{"id":3538,"date":"2024-10-23T12:02:04","date_gmt":"2024-10-23T12:02:04","guid":{"rendered":"https:\/\/apex-flow.ai\/?p=3538"},"modified":"2024-10-23T12:02:04","modified_gmt":"2024-10-23T12:02:04","slug":"where-are-retail-forex-traders-actually-trading-2","status":"publish","type":"post","link":"https:\/\/apex-flow.ai\/es\/where-are-retail-forex-traders-actually-trading-2\/","title":{"rendered":"\u00bfD\u00f3nde operan realmente los comerciantes minoristas de Forex?"},"content":{"rendered":"

A lot of retail traders have no idea of how an order is processed or how forex brokers or CFD providers really operate.<\/p>\n\n\n\n

This lesson is intended as an introduction to the mechanics behind retail forex trading.<\/p>\n\n\n\n

It is aimed at forex traders wishing to gain a practical understanding of how forex brokers manage their risk and make money.<\/p>\n\n\n\n

The trading process is not always transparent, and there are multiple ways in which an order can be executed with different risks associated with each.<\/p>\n\n\n\n

If you take the time to understand how orders are executed, then you\u2019ll be able to differentiate between forex brokers and can make a more informed decision when choosing one.<\/p>\n\n\n\n

Let\u2019s begin!\u00a0<\/p>\n\n\n\n

Counterparties<\/h2>\n\n\n\n

When you place a trade order in your broker\u2019s trading platform, and the order gets executed or \u201cfilled\u201d, where does the trade go?<\/p>\n\n\n\n

\"Where<\/figure>\n\n\n\n

It actually goes nowhere<\/strong><\/em>.<\/p>\n\n\n\n

The definition of a broker<\/strong> is an intermediary that executes a trade on behalf of its clients. While the definition of a dealer<\/strong> is a person or entity that trades on its own account.<\/p>\n\n\n\n

Retail forex brokers do NOT trade on behalf of their customers. They are dealers<\/strong>.<\/p>\n\n\n\n

A retail forex broker trades on its own account by taking the opposite side of its customers\u2019 trades.<\/p>\n\n\n\n

The term \u201cforex broker\u201d is really a marketing phrase since retail forex \u201cbrokers\u201d are actually retail forex dealers<\/em>. <\/strong><\/p>\n\n\n\n

For example, all retail forex brokers regulated in the U.S. are formally referred to as \u201cRetail Foreign Exchange Dealers<\/strong>\u201d or RFEDs<\/a>.<\/strong><\/p>\n\n\n\n

So why do retail forex dealers market themselves as \u201cforex brokers\u201d?<\/p>\n\n\n\n

Maybe because it sounds better? Sounds friendlier?<\/p>\n\n\n\n

Who knows. \u00af\\_(\u30c4)_\/\u00af<\/p>\n\n\n\n

The main point is if we wanted to be technically accurate, we should<\/em> be using the phrase, \u201cforex dealers<\/strong>\u201c.<\/p>\n\n\n\n

But since the phrase, \u201cforex brokers\u201d is so popular and has been seared into everyone\u2019s minds already due to effective\u00a0brainwashing<\/del>\u00a0marketing, going forward we\u2019ll still refer to them as \u201cforex brokers\u201d. (Good job marketing folks from the retail forex industry!\u00a0)<\/p>\n\n\n\n

CLIENT or CUSTOMER?<\/strong><\/p>\n\n\n\n

Are you a client<\/strong> of a forex broker? Or are you a customer<\/strong> of a forex broker?\u201c<\/p>\n\n\n\n

\u201cClient\u201d and \u201ccustomer\u201d are words that are often used interchangeably.<\/p>\n\n\n\n

For our purposes, we think there\u2019s a distinct difference<\/strong> between being a client and being a customer.<\/p>\n\n\n\n

Being a client of a company means there is a fiduciary relationship<\/strong> between you and the company. This means that the company acts on your behalf and is obligated by law to act in your best interest.<\/p>\n\n\n\n

But a forex broker does not act on your behalf, nor is it obligated to act in your best interest.<\/strong><\/p>\n\n\n\n

So if we go by the definition that being a client means there is a fiduciary relationship, then this means that you are NOT a client of your \u201cforex broker\u201d.<\/p>\n\n\n\n

You are a customer<\/strong>.<\/p>\n\n\n\n

If you want to buy, the service it provides isn\u2019t to act on your befall and find you a seller. It\u2019s the one selling to you.<\/p>\n\n\n\n

How can you be a \u201cclient\u201d when it is the broker itself selling to or buying from you?<\/p>\n\n\n\n

You are a customer of your \u201cforex broker\u201d who provides a service that enables you to speculate (make bets) on the price movements of currency pairs.<\/p>\n\n\n\n

Since you can\u2019t trade directly in the (institutional) FX market, it \u201cmakes\u201d a trading market for you.<\/p>\n\n\n\n

It provides you a way to make bets on currency prices by always taking the opposite of your bets whenever you want to make one. It\u2019s not trying to find someone to take the other side of the bet, it simply takes the bet on itself.<\/p>\n\n\n\n

But the \u201cforex broker\u201d does not have the fiduciary duty to act for your benefit.<\/p>\n\n\n\n

That said, even though there is NOT a fiduciary relationship with the customer, the forex broker should act honestly and fairly<\/strong> with all of its customers.<\/p>\n\n\n\n

Going forward, we will use the term \u201ccustomers<\/strong>\u201d when referring to traders using the services of a retail forex broker or CFD provider.<\/p>\n\n\n\n

All orders and trades entered through your broker\u2019s trading platform are NOT executed on an external trading venue but are executed by the broker itself.<\/p>\n\n\n\n

Your \u201cbroker\u201d is taking the opposite side of your trade.<\/p>\n\n\n\n

This is known as being the counterparty<\/strong>.<\/p>\n\n\n\n

Think about it. If you want to buy, someone has to sell. And if you want to sell, someone has to buy.<\/p>\n\n\n\n

Every buyer must be paired with a seller and vice versa<\/strong>.<\/p>\n\n\n\n

You need a counterparty.<\/p>\n\n\n\n

When you trade with a broker, both you and the \u201cbroker\u201d hold positions against each other.<\/p>\n\n\n\n

You are each other\u2019s counterparties.<\/p>\n\n\n\n

You are your broker\u2019s counterparty. Your broker is your counterparty.<\/p>\n\n\n\n

This means that if you want to buy or \u201cgo long\u201d<\/strong>, the broker will take the opposite side of your trade and sell to you or \u201cgo short\u201d<\/strong>.<\/p>\n\n\n\n

\"Trader<\/figure>\n\n\n\n

The same thing happens if you want to sell or \u201cgo short\u201d, the broker will take the opposite side of your trade and buy from you or \u201cgo long\u201d.<\/p>\n\n\n\n

\"Trader<\/figure>\n\n\n\n

Your order is known as a bilateral<\/strong> transaction with your broker. \u201cBilateral\u201d is just a fancy word that just means \u201cinvolving two parties\u201d.<\/p>\n\n\n\n

All retail forex trades are bilateral since your retail forex \u201cbroker \u201cis the counterparty to ALL of your trades.<\/p>\n\n\n\n

Example 1: Single Trader and Broker<\/h2>\n\n\n\n

For example, if you buy 100,000 GBP\/USD, or open a \u201clong\u201d position, your broker takes the opposite side of your trade.<\/p>\n\n\n\n

This means it will sell 100,000 GBP\/USD or hold a \u201cshort\u201d position against you.<\/p>\n\n\n\n

\"Long<\/figure>\n\n\n\n

Since you are now \u201clong\u201d GBP\/USD, you are now exposed to the potential risk that the price for GBP\/USD will decrease and you end up having to close your position by selling at a lower price than you bought it for, resulting in a loss.<\/p>\n\n\n\n

The broker who is now \u201cshort\u201d GBP\/USD, is also exposed to risk. But in its case, the risk is that the price for GBP\/USD will increase. If GBP\/USD continues to rise, the more the broker\u2019s loss grows.<\/p>\n\n\n\n

<\/a>This risk is called market risk<\/strong>.<\/p>\n\n\n\n

Market risk is the risk of a loss in a position caused by adverse price movements.<\/strong><\/p>\n\n\n\n

When you initiate a trade with your broker, both you (the trader) and the broker are exposed to market risk.<\/p>\n\n\n\n

As you can see, your trade never reaches the \u201cmarket\u201d. It stays as a private agreement between you and your \u201cbroker\u201d.<\/p>\n\n\n\n

This why your forex broker is not really a broker. It is a DEALER.<\/p>\n\n\n\n

If it was a true broker, it would find and match your trade with another counterparty. For example, if you want to buy, the broker would find someone who wants to sell.<\/p>\n\n\n\n

But it doesn\u2019t do this. If you want to buy, It is the one that sells to you.<\/p>\n\n\n\n

Since a retail forex broker is THE counterparty for ALL of its traders (\u201ccustomers\u201d), this means that it holds A LOT of positions for different currency pairs.<\/p>\n\n\n\n

In order to understand the market risk for a specific currency pair, we need to add ALL of the broker\u2019s positions against traders in this currency pair.<\/p>\n\n\n\n

Example 2: Two Traders and Broker<\/h2>\n\n\n\n

Let\u2019s pretend that there are two princess<\/del> traders: Elsa and Ariel.<\/p>\n\n\n\n

They both trade GBP\/USD but have different opinions on where the price is headed.<\/p>\n\n\n\n

Elsa goes long GBP\/USD, while Ariel goes short GBP\/USD.<\/p>\n\n\n\n

\"Two<\/figure>\n\n\n\n

The broker takes the opposite side of each trade.<\/p>\n\n\n\n

Remember, the broker is the sole counterparty to all its customers\u2019 trades.<\/p>\n\n\n\n

Each trader trades directly (\u201cbilaterally\u201d) with the broker, and only the retail broker. Retail forex traders do not trade with each other<\/strong>.<\/p>\n\n\n\n

Let\u2019s see how Elsa\u2019s and Ariel\u2019s trades affect the broker\u2019s trading book.<\/p>\n\n\n\n

A trading book, or \u201cbook<\/strong>\u201d for short, keeps track of all the open positions that a broker holds.<\/p>\n\n\n\n

Whenever its customers trade, the broker has to take the opposite side of the trade. This causes the trading book to constantly change and \u201cnet\u201d long (or short) positions in individual currencies to arise.<\/p>\n\n\n\n

The broker must continuously keep track of its long and short positions and know its net positions precisely at all times.<\/p>\n\n\n\n

\n

A \u201cbook\u201d is a record of all the positions held by a trader. Retail traders may also refer to their own positions as a book, although the term is mostly associated with institutional traders.<\/p>\n<\/blockquote>\n\n\n\n

As a trader, you have your own \u201cbook\u201d as well. Your book is simply all your open positions as well.\"Broker's<\/p>\n\n\n\n

As you can see above, even though both Elsa and Ariel have open positions against the broker, the broker\u2019s net position is zero<\/strong>.<\/p>\n\n\n\n

The broker has a short position against Elsa\u2019s trade but also has a long position against Ariel\u2019s trade.<\/p>\n\n\n\n

The two trades offset<\/strong> each other which results in the broker\u2019s exposure to market risk being eliminated.<\/p>\n\n\n\n

Assuming this is all the GBP\/USD positions that the broker has on its book, its market risk exposure is zero<\/strong>.<\/p>\n\n\n\n

Of course, the broker has to make money so it quotes a different price depending on whether the customer wants to buy or sell. The difference between the two prices is known as the spread<\/strong>.\"Forex<\/p>\n\n\n\n

In the example above, Elsa bought GBP\/USD at 1.2503, known as the \u201cask<\/strong>\u201d price, while Ariel sold GBP\/USD at 1.2500, known as the \u201cbid<\/strong>\u201d price.<\/p>\n\n\n\n

This means the broker\u2019s spread was 3 pips<\/strong> or 0.0003 (1.2503 \u2013 1.2500).<\/p>\n\n\n\n

Basically, the broker bought GBP\/USD from Ariel at 1.2500<\/strong> and turned right around and sold GBP\/USD to Elsa at the higher price of 1.2503<\/strong>, pocketing the spread.<\/p>\n\n\n\n

This spread is the broker\u2019s profi<\/strong>t, which equals $30 (0.0003 x 100,000).<\/p>\n\n\n\n

At this point, it doesn\u2019t matter if the market fluctuates widely since the broker\u2019s net position is zero<\/strong>, The market is locked in due to the offsetting trades.<\/p>\n\n\n\n

For example, Elsa bought GBP\/USD at 1.2503 and Ariel sold GBP\/USD at 1.2500 and the current market price is now 1.3100<\/strong>.<\/p>\n\n\n\n

Let\u2019s calculate the broker\u2019s P&L (profit and loss):<\/p>\n\n\n\n

P&L = 100,000 (1.2503 - 1.3100) + 100,000 (1.3100 - 1.2500) \nP&L = -5,970 + 6,000\nP&L = 30\n<\/pre>\n\n\n\n
The broker has a profit of $30<\/strong>.<\/p>\n\n\n\n
Let\u2019s see what happens if the current market price plunges to 1.2900<\/strong>.<\/p>\n\n\n\n
P&L = 100,000 (1.2503 - 1.2900) + 100,000 (1.2900 - 1.2500) \nP&L = -3970 + 4000\nP&L = 30\n<\/pre>\n\n\n\n
As you can see, even when the price moved 200 pips (from 1.3100 to 1.2900) because the two trades offset each other, the broker was NOT exposed to market risk and its profit remained at $30<\/strong>.<\/p>\n\n\n\n
Example 3: Many Traders and Broker<\/h2>\n\n\n\n
Now instead of just two traders, let\u2019s add more traders.<\/p>\n\n\n\n
There are 1,000 traders and ALL of them go long 1 standard lot (or 100,000 units) of GBP\/USD each.<\/p>\n\n\n\n
Let\u2019s see how the broker\u2019s book looks now.\"Forex<\/p>\n\n\n\n
Whoa.<\/p>\n\n\n\n
As you can see, the broker is net short 100 million<\/em> units<\/strong> of GBP\/USD.<\/p>\n\n\n\n
(1,000 traders x 100,000 units = 100,000,0000 units)<\/p>\n\n\n\n
There weren\u2019t any other traders who wanted to short GBP\/USD so the broker wasn\u2019t able to offset any positions to help reduce his net short position.<\/p>\n\n\n\n
That kind of exposure to market risk is pretty BIG.<\/p>\n\n\n\n
How big?<\/p>\n\n\n\n
If a 1-pip move for a standard lot or a 100,000 unit position equals $10, this means that for a 10M unit position, every pip increase that GBP\/USD makes, the broker experiences a $10,000 unrealized loss<\/strong>.<\/p>\n\n\n\n
Let\u2019s repeat that: 1 pip increase = $10,000 unrealized loss<\/strong>.<\/p>\n\n\n\n
So if GBP\/USD rises 100 pips, the broker would be down $1,000,000<\/strong>!<\/p>\n\n\n\n
In theory, the broker could stop accepting the trades if it didn\u2019t want to expose itself to such risk but then that would mean that all of its customers couldn\u2019t enter into any more trades.<\/p>\n\n\n\n
That\u2019s the equivalent of a store hanging up a \u201cClosed\u201d sign in the middle of the day when its customers expect the store to be open for business. If all of a sudden,  traders couldn\u2019t open trades on the broker\u2019s trading platform, they\u2019d be like \u201cWTF?\u201d and be pissed.<\/p>\n\n\n\n
\"Angry<\/figure>\n\n\n\n
So not accepting trades is out of the question. The broker must stay \u201cOpen\u201d or it would lose customers. It must continue to accept trades.<\/p>\n\n\n\n
Let\u2019s pretend EVERY trader closed their trade after GBP\/USD rose 100 pips<\/strong>.<\/p>\n\n\n\n
Each trader would have a $1,000 profit<\/strong> (100 pips x $10).<\/p>\n\n\n\n
And since the broker was the counterparty to all 1,000 traders, it would have a realized loss of $1,000,000<\/strong> ($1,000 x 1,000 customers).<\/p>\n\n\n\n
The question then arises\u2026<\/p>\n\n\n\n
Does the broker actually have a $1M to pay out to its winning customers?<\/p>\n\n\n\n
If it doesn\u2019t, along with some very angry customers, it will be out of business.<\/p>\n\n\n\n
In this scenario, if the broker doesn\u2019t have the funds, it did not manage its market risk properly<\/strong>.<\/p>\n\n\n\n
The price moved against the broker\u2019s net position so much that it wasn\u2019t able to fulfill its obligations to its customers and pay out their profits.<\/p>\n\n\n\n
The broker\u2019s overexposure to market risk has now exposed the traders (its customers) to counterparty risk<\/strong>.<\/p>\n\n\n\n
Counterparty risk is when one party fails to deliver on its end of the deal.<\/p>\n\n\n\n
In this scenario, when the traders exited their long positions, they expected to receive their profit in their account.<\/p>\n\n\n\n
But the broker took on too much risk and doesn\u2019t have enough money to pay out.<\/p>\n\n\n\n
\"Forex<\/figure>\n\n\n\n
In casino lingo, \u201cThe house has gone bust<\/strong>.\u201d<\/p>\n\n\n\n
This is why it\u2019s important to know how your broker manages the risk on the other side of your trade.<\/p>\n\n\n\n
There are three ways for the broker to manage market risk:<\/p>\n\n\n\n
    \n
  1. It can\u00a0offset<\/strong>\u00a0opposing trades from its customers.<\/li>\n\n\n\n
  2. It can\u00a0transfer<\/strong>\u00a0or \u201coffload\u201d the risk to another market participant.<\/li>\n\n\n\n
  3. It can\u00a0accept<\/strong>\u00a0or \u201cwarehouse\u201d the risk.<\/li>\n<\/ol>\n\n\n\n
    \"Three<\/figure>\n\n\n\n
    HOW a forex broker manages market risk determines what type of broker it is and how it operates as a business. <\/strong><\/p>\n\n\n\n
    Understanding the concept of your broker \u201ctaking risk\u201d on your order is critical to your success as a trader.<\/p>\n\n\n\n
    If your broker is taking the other side of your order and not passing it onto an external counterparty, your broker is taking 100% of the market risk<\/strong> associated with your order.<\/p>\n\n\n\n
    So if you can understand how your broker manages its risk when it takes the opposite of your trade, you\u2019ll know what type of broker you\u2019re actually dealing with and if there are any potential conflicts of interest.<\/p>","protected":false},"excerpt":{"rendered":"
    A lot of retail traders have no idea of how an order is processed or how forex brokers or CFD providers really operate. This lesson is intended as an introduction to the mechanics behind retail forex trading. It is aimed at forex traders wishing to gain a practical understanding of how forex brokers manage their […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49,48],"tags":[],"class_list":["post-3538","post","type-post","status-publish","format-standard","hentry","category-forex-brokers-101","category-kindergarten"],"_links":{"self":[{"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/posts\/3538","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/comments?post=3538"}],"version-history":[{"count":1,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/posts\/3538\/revisions"}],"predecessor-version":[{"id":3539,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/posts\/3538\/revisions\/3539"}],"wp:attachment":[{"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/media?parent=3538"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/categories?post=3538"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/apex-flow.ai\/es\/wp-json\/wp\/v2\/tags?post=3538"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}