earning on losses does create one. How both models work is the next article.

How A-book works

The broker takes your trade and opens the same one with a liquidity provider: a bank, a prime broker, an aggregator. Your gain or loss passes straight through the broker, and its own result doesn't depend on how the trade ends. It earns on the spread, on a markup over the provider's spread, and on commission, that is, on turnover. Such a broker benefits from you trading a lot and for a long time, which means not blowing your deposit quickly.

How B-book works

When a broker internalises a trade, it becomes the counterparty. Client losses may contribute to its trading revenue, while client profits represent a cost to it. The broker may also hedge some or all of this exposure. The model in itself is not a violation: market-making also exists at brokers licensed by strict regulators. The difference is what keeps such a broker from abuse: a regulator's rules and oversight, or nothing.

The hybrid

The models get combined: part of the client flow goes to the market, part stays inside. By what criteria the flow is split isn't visible from outside: brokers don't disclose such rules publicly.

Where the conflict of interest appears

For a B-book broker, immediate trading revenue equals the client's loss. This doesn't mean every B-book broker stops clients from making money. It means it has an economic motive an A-book broker doesn't, and everything comes down to who controls it and how. That's exactly why the question “who is the broker's regulator” matters more than “what is its spread”: section 03 of the guide covers this.

Can you determine the model yourself

Not with certainty. A broker isn't obliged to announce where your particular trade goes, and marketing words like “ECN”, “STP” and “DMA” legally guarantee little. What's left: read the execution documents (the execution policy), look at the regulator, and watch the quality of execution on your own trades. Systematic requotes and slippage only against you are a reason to leave.

Where the price comes from at all

Forex is an over-the-counter market. Currency is traded by banks and other large participants directly and through electronic venues, and there is no single “official” rate at any given moment. A broker receives price streams from its liquidity providers, aggregates them, and broadcasts its own bid and ask to clients. That's why the price at two brokers in the same second almost never matches perfectly.

What counts as a normal discrepancy

Differences of a few pips on a calm market, and larger ones on news and thin liquidity, are normal in an over-the-counter market. Sharp, brief price bursts (spikes) also happen on the real market: in thin hours, on data releases, when liquidity dries up.

What a bucket shop with spikes is

The problem starts where a price move exists only in one broker's terminal. The classic scenario reported by affected traders: a short spike exactly to the level where stops were sitting, which appears in no independent source of quotes. A broker that is itself the other side of the trade (see the article on A-book and B-book) technically has both the ability and the motive for this. Claiming it about a specific broker can only be done with the data in hand.

How to check

• Open the same instrument in the same minute at an independent source (another broker, TradingView, any third-party terminal) and compare: did the spike appear anywhere else. Keep in mind that there too the quotes come from specific providers, not “from the market in general”.
• Save screenshots and export the broker's quote history right away: the terminal history can be refreshed.
• Send the broker a request with this data: regulated brokers have a procedure for reviewing disputed executions. Where to go next in a dispute: section 03.

Two execution modes

Market execution aims to fill the order at the best available price, but neither the requested price nor execution under all market conditions is guaranteed. With instant execution the broker either fills at the requested price or replies with a requote: “the price has changed, confirm the new one”. Which mode applies is set by the broker and the account type and written in the specification: worth knowing before your first trade, not after your first surprise.

Slippage

In the milliseconds between sending an order and processing it, the price may move, and the trade fills at a slightly different price. That is slippage. On a calm market it is small and happens both ways: sometimes worse than requested, sometimes better. On news and gaps it grows at any broker. What should alert you is different: if over a long series of trades slippage is systematically against you and never in your favour.

Requotes

A requote is a refusal to fill at the requested price along with an offer of a new one. In instant mode it is a standard mechanism, but its frequency matters: constant requotes at the moment the price moves in your favour make trading unmanageable.

Gaps and what they do to stops

A gap is a break in price with no intermediate values. Typical places: the market open after the weekend and strong news. On a gap a stop-loss fills not at the set level but at the first available price beyond it, and that can be noticeably worse. Two consequences follow. First: a stop limits the loss approximately, not exactly. Second: a position held over the weekend carries a risk that isn't there intraday.

Some brokers offer a guaranteed stop-loss as a separate paid option, while negative balance protection keeps the account from going below zero on an extreme gap. Whether a particular broker has them: see its card and terms.

Why you even need a broker

The currency market is built for large participants: the standard unit of volume (a lot) equals 100,000 units of the base currency. Buying one lot of EUR/USD “with your own money” means holding around a hundred thousand euros, and even the smallest fractional volumes without borrowed money require thousands of dollars. An ordinary person with a deposit of a couple of hundred dollars simply has no ticket into such a market.

A retail broker solves exactly this. It lets a private trader open a position whose notional value is larger than the margin deposited for it: the client puts up a small share of the trade as collateral, called margin. The ratio of “trade volume to margin” is called leverage: at 1:100 the margin is one hundredth of the volume. This does not mean the broker simply lends or transfers the remaining amount to the client. The exact structure depends on the instrument and the broker's execution model. What leverage does mechanically: it lets a small deposit control a much larger position, and when the margin stops being enough to cover a losing position, the broker closes it itself. Exactly how, step by step, is below.

The basic terms

To open a 1-lot EUR/USD position at 1:100 leverage you need to lock up collateral of 1/100 of the volume: 1,000 euros of margin. While the position is open that money is tied up; free margin is what's left for new positions and to cover the current drawdown.

Margin call and stop out

The terminal computes the margin level: the ratio of current equity (deposit plus or minus the floating result) to used margin. As the loss grows and the level drops to the margin-call threshold, the broker warns you: top up the account or close part of your positions. If the price keeps going against you and the level drops to the stop-out threshold, the broker itself starts closing positions, beginning with the position selected under its stop-out policy. The thresholds are set by the broker and stated in the account specification: for example, at one of the brokers in the shortlist they are 100% and 50%.

What leverage does to a deposit: the arithmetic

Deposit $1,000, leverage 1:100, an open position of 1 lot EUR/USD (roughly $100,000). A 1% price move against the position is minus $1,000, that is the whole deposit. A 0.5% move is half the deposit. Leverage in itself doesn't change the odds of guessing direction. What determines the dollar value of each point of movement is the size of the position, and leverage is what lets you open that size with a smaller margin deposit. The higher the leverage and the larger the volume relative to the deposit, the closer the stop out sits within ordinary market noise.

Leverage is not a constant

The advertised “leverage up to 1:X” is an upper bound, not a guarantee for every situation. Brokers use automatic leverage reductions: as account equity grows, over the weekend, on particular instruments. These rules are also set out in the account terms, and it's worth knowing them before they trigger in the middle of an open position. The values for the brokers in the shortlist are on their cards on the site.

Where the swap comes from

A currency position is essentially a loan in one currency and a deposit in another. Each currency has its own interest rate, and holding a position overnight accrues the difference between those rates: positive if the bought currency's rate is higher, negative if it's lower. On top of that the broker adds its own markup. That's why swaps on the same pair differ between brokers, and are often negative in both directions at once: the markup eats up the rate difference.

The triple swap

Settlement of currency trades takes two business days, so a position carried over Wednesday night into Thursday “catches” the weekend: that night the swap is charged triple. For instruments of other classes the triple-swap day may differ: the exact information is in the instrument specification at the broker.

Why buy-and-hold is expensive here

On the stock market, a share bought outright doesn't carry an overnight financing cost the way a forex or CFD position does, though custody, account or financing fees can still apply depending on the broker and instrument. On forex and CFDs a position with a negative swap pays for every night. The exact cost of holding is easy to calculate in advance: the instrument's swap from the specification multiplied by the number of nights. A long-term idea that looks reasonable on the chart can, after being multiplied by 200 nights of swap, turn out to be loss-making before the price even moves.

When the swap works for you

If the rate difference in favour of the bought currency is greater than the broker's markup, the swap is positive: you get credited for holding. This is what the carry approach is built on: holding a position for the swap. It works only while the exchange rate doesn't eat up the credits: a price move against the position doesn't go anywhere.

Swap-free accounts

Some brokers offer accounts without a swap: instead, other terms apply, for example a fixed holding fee or limits on instruments and duration. Holding doesn't become free, the form of payment changes. Whether the brokers in the shortlist have a swap-free mode is visible on their cards on the site.

The figures brokers publish themselves

Since August 2018, by decision of the European regulator ESMA, firms offering CFDs to retail clients in the EU must show a standard warning: “N% of retail investor accounts lose money when trading CFDs with this provider”. Each broker calculates the percentage on its own clients and updates it itself. In introducing the requirement, ESMA drew on analyses by national regulators: across different EU countries, between 74% and 89% of retail accounts turned out to be loss-making, and average losses per client ran from €1,600 to €29,000.

This requirement applies to firms under EU regulators. Clients outside the EU are served by separate entities of the international brands under other regulators, and the European rule doesn't reach them: on their sites the percentage may not appear at all.

What the AMF study showed

A 2014 study by the French regulator AMF covered almost 15,000 real clients of forex and CFD brokers, 16 million trades over four years (2009-2012). The result: 89% of clients ended the period in the red, average loss per client €10,900, total losses of the sample €161 million. By instrument: 84% of active forex clients and 78% of active CFD clients were in the red.

How to read these figures

“89% of accounts in the red over a period” doesn't mean “everyone loses their whole deposit”: small losses count in the statistics too. Nor does it mean the opposite: the average loss amounts from the same data show these are not pennies. One more detail from the AMF data: the loss grew with activity, and the most active clients had worse-than-average results.

The practical takeaway for the reader is simple. Promises or plans built around a fixed monthly return should be treated with caution, given the consistently high share of loss-making retail accounts, and financial decisions shouldn't be built on them (credit, borrowed money, “last” money). The risk warnings on brokers' sites and in this site's footer are not a formality but a condensed statement of the same data.

What demo really works for

Getting to grips with the platform, learning to place orders, stops and takes, looking at the instruments and quotes, testing the mechanics of a strategy without risk: demo does all of this excellently. It is generally safer to understand the platform in a demo environment before trading with real money.

How demo differs technically

A trade on demo doesn't reach real liquidity: there's no one to deny you a price. So execution on demo can be better than live: without the requotes, queues and slippage that would happen on a live account at those moments. Strategies sensitive to execution quality (scalping, news trading) look better on demo than they'll turn out live.

Demo account conditions aren't required to match the live one. The size of the virtual deposit is often chosen large and convenient, while margin requirements and leverage on demo may differ from the live account's specification. Trading conditions should be checked against the instrument specification on the broker's site, not against the numbers in the demo terminal.

How demo differs psychologically

On demo it's virtual money being lost, and decisions are made calmly: the stop stays where it was planned, the plan is followed. On a live account, real money creates emotional pressure, and traders may behave differently than they did on demo: nudging the stop “just a little more”, closing a winning trade too early, trying to win a loss back with increased volume. The platform is the same, the market is the same, a different person is trading.

How to move to live

The intermediate step between demo and a full account is minimal real volumes. Micro-lots (0.01 lot) exist at most brokers, and some have cent accounts, where the deposit and trades are counted in cents. Real money, real execution, but the cost of a mistake is many times smaller. Whether the brokers in the shortlist have cent accounts is visible on the cards.

What “deposit from $5” actually means

The minimum deposit is a technical threshold at which the broker opens an account. It says nothing about the amount at which trading makes sense. A low threshold is handy for something else: to test the full deposit, trading and withdrawal cycle with a small sum before putting in the main one.

The arithmetic of working capital

It's calculated from the trade, not from the entry threshold. The minimum volume at most brokers is a micro-lot, 0.01 of a standard lot, which for EUR/USD is 1,000 units of currency. For 0.01 lot of EUR/USD, one pip is worth approximately $0.10. A 50-pip stop therefore represents about $5 of risk per trade.

Next comes the question of what share of the account that is. A common risk-management rule: don't put more than 1-2% of the account on a single trade. Then $5 of risk per trade requires a deposit of $250-500. With a $10 deposit the same $5 stop is half the account, and two losing trades in a row end the story. Not because the strategy is bad, but because the account may not withstand a normal losing streak.

The link with leverage and stop out

A small deposit pushes you toward a large volume relative to the account, and that is exactly the mechanism covered in the leverage article: the larger the volume relative to the deposit, the closer the stop out sits within ordinary market noise. The marketing minimum deposit and the capital on which a strategy can survive a run of losses are different amounts, and confusing them is expensive.

The second bound: how much you can afford to lose

The arithmetic above sets the lower bound of the deposit: below it the strategy doesn't survive technically. The upper bound is set not by the market but by personal finances. The statistics from the losses article are blunt: a loss on the account is the industry's baseline scenario, not a rare misfortune. So the deposit is planned as an amount whose total loss would not affect essential expenses or plans: not credit and not borrowed money, not money set aside for a specific goal, not a financial cushion.

The test is simple: if fully losing the deposit would force you to change plans, borrow, or “win it back”, the amount was chosen wrong.

What a bonus really is

Bonus money is credited to the account but doesn't become yours: in all the bonus programmes of the shortlist's brokers the bonus itself can't be withdrawn. What can be withdrawn is the profit traded with its participation, and only after the conditions are met. A bonus is an advance against future trading turnover, and its real price is written in the terms section that gets read least of all.

Wagering: what the “gift” costs

The bonus has to be “worked off”: make trades for a certain amount, or it gets taken back. In the shortlist's terms the rule reads like this: for every dollar of bonus you need to trade $20,000 of volume (there's a version of the same terms with $30,000). What that means for a $100 bonus:

• $100 of bonus × $20,000 = trades totalling $2,000,000 are needed;
• volume is counted by position size: one trade of a full lot of EUR/USD is roughly $100,000. So the wagering is 20 full-lot trades, or 200 trades of 0.1 lot, whichever way;
• all of this comes with a limited window, on the order of a few months. Miss it: the bonus is written off.

Now what that turnover costs the trader. Each trade isn't free: entry is paid for with the spread. On a full-lot EUR/USD trade a 1-pip spread costs $10. The wagering requires 20 such trades: about $200 handed over in spread. In total: to claim the “gift” $100 you pay about $200 in trading costs. The figures in the example are illustrative, but the mechanics are exactly this: a bonus is an advance the client returns to the broker through turnover, and still ends up owing.

What happens when you withdraw money

Two real rules from the shortlist's programmes. First: the bonus is reduced in proportion to any withdrawal of funds: withdraw half the money from the account, lose half the bonus. Second: withdrawing the deposit before the wagering is met means forfeiting the bonus entirely. In both cases the rule is the same: first read what happens to the bonus on withdrawal, then fund.

A separate detail for those who trade on bonus funds: where the bonus takes part in trading (there's such a case in the shortlist), writing it off reduces the account equity, and therefore the buffer to the stop out: the same arithmetic as in the leverage article.

The broker's right to change its mind

The rules of one of the shortlist's programmes state outright: the broker may refuse to credit a bonus, write off a bonus already granted, and void the trading result obtained on bonus funds. Alongside, the shortlist's programme terms contain other grounds for a write-off: account inactivity, an attempt to claim the bonus again, “abuse” of the promotion's terms as the broker interprets it. A bonus exists under rules that one side writes and changes.

How to use it without surprises

• A bonus is optional: you can leave it un-activated, and in one of the shortlist's programmes you can decline it at any time on request.
• Before activating, convert the wagering into lots and days: is it realistic for your trading volume.
• Check in the terms what happens to the bonus on withdrawal and on drawdown.
• Treat a bonus as marketing, not money: it shouldn't outweigh the choice of broker.