Many traders often ask: “Where does my profit come from in case of a successful transaction?” Usually the operations of all dealing centers are conducted as follows: the broker “takes” minor positions, i.e. serves as the second party to the transaction. As for the large positions – he moves them to a bigger contractor. Thus, the gain of the client is paid from the loss of other customers, or from his own pocket. By the way, this is the exact reason why a reliable broker must have his own funds. Large positions are typically an amount of $1 million and more, and they are shifted to larger parties (banks, for example).
Such a transfer of risk is called the overlap of the net position. Often, small start-up companies do not carry out the overlap, and there is a risk that customers will be left with nothing in case of a large profit. Therefore, it is important to gently find out how the risk management procedure is organized in the company and where the dealing desk closes the net position.
Of course, no one will tell you all the details – it is a professional secret. However, you might find out something for sure. If your broker refuses to discuss this subject, it should turn on some red lights; maybe you shouldn’t work with this broker. Always Look Before You Leap into a commercial partnership.
You should not expect to live on an income from securities trading, unless you are an experienced trader and you have $100,000. It is important to have The Right Mind-Set for Trading the Forex.