How does trading work?

Trading financial markets is structured in a way that allows people and financial institutions to trade globally at the same time from anywhere in the world that has internet

The internet has connected and streamlined many things we do on a day to day basis and trading is one of those things.  

Liquidity Provider

There’s a few layers that your trade goes through which allows the market to function on a global and liquid level. There’s liquidity providers, who provide the broker with a data feed and access to the market itself, along with the ability to place orders to the market.  

The Broker

Then there’s the brokers, who use the liquidity providers to allow market access, while the broker manages it’s portfolio of traders. They may choose to hedge your trades, or take them on themselves and they profit if you lose. They can adjust the spreads (which is the brokerage commission you pay, the wider the more costly) and may have the ability to fluctuate prices to ‘stop hunt’, effectively pushing you out of your trade so you lose and they win.  

Investors

Next there’s the investors, these are individuals, companies, trusts and funds looking to profit from market speculation and investment. These parties use a broker to access the market and place their orders through the broker, generally by use of a platform.  

Platforms

A platform is software that allows trades to be places electronically with the broker. This is often a program such as MetaTrader but can also be browser based. Platforms are used on computers, laptops and mobile devices. There are two forms of platform when it comes to MetaTrader depending on the device you use. For computer and laptop devices, you use a program that you install and it has many features and customisable options. For mobile devices and tablets, you use an app (application) from the app store which is basic functionality and limited features. The benefit of the mobile device is that you can monitor positions on the go and make changes to your trades while out and about. The majority of your work as a trader should really be based on a computer or laptop.  

Where does the money go?

As the market moves up and down, millions of dollars change hands or accrue in trades. Every slight movement affects businesses and countries financially and investors play a part in creating that movement, and also adding depth to the market so that it is more liquid and easier to enter and exit positions then and there. Think of this like trying to sell a toy car, versus selling a stock to the market. One takes research and effort to find a buyer, whereas the stock market has many buyers and sellers ready to enter the market at any point in time.  

If you lose a trade, there are more orders the other direction pushing the trade the other way, meaning whoever is on the other side of the trade (which is generally thousands of other traders) will be making money. Your trade doesn’t always get to the market and can be taken on by a market maker (broker) that takes on the trades and is effectively being the market in a hope that you lose the trade.  

Is it rigged?

That’s not to say that no one makes money trading and that its completely rigged, its just a play on averages. Just like a casino plays every single hand, some people lose some people win. Just like there’s many university dropouts, and if there was a service that benefited from the average dropout rate that would be like being a broker. That’s not to say there’s no one successful out there that completed a degree. With trading, it’s just that there’s more people and money out there trading poorly, compared with people that take trading seriously and put in the hard yards to become top performers giving brokers the ability to take on the herd and be profitable.  

To summarise, as an investor or trader, you place an order on a platform, which goes through the broker, through the liquidity provider and into the market.