When you’re trading Forex, you’re essentially trading currencies. Just like any other type of investment or trade, there needs to be someone on the other end of the deal to make it work. In Forex, that ‘someone’ is a market maker. A market maker is a financial institution that quotes both a buy and sell price for a given security, currency, or commodity. They stand ready to buy and sell at these prices at all times, and thus act as the liquidity provider in the market.
When you initiate a trade with a market maker, they will take the opposite position on your trade – meaning they will buy if you sell and sell if you buy. This ensures that they always have a buy and sell order in the market, and it’s this liquidity that keeps the market moving.
Market makers make their money from the bid-ask spread – the difference between the buy and sell price. When you buy or sell a security, you’re paying (or receiving) the ask price. The ask price is always higher than the bid price, as it represents how much the market maker is willing to sell the security for.
The bid-ask spread is essentially the market maker’s profit, and it’s how they make their living. Of course, there are also commissions that are charged on each trade, but these are relatively small amounts when compared to the spread.
So, where does the money come from in Forex?
It comes from the market makers, who make their money from the bid-ask spread. This is how they make a living, and it’s what keeps the market moving.***
When you trade Forex, you are trading against other investors who are buying and selling different currencies. Just like any other market, the money to buy and sell these currencies comes from a variety of places.
Here’s a look at where the money comes from in Forex:
1) Individual investors:
The majority of Forex traders are individual investors. These investors can be from anywhere in the world, and they can trade any time of the day or night. They use their own money to buy and sell currencies.
2) Investment banks:
Investment banks play a major role in the Forex market. They act as middlemen between buyers and sellers, and they provide liquidity to the market. They also make money by charging a commission on each trade.
3) Central banks:
Central banks are the governments of a country that control the monetary policy of that country. They play a big role in the Forex market by buying and selling currencies to try to stabilize the market.
4) Commercial banks:
Commercial banks are the banks that people use to do their everyday banking. They also act as middlemen in the Forex market, and they make money by charging a spread on each trade.
5) Hedge funds:
Hedge funds are investment funds that use a variety of strategies to make money, including investing in stocks, bonds, and Forex. They have become increasingly popular in recent years, and they account for a large percentage of daily trading volume.
6) Other investors:
There are a variety of other investors who participate in the Forex market, including pension funds, retail traders, and institutional investors.
As you can see, there are a variety of sources of money that flow into the Forex market. It’s a truly global market where investors from all over the world come together to trade.
Thanks for reading! I hope this gives you a better understanding of where the money comes from in Forex.