How to Forex Broker Makes Money

forex broker assumes that you will lose money over the long run when you trade.

 Given that 95% of forex traders lose money, it is a very safe assumption. Every broker has to decide whether a new account will belong to the group (95%) of traders that loses money, or the group (5%) that makes money.

If I gave you a coin and said that it would land on heads 95% of the time, I think you would probably want to keep the coin so that you could use it to win some bets with your friends and 2) always assume the coin would land on heads.
This is precisely what your forex broker does. Every new account is assumed to belong to “group B” – those traders that will lose money. Since 95% of the traders belong in this group, your broker is only too happy to assume that you belong in this group.

• After some time, if you have consistently made profits, your broker will re-assign you to “group A” – these are the lucky 5% of traders who consistently make money. After you have joined this group your broker will lump your trades with all of the rest of group A and hedge against your trades. So, for example, if all traders in group A have bought the EUR/USD your broker will place a trade in the interbank forex market to offset any profits group A make on this trade.
• Basically, your broker puts up with group A traders but is really interested in gaining group B accounts. This is because if a trader in group B loses $7,000 – that is, he completely blows up his $7,000 account, then the broker gets all of that money. The broker does not make money on the spread; the broker makes money on the losing accounts.
• This is also why brokers are constantly advertising for new customers. The brokers need “fresh blood” to keep making money, many of the traders in group B will give up on trading or move to another broker.