How Forex Brokers Manage Risk.

Let’s continue our discussion on how forex brokers manage risk.

It’s important to know how your broker manages the risk on the other side of your trade.

There are three ways for the broker to manage market risk:

1. They can offset opposing trades from their customers.
2. It can transfer or “offload” the risk to another market participant.
3. The broker can accept or “warehouse” the risk.

HOW a forex broker manages market risk determines what type of broker it is and how it operates as a business. 

Understanding the concept of your broker “taking a risk” on your order is critical to your success as a trader.

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 associated with your order.

So if you can understand how your broker manages its risk when it takes the opposite of your trade, you’ll know what type of broker you’re actually dealing with and if there are any potential conflicts of interest.

Let’s now go into further detail on the different ways that brokers manage their risk and make money.

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