Why 90% of traders fail.... an alternative outlook

Beginner Questions
21

There’s no “may” to it. I’ve got a mathematical proof in my PhD thesis. It’s a fundamental fact of the contract structure of retail forex. For every long their is a matching short somewhere in the system. That means one side’s gain is the other side’s loss. Factor in the exchange rate and interest carry bid/ask spreads and you end up with only one group of participants in aggregate with a positive long-run expected return - the market makers/brokers.

If the collective of the world’s individual account holders were profitable at some point, then those gains would come as a loss to the liquidity providers - read the big banks. Those banks may be hedging themselves in the interbank market (though probably not much of the time given the negative expected long-run returns of the retail community), but that’s outside the retail forex structure.

It’s basically the same idea as a market maker in equity index futures hedging themselves in the ETF market. That doesn’t change the fundamental zero sum nature of the futures market. It merely serves to link the futures and cash markets more closely (retail forex doesn’t have nearly the same level of effect on interbank exchange rates).

22

Ok bro, first you talk of those who fail. Guess what you’re talk about the likes off me. Second, you directed us to your site.

So I know first hand that failure isn’t due to lack of fundamental or technical knowledge. In fact guys like yourself contribute to the problem. You promote your beliefs and methodology through development and marketing of your sites, yet at the same time know that the information you provide is useless to those seeking it…

But you know what, you fall, you get back up, dust yourself of and try again. You learn a little, then seek more knowledge, raise a little capital and try again. You actively participate in forums like BP’s. Then you learn who to listern to and why. My experience is that you certainly don’t hold the answers. If you did you would be more active in the community.

Why do people fail, because they lie to themselves and believe the crap that’s feed to them.

Trust me, your message has no place on a tick chart.

23

Well I guess every is entitled to an opinion… I don’t particularly agree, but each to their own. Perhaps we can get together on here in 6 months and compare verified results to see who is right…

I would say lets do it now, BUT im literally only 3 months into building myself a myfxbook track record (though i have plenty of longer term client owned account ive been trading). I did try and find some myfxbook results for you to see if there is any substance to your preaching, but i’m struggling to find them, but alas i’m sure i just havent looked hard enough, and im sure that somewhere out there you also have a reputation that has been built over many years, with one of the largest educational providers in the world… so perhaps we should continue this in a few months and let the money/results do the talking… actions speaker louder than words so im happy to put myself out there. :wink:

24

Im not your “Bro” - how old are you, 18?

25

My god your right. I’m not your bro. But you still have nothing of market value to offer.

But we do have common ground. We both look for PA not matching the fundamental rule of supply n demand on our chosen chart. Our difference well I’m not trying to sell myself so I’ll happily share my experience here at BP’s.

26

My point exactly. The retail traders could be net winners. And the liquidity providers and market makers could also win with them leaving the hedgers as the losers. And the hedgers would actually be net flat because while losing on their hedges they won on their balance sheet exposure to changes in exchange rates. So who lost? Some guy who bought a Toyota in Canada and some lady who gassed up her car.

-Adrian

27

OK, let’s break this down.

First of all, in order for all individual account holders (what you’re calling retail traders) to be winners all of them would have to be trading in the same direction. If even one person trades the other direction then someone is losing.

So basically, it’s impossible for every individual account holder to be a winner all at the same time.

To the extent that you have individual account holders (IAH) taking matched opposing positions you have them in a tug-o-war between themselves as each side’s gain is the other’s loss. Things are rarely in perfect balance like that, though, which means there’s some fraction of IAH positions not offset by other IAH positions. The remainder are offset by the liquidity providers (broadly speaking). This means we have IAH trading against their fellow IAH on the one hand, and IAH trading against liquidity providers on the other.

Drilling down on the latter, the liquidity providers will accept a certain degree of exposure to IAH positions based on their risk management policies. Anything above that will see them look to hedge away, which basically means unwanted exposure aggregates up to the big inter-bank dealers at the top of the food chain. They, of course, will have their own risk management procedures to tell them how much of that exposure they will accept and what they need to offset. That bit at the end is what you’re talking about with what you say about the losses being passed on to the hedgers.

The willingness of brokers, market makers, and liquidity providers to accept some degree of exposure to IAH positions does two things. First, with respect to this discussion, it means there can never be a full offset outside the retail forex market for the net IAH exposure. In other words, the liquidity providers, et al will never have a matching gain from the hedger in the inter-bank market because they won’t actually look to offset that full amount. Second, this serves to severely limit the impact of retail forex trading on inter-bank exchange rate movements.

But we do have [I]some[/I] liquidity provider exposure offsetting in the inter-bank market. With respect to that, your observation about the hedgers is a valid one. I do not make the claim that forex overall is zero sum because any market which involves the actual exchange of assets - as opposed to contracts for a future exchange - is not functionally zero sum.

Retail forex, though, is not an asset market. It’s a obligation market with marking-to-market, making it a zero sum portion of the broader forex market. The same is true of forex futures. Just because my gains come at the expense of trading profits Citi makes outside retail forex doesn’t change that any more than my gains coming at the expense of your poker winnings would.

28

The only reason the IAHs don’t all win at the same time is because they trade differently. But there was absolutely nothing stopping every IAH from shorting EUR/USD last July. Every last IAH could have held that short to this day and no market maker could have prevented it. And a global IAH EUR/USD short would not suddenly prevent the downward move that has occurred even when the market makers moved to net flat with offsetting positions in the interbank market. No rule or structural feature would have prevented it. It is not impossible for all IAHs to profit at the same time in the same trade. it is not required that an IAH take the opposite side of an IAH trade, (this is why they have retail sentiment indexes that are net short or net long).

The answer to the question about whether retail fx is zero-sum depends on the extent of it which one will arbitrarily define as the game. Is the market maker part of the game? Is the whole interbank market also part of the game? Is Toyota’s balance sheet part of the game?

-Adrian