Where Do Retail Forex Traders Actually Trade?

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Where do retail Forex traders trade?

Where Are the Retail Forex Traders Actually Trading

If you are a retail Forex trader, you will be astonished to know that retail Forex traders are not trading on the “real foreign exchange market.” 

Sounds awkward? Now you may have another question that is then “where are retail traders trading?”

Where Are The Retail Traders Trading?

As a retail trader, you open an account with any broker and then buy or sell currency pairs according to your analysis. If so, then where are your orders executed?

You don’t have access to the giant Forex market as a retail trader. Instead, you only trade with your retail Forex broker. For example, suppose you place a buy or sell order. Your broker takes these orders. So when you are executing an order, who is standing opposite you? Your broker. Yes, you hear it right. Your broker is the counterpart of your orders. 

Your Forex broker creates such an environment that retail traders feel like they are trading in the real forex market. The MT4 or MT5 platform price is very similar to the real market. But the harsh reality is that you are not trading with other big boys such as large institutional investors and big banks (like Barclays, Citigroup, Deutsche Bank, HSBC, JP Morgan Chase, and UBS). Also, you are not trading with non-bank financial institutions, big hedge funds, multinational corporations, or prominent financial institutes. And they are not your counter-party. 

Instead, your broker is your sole counterpart. Your broker is taking the opposite side of your order. When you push the sell button, your broker is the buyer, and when you buy any currency, your broker is the seller.

Why don’t then retail traders can’t understand these facts? Because these retail brokers create a parallel market. But always remember that although they make a parallel market, it is separate. So when you are trading, you are just playing a game created by them. No real money is going outside of the broker. You are using only virtual cash. 

So, where does your deposit go? They use this deposit when they need to hedge. But remember, this hedging position is also made by them, not you.

Your trades never leave the broker’s platform. Therefore, you are not participating with other traders.

A Critical Question

Now one critical question is, “what if two traders trade with the same broker? Do they participate in trades with each other?”

The answer is no; both traders are trading against the broker. They are just playing with brokers’ virtual money.

Retail Forex Trader vs. Institutional Forex Trader

To participate in the real Forex market, you must become an institutional forex trader.

Thus retail Forex brokers act like market makers for retail traders. As the wholesale or institutional forex market is inaccessible to retail Forex traders, your brokers are making a similar market for you. 

Another exciting fact; your broker is your counter-party. So when you make money, your retail broker will lose money, and when you lose money, your broker will make money from you.

Blog Contributor: David Roads