A lot of retail traders have no inkling or concept as to how an order is processed or how these so-called forex brokers or CFD providers really operate.
In today's lesson, we will learn an introduction to the nuts and bolts behind retail forex trading.
This lesson draws a bead on traders who wish to gain an empirical, pragmatic, or hands-on understanding of how forex brokers manage their risk and still make money.
The trading affair is not always clear-cut, and there are a variety of ways an order can be executed with the different risks associated with each. Take your time to understand how these orders are executed. This will help you differentiate forex brokers and make a well-aware decision when choosing one.
When you place a trade on your broker's trading platform, and that order gets filled, where does the trade go?
Truth be told, it goes nowhere.
A broker is defined as an intermediary that executes trades on behalf of its clients. Whereas a dealer is defined as a person or entity that trades on its own account.
Retail forex brokers NEVER trade on behalf of their customers. They are dealers.
A retail forex broker trades on its own account by taking the opposite of its customers’ trades. So, the term “forex broker” is just a marketing phrase since retail forex “brokers” are actually retail forex dealers.
So why do these retail forex dealers paint themselves as “forex brokers”?
Does it sound better? A little friendlier?
The take home point is, to be technically accurate, we should be using the phrase, “forex dealers”. But since the phrase “forex brokers” is so sought-after and has been seared into the hearts and minds of everyone as a result of calculated brainwashing, we’ll still refer to them as “forex brokers”. Kudos to these marketing folks.
CLIENT OR CUSTOMER?
Are you a client of a forex broker? Or are you a customer of a forex broker?
The words “client” and “customer” are often used conversely. But facts show that there is an idiosyncratic difference between being a client and being a customer.
Being a client of a company means that there is a trustee relationship between you and that firm. It means that the company acts upon its right and on your behalf and is obliged to act in your best interest.
A forex broker never acts on your behalf, neither does it put your best interest at heart.
So, if we go by the definition, since there is no trustee or fiduciary relationship, you are definitely not a CLIENT of your “forex broker”.
You are a customer.
If you want to buy, the services it provides is not to act on your behalf and find you a correspondent seller. It’s the one selling to you.
How then can you be a “client” when it is the broker itself buying and selling from you?
You become a customer of your “forex broker” who provides you with a service that enables you to play the market on the price movements of currency pairs.
Since as a retail trader you can’t trade the institutional FX market directly, it provides a “market” for you.
It provides you a way to play the ponies or buck the odds on currency pairs by always taking the opposite of what you do. It’s not trying to find someone to fill the other side of the bet, it takes the bet itself.
But the “forex broker” does not have any feoffee duty to act on your best interests.
All things considered, even though there is NOT a feoffee relationship with the customer, the forex broker should always act honestly and fairly with all of its customers.
Making headway, we’ll make use of the term “customers” when referring to traders using the services of a retail forex broker or CFD provider.
All orders and trades entered through your broker’s trading platform are NOT executed on any external trading marketplace but are executed by the broker itself.
Your “broker” is taking the opposite sides of your trades. HAHA.
Think it through, if you want to buy, someone has to sell. If you want to sell, someone has to buy.
You need a counterparty.
Is your broker your counterparty?
Let’s find out in Part Two.