How Is Profit Made In Forex? Does Another Person’s Loss Become My Profit And Vice Versa?

The Forex market is a zero sum market. You don’t have winners and losers in the traditional sense, and you aren’t trading against one individual who will make or lose in opposition to you. That being said, if you have profited from a trade then someone would have lost, but not necessarily to you.

Imagine you are trading the EUR USD forex pair. For whatever you reason you decide that the charts are looking bullish and you go ahead and buy on that pair. What you are doing, is purchasing Euros and simultaneously selling USD. So someone would have purchased those USD from you and someone would have sold Euros to you. With me so far?

To keep it simple I will use easy to use numbers, these in no way reflect true exchange rates of the currencies. Imagine you purchased EUR 1’000, and it cost you USD 1’200

Now some time goes by, and your were right. The Euro is now strengthening against the USD and you are ready for some profit. So you close that trade. When you close that trade, you are now selling the Euros that you previously bought, and you are buying them with USD. Basically the opposite of what you did to open the trade.

So, you had EUR 1’000 that you now want to get rid off. You sell them, but you now get 1’300 USD in return because the Euro increased in value. If you remember, the original cost of those EUR 1’000 was only USD 1’200. So you have made a profit of USD 100 off that trade.

So that’s where profit comes from. But now where are the losers that allowed me to make that $100 profit?

During the time that you held that trade, something happened that strengthened the Euro or weakened the Dollar. Thousands to millions of trades would have occurred. Anywhere from people trading forex for profit like you and me, right through to massive multi national conglomerates shipping goods between countries. News events happen, which may cause investors to pump money into a country or start pulling money out. On a busy day in the market, over 12 Trillion USD gets traded a day. An average day is over 4 Trillion. Things happen in the Forex market, and with staggeringly high numbers.

The largest stock echanges in the world, all put together, average approximately 300 Billion USD per day.

Between the open and close of your trade so many things have happened even on a 5 minute trade to adjust the pricing. People have made and lost millions, giant companies like Walmart could have placed orders to foreign countries for tens of millions of dollars of goods to be brought down. And somewhere along the line, amongst all of those billions of Dollars being traded, your $100 profit came from. And not from one place, but from all of it.

So yes, your $100 profit would mean a $100 loss in the greater scheme of things. But its not like a single person sitting behind his computer like you or me had to lose that $100 for you to make your money.