Can someone explain to me the logic behind selling please?

[pradafang]

Hi guys, I have a very basic question about trading, I was wondering if someone can explain something to me…

I understand the basics of “buying”: when the prices are low, you buy, and then when they get high, you close the trade and you earn money. If the price goes lower and you close the trade, you don’t earn all your money back and hence you lose money. It’s pretty straightforward.

However, for example, in etoro there are two ways to start a trade: you can buy or you can sell. Now, I don’t understand the “sell” part… What’s the logic behind it? How can you “sell” something you haven’t actually bought in the first place? And how do you earn more by selling? When the numbers go… down? Or how does it work?

I just don’t understand how I can start a trade selling, say, gold when I actually don’t even have gold. What am I selling?

[loganperillo]

I can understand your confusion. For example if you buy EUR/USD you are buying EUR in exchange for USD. If you sell EUR/USD you are buying USD in exchange for EUR. You buy if you are in favor of EUR and sell if you are in favor of USD. If you are trading with GBP and do not have either currency the broker takes care of that for you. It will in theory buy the currency you need for the exchange first.

In your gold example it all works through brokers as well. You don’t actually need gold to sell it. If you sell gold at $1500.00 an ounce you are basically saying in the future I am going to sell this gold for $1500 an ounce. Then if gold reaches $1400 you can buy it and sell it at your previously negotiated price and earn $100 per ounce.

[Vaibhav_Sinha]

Check this video for more details The Logic Behind Emotional Selling (Brand New Money #3) - YouTube

[okon2much]

When you buy a currency pair, you buy the base currency and sell the quote currency. The exchange rate tells buyers how much of the quote currency they need to buy one of the base currency. The order in a pair always stays the same, being a common approach by the industry. USD/JPY, for example, is a pair (USD = base, JPY = the quote). The order within the pair, in the way you use the term, does not change. So you either BUY it or SELL it, depending on the direction of the trade. For example: USD/JPY – you either BUY JPY using USD or you Sell JPY to get USD. On the currency rate table on the easy-forex® website you can view the way in which each pair available for trade is ordered.
Here is an example: EUR/USD 1.2500 means you need 1.25USD to buy one euro. It also means if you sell one euro you get 1.25USD. All trades involve buying one currency and selling another currency at the same time. If in the next day the Euro is rising against the USD and the exchange rate is now 1.26, for every 1 Euro that you bought, you have earned 1USD cent. Or, if you traded the opposite direction, for every EUR that you sold (at 1.25) you lost 1USD cent (since you “buy” back the EUR for 1.26).

[Clint]

How can you “sell” something you haven’t actually bought in the first place?

Good question. But, you were given some bad answers.

I can understand your confusion. For example if you buy EUR/USD you are buying EUR in exchange for USD. If you sell EUR/USD you are buying USD in exchange for EUR.

This is not correct.

When you buy a currency pair, you buy the base currency and sell the quote currency.

Likewise, this is not correct.

Here’s a copy-and-paste from one of my previous posts —

From time to time, you will hear one trader try to explain to another trader that taking a position in the spot forex market is “like buying one currency in a pair, and selling the other.” Whenever you hear that, just ignore it. It’s totally wrong. There is no buying or selling of currencies at the retail level.

And here’s another post which addresses the [B]misconception[/B] of “buying” and “selling” in the retail forex market —

http://forums.babypips.com/newbie-island/442-buying-currency-currency-pair.html#post290187

[IyaJenkei]

[QUOTE=“Clint;488415”]

Good question. But, you were given some bad answers.

This is not correct.

Likewise, this is not correct.

Here’s a copy-and-paste from one of my previous posts —

From time to time, you will hear one trader try to explain to another trader that taking a position in the spot forex market is “like buying one currency in a pair, and selling the other.” Whenever you hear that, just ignore it. It’s totally wrong. There is no buying or selling of currencies at the retail level.

And here’s another post which addresses the misconception of “buying” and “selling” in the retail forex market —

http://forums.babypips.com/newbie-island/442-buying-currency-currency-pair.html#post290187[/QUOTE]

So Clint liquidity will never be a problem as long as you’re in the spot fx market?

[flam]

Where would the paper loss or gains come from? If that’s the case wouldn’t the broker’s objective to make you have paper loss?

[Clint]

So Clint liquidity will never be a problem as long as you’re in the spot fx market?

Liquidity is essential at every level of the forex market.

Most retail traders have one, and only one, source of “liquidity” — their retail broker. Retail traders take for granted that their broker will always be there, non-stop for 120 hours per week, offering reasonable BID and ASK prices for every currency pair. That is possible ONLY because there is a highly liquid wholesale market upstream from the retail broker, which the broker can instantaneously buy or sell into, in order to offset or hedge his side of your trade, and my trade, and every other retail trade on his books.

Without wholesale liquidity (meaning liquidity available at the interbank level), your broker would have to balance his book by operating like a bookie — or, more precisely, like a bucket-shop.

Where would the paper loss or gains come from? If that’s the case wouldn’t the broker’s objective to make you have paper loss?

“Paper gains or losses” simply means “unrealized gains or losses” — in other words, gains or losses in open trades. Those open gains and losses affect the [B]open equity[/B] in your account, but are not reflected in your account balance, because they have not yet been booked.

Regarding the question of your broker profiting from your losses (and therefore essentially trading against you), this post might shed some light — 301 Moved Permanently

[Allan4X]

<5,000,000 = No concern on the majors (why trade anything else anyway?)
<10,000,000 = perhaps a few pips of leakage, but nothing to be concerned about assuming you aren’t a scalper (you aren’t a scalper are you??)
>10,000,000 = potential leakage of 5 pips+ depending on time of day/liquidity (have to start thinking like a market maker!!!)

Good reality check there Clint, don’t see that too often, great addition Pal

[flam]

[QUOTE=“Clint;488424”]

Liquidity is essential at every level of the forex market.

Most retail traders have one, and only one, source of “liquidity” — their retail broker. Retail traders take for granted that their broker will always be there, non-stop for 120 hours per week, offering reasonable BID and ASK prices for every currency pair. That is possible ONLY because there is a highly liquid wholesale market upstream from the retail broker, which the broker can instantaneously buy or sell into, in order to offset or hedge his side of your trade, and my trade, and every other retail trade on his books.

Without wholesale liquidity (meaning liquidity available at the interbank level), your broker would have to balance his book by operating like a bookie — or, more precisely, like a bucket-shop.

“Paper gains or losses” simply means “unrealized gains or losses” — in other words, gains or losses in open trades. Those open gains and losses affect the open equity in your account, but are not reflected in your account balance, because they have not yet been booked.

Regarding the question of your broker profiting from your losses (and therefore essentially trading against you), this post might shed some light — http://forums.babypips.com/newbie-island/41437-maybe-naivequestion-im-newbie-after-all.html#post291216[/QUOTE]

Thanks for your clear explanation. The paper gains must come from an upstream source. But how do you know your broker is a market maker?

[loganperillo]

Good question. But, you were given some bad answers.

This is not correct.

Likewise, this is not correct.

Here’s a copy-and-paste from one of my previous posts —

From time to time, you will hear one trader try to explain to another trader that taking a position in the spot forex market is “like buying one currency in a pair, and selling the other.” Whenever you hear that, just ignore it. It’s totally wrong. There is no buying or selling of currencies at the retail level.

And here’s another post which addresses the [B]misconception[/B] of “buying” and “selling” in the retail forex market —

301 Moved Permanently

Clint, I read through the threads you posted and I’m still having a little trouble understanding. So you and the broker never actually exchange currency? It is done through a liquidity provider?

What does the liquidity provider do? Do they actually exchange currency? Because if there is no currency actually being trader at any level isn’t the whole system essentially operated the same as a bookie?

[Clint]

The paper gains must come from an upstream source.

No, “paper gains or losses” do not come from your broker’s upstream liquidity provider.

“Paper gains or losses” are simply the gains or losses in positions which have not been closed yet. The only difference between unrealized (paper) gains or losses on the one hand, and realized gains or losses on the other hand, is a matter of bookkeeping.

The banks (liquidity providers) upstream from your broker are not involved in any way in your gains or losses, whether unrealized or realized. All of your retail forex business is transacted with your retail broker, not with any bank. Consequently, your gains and losses affect only you and your broker, not the bank.

When you make a profit on a trade, your broker takes the loss (because he has the other side of your trade), UNLESS he has offset his side of your trade by trading upstream with one of his liquidity providers (banks). If he has offset his side of your trade, then he has eliminated his exposure to any profit or loss resulting from your trade. But, he has not removed himself as your counterparty; he will remain your counterparty until you close your trade.

When your broker deals with a bank (upstream) in order to offset his side of your trade, he is dealing on his own behalf, not on your behalf. Your broker’s dealings with you do not involve any bank. And his dealings with his banks do not involve you.

But how do you know your broker is a market maker?

Regarding market makers and other types of retail brokers, if your broker [B]is not[/B] a market maker, he will most probably make that fact very clear in his advertising, and on his website.

FXCM, for example, emphasizes that all their retail orders are handled using a straight-through-processing (STP) protocol. And their website offers educational material on the advantages of the STP model over the market maker model.

On the other hand, if your broker [B]is[/B] a market maker, he may be coy about volunteering that information. If in doubt, ask. A reputable broker who happens to be a market maker certainly will not lie about that fact, if asked.

[Clint]

So you and the broker never actually exchange currency?

That is correct. You (as a retail forex customer), and your broker (as your counterparty), enter into a 2-day forward contract, with a rolling settlement (expiration) date. This contract has a notional value, which we generally refer to as the position size, and this notional value varies over time as the price of the underlying currency pair fluctuates. The contract provides that the difference between the notional value at the time a position is opened, and the notional value at the time the position is closed, will be settled in cash, in the currency in which the retail account is denominated.

Example: You have a forex account with a U.S. broker, into which you have deposited U.S. dollars. You enter a trade in the AUD/JPY which turns out to be profitable. At the time your trade is closed, the profit in yen is converted to U.S. dollars, and posted to your account. That conversion is a mathematical calculation only. No currency is actually converted.

Also, you did not buy or sell any Australian dollars or Japanese yen as part of this trade. Your position was simply a speculation on the direction and extent of a price move in the AUD/JPY pair.

It is done through a liquidity provider?

To continue with the AUD/JPY example above, if you’re asking whether Australian dollars get exchanged for Japanese yen at your broker’s bank (liquidity provider), as a result of the AUD/JPY trade which you took, the answer is “maybe”.

Technically, no part of your trade (AUD/JPY in the example) is handled by a bank. As I replied to [I]flam,[/I] “Your broker’s dealings with you do not involve any bank. And his dealings with his bank do not involve you.”

However, your broker has the other side of your AUD/JPY trade. If you are LONG, then he is SHORT; and it might be necessary for him to offset his SHORT position, by trading upstream with one of his banks, in order to eliminate his exposure to either profit or loss resulting from your trade.

If he were to offset his side of your trade in this way, then he would BUY the AUD/JPY in a cash transaction at full notional value, through his line of credit with the bank, and this action would have some (miniscule) impact on the price of AUD/JPY in the worldwide currency market.

However, it’s entirely possible that your LONG AUD/JPY position offsets some other trader’s SHORT AUD/JPY position, so that your broker ends up “flat” as far as AUD/JPY exposure is concerned. In other words, your broker might not need to offset your trade upstream, in which case your trade would have absolutely no impact on the market.

What does the liquidity provider do? Do they actually exchange currency? Because if there is no currency actually being trader at any level isn’t the whole system essentially operated the same as a bookie?

“Liquidity providers” essentially are the biggest banks in the worldwide interbank network. They exist to provide currency transfer services and currency exchange services to governments, large multinational firms, large hedge funds, smaller banks, certain ultra-high-net-worth individuals, and certain other clients. These banks are organized into two competing trading “platforms”, Reuters and EBS, through which they offer real-time BID/ASK prices to one another, and through which they do high-speed, high-volume electronic trading with one another.

Large retail forex brokers are among the “certain other clients” referred to above. A typical retail broker “aggregates” the business of thousands of small (retail) traders into a large enough total volume to qualify for direct access to the big banks.

However, all the retail forex business in the world amounts to less than 3½% of the world’s total foreign exchange volume. So, in the larger scheme of things, it doesn’t matter much whether or not our little retail forex trades result in actual currency exchanges somewhere up the line. We are small speculators; and speculators do not have a commercial interest in the foreign exchange market.

The interbank network — that group of liquidity providers we’ve been talking about — doesn’t exist to enable our nickel-and-dime speculation in currencies. The interbank network exists to facilitate the business activities of the world’s largest commercial (and government) interests. And those entities move massive amounts of currency around the world every day, and their legitimate business activities require currency exchanges — one currency into another — in huge amounts, on a daily basis.

So, in answer to your question, a vast amount of currency is being “traded” daily at the top level of this market. But, not much of it can be attributed to our little 3½% of the pie.

Clearly, the overall currency market is not some gigantic gambling operation. But, it’s hard to demonstrate much of a difference between retail forex speculating on the one hand, and gambling on the other hand.

[loganperillo]

That is correct. You (as a retail forex customer), and your broker (as your counterparty), enter into a 2-day forward contract, with a rolling settlement (expiration) date. This contract has a notional value, which we generally refer to as the position size, and this notional value varies over time as the price of the underlying currency pair fluctuates. The contract provides that the difference between the notional value at the time a position is opened, and the notional value at the time the position is closed, will be settled in cash, in the currency in which the retail account is denominated.

Example: You have a forex account with a U.S. broker, into which you have deposited U.S. dollars. You enter a trade in the AUD/JPY which turns out to be profitable. At the time your trade is closed, the profit in yen is converted to U.S. dollars, and posted to your account. That conversion is a mathematical calculation only. No currency is actually converted.

Also, you did not buy or sell any Australian dollars or Japanese yen as part of this trade. Your position was simply a speculation on the direction and extent of a price move in the AUD/JPY pair.

To continue with the AUD/JPY example above, if you’re asking whether Australian dollars get exchanged for Japanese yen at your broker’s bank (liquidity provider), as a result of the AUD/JPY trade which you took, the answer is “maybe”.

Technically, no part of your trade (AUD/JPY in the example) is handled by a bank. As I replied to [I]flam,[/I] “Your broker’s dealings with you do not involve any bank. And his dealings with his bank do not involve you.”

However, your broker has the other side of your AUD/JPY trade. If you are LONG, then he is SHORT; and it might be necessary for him to offset his SHORT position, by trading upstream with one of his banks, in order to eliminate his exposure to either profit or loss resulting from your trade.

If he were to offset his side of your trade in this way, then he would BUY the AUD/JPY in a cash transaction at full notional value, through his line of credit with the bank, and this action would have some (miniscule) impact on the price of AUD/JPY in the worldwide currency market.

However, it’s entirely possible that your LONG AUD/JPY position offsets some other trader’s SHORT AUD/JPY position, so that your broker ends up “flat” as far as AUD/JPY exposure is concerned. In other words, your broker might not need to offset your trade upstream, in which case your trade would have absolutely no impact on the market.

“Liquidity providers” essentially are the biggest banks in the worldwide interbank network. They exist to provide currency transfer services and currency exchange services to governments, large multinational firms, large hedge funds, smaller banks, certain ultra-high-net-worth individuals, and certain other clients. These banks are organized into two competing trading “platforms”, Reuters and EBS, through which they offer real-time BID/ASK prices to one another, and through which they do high-speed, high-volume electronic trading with one another.

Large retail forex brokers are among the “certain other clients” referred to above. A typical retail broker “aggregates” the business of thousands of small (retail) traders into a large enough total volume to qualify for direct access to the big banks.

However, all the retail forex business in the world amounts to less than 3½% of the world’s total foreign exchange volume. So, in the larger scheme of things, it doesn’t matter much whether or not our little retail forex trades result in actual currency exchanges somewhere up the line. We are small speculators; and speculators do not have a commercial interest in the foreign exchange market.

The interbank network — that group of liquidity providers we’ve been talking about — doesn’t exist to enable our nickel-and-dime speculation in currencies. The interbank network exists to facilitate the business activities of the world’s largest commercial (and government) interests. And those entities move massive amounts of currency around the world every day, and their legitimate business activities require currency exchanges — one currency into another — in huge amounts, on a daily basis.

So, in answer to your question, a vast amount of currency is being “traded” daily at the top level of this market. But, not much of it can be attributed to our little 3½% of the pie.

Clearly, the overall currency market is not some gigantic gambling operation. But, it’s hard to demonstrate much of a difference between retail forex speculating on the one hand, and gambling on the other hand.

Thanks for the reply. I understand it a lot better now. So basically what you are saying is that retail traders have little effect on the exchange rates?

But the brokers can bet against you in which they are basically like a casino?

[bobmaninc]

There is a simple way to look at it. If you sell in order for you to get out of that trade you must buy it. So if you sell anything for more than you buy it then you make profit. If you sell something for less the you bought it for you take a loss on the difference.

To put it simple lets take currency pairs off the table and make it easy. Lets say I am going to sell you a new car for 12000 but I dont actually have a new car. However you agree to pay 12000 but this car. I now go down to my buddies car lot and pick up a new car for 8000 and you paid 12000. That leaves me with 4000 in profit.

[flam]

This detailed explanation really clears the air entirely or rather it blew my mind.

So assuming oanda(my broker) is a real market maker, it will aggregate my trade along with all the others and earn from the spread?

But when the market “reacts” to a news you are saying it’s all(96.5%) the actions of the banks?

[Clint]

So basically what you are saying is that retail traders have little effect on the exchange rates?

Basically, that is correct.

Some time ago, someone on this forum asked whether all the retail forex traders in the world would move the market, if they all happened to take the same position in the same pair at the same time. It’s interesting to think about, but it’s so hypothetical that it can’t be answered.

Nevertheless, 3½% is still just three-and-a-half percent. And that’s all we are.

We’re not David facing Goliath. We’re more like a mouse facing Goliath.

But the brokers can bet against you in which they are basically like a casino?

A broker can bet against you, if that’s his business model.

A true STP broker (as FXCM claims to be) does not operate a dealing desk in which they pick and choose which customer positions to trade against; rather, they aggragate all open customer positions, and offset the aggregate with their liquidity provider(s).

This aggregation is a massive data-processing chore, which must be done continuously in real time, and consequently is done by computer algorithms. The main objective of aggregation is to determine the broker’s net exposure to each foreign currency (versus the broker’s native currency), and to eliminate that exposure, by offsetting (hedging) it upstream.

If a market maker broker chooses not to offset certain customer positions, it’s because he believes that those customer positions will be losers, and he sees no reason to offset the profit which will flow to him, if and when those customers realize their losses.

There is nothing inherently evil about this decision on the part of the broker. He has as much of a right to speculate in the currency market, as you do. If you freely choose to enter a position which the broker thinks is stupid, then it’s perfectly legitimate for him to profit from your loss — so long as he doesn’t cheat you in any way.

Are there ways that a dishonest broker can cheat you? Of course. But, “market maker” does not mean “dishonest broker”.

On the other hand, it can be argued that a market maker has more opportunities to cheat you (if he chooses to be dishonest) than an STP broker or an ECN broker has.

You have used the word [I]casino[/I] a couple of times in this thread.

At the retail level, the forex market is purely a small speculators’ market, and in that respect it very much resembles a casino. The question “is retail forex gambling” is endlessly debated on this forum, and others. And the battle-lines are always drawn between two factions: (1) those who object to gambling on religious or emotional grounds, who nevertheless want to trade forex, and therefore say that retail forex is NOT gambling; and (2) those who don’t have a religious or emotional bias against gambling, who say that retail forex looks like gambling, feels like gambling, and pays off like gambling — and therefore it’s gambling.

If you have issues with gambling in general, or with casinos in particular, you shoud study and resolve the question “is retail forex gambling”, based on your own set of values. Trading is hard enough, without carrying around some vague sense of guilt in the back of your mind.

So assuming oanda(my broker) is a real market maker, it will aggregate my trade along with all the others and earn from the spread?

Oanda is a market maker. They say so right on their website.

A market maker may, or may not, include all customer positions in their aggregation (as I described to [I]loganperillo[/I] in my reply, above). An STP broker, or an ECN broker, on the other hand, will aggregate everything.

Spreads (which you also referred to) are charged by all types of brokers. Brokers transact business with their banks based on the wholesale BID/ASK prices offered to them by the banks. The difference between the wholesale ASK price and the wholesale BID price is the wholesale spread, and (at a minimum) all brokers pass those wholesale spreads on to their retail customers. Most brokers add a retail mark-up to those wholesale spreads (say, 1 pip on each side), and those marked-up spreads are the ones we pay. The broker’s profit is the mark-up (not the entire spread).

But when the market “reacts” to a news you are saying it’s all(96.5%) the actions of the banks?

No. When the market reacts to news, more than likely 96½% of the spike in supply or demand comes from players other than the retail forex sector. But, that doesn’t mean that all the action is banks trading with each other. On the contrary, banks’ proprietary trading desks — like the retail forex sector — represent a small percentage of a very huge market.

When the market reacts to news, the major drivers are large speculators; and the minor drivers are bank proprietary traders (acting as speculators), and small retail speculators.

Essentially absent from the action are the multinational corporations who actually have commercial interests in the currency market. Almost without exception, they don’t speculate in the currency market. Instead, they use the currency market (1) to hedge against currency risk associated with their international operations, and (2) to convert funds either for deployment elsewhere in the world, or for repatriation to their home countries.

For a multinational corporation to try to scalp 100 pips out of the market’s reaction to an NFP report would be tantamount to gambling with the company’s money. Once again, there’s that issue of “speculating = gambling”.

[loganperillo]

Basically, that is correct.

Some time ago, someone on this forum asked whether all the retail forex traders in the world would move the market, if they all happened to take the same position in the same pair at the same time. It’s interesting to think about, but it’s so hypothetical that it can’t be answered.

Nevertheless, 3½% is still just three-and-a-half percent. And that’s all we are.

We’re not David facing Goliath. We’re more like a mouse facing Goliath.

A broker can bet against you, if that’s his business model.

A true STP broker (as FXCM claims to be) does not operate a dealing desk in which they pick and choose which customer positions to trade against; rather, they aggragate all open customer positions, and offset the aggregate with their liquidity provider(s).

This aggregation is a massive data-processing chore, which must be done continuously in real time, and consequently is done by computer algorithms. The main objective of aggregation is to determine the broker’s net exposure to each foreign currency (versus the broker’s native currency), and to eliminate that exposure, by offsetting (hedging) it upstream.

If a market maker broker chooses not to offset certain customer positions, it’s because he believes that those customer positions will be losers, and he sees no reason to offset the profit which will flow to him, if and when those customers realize their losses.

There is nothing inherently evil about this decision on the part of the broker. He has as much of a right to speculate in the currency market, as you do. If you freely choose to enter a position which the broker thinks is stupid, then it’s perfectly legitimate for him to profit from your loss — so long as he doesn’t cheat you in any way.

Are there ways that a dishonest broker can cheat you? Of course. But, “market maker” does not mean “dishonest broker”.

On the other hand, it can be argued that a market maker has more opportunities to cheat you (if he chooses to be dishonest) than an STP broker or an ECN broker has.

You have used the word [I]casino[/I] a couple of times in this thread.

At the retail level, the forex market is purely a small speculators’ market, and in that respect it very much resembles a casino. The question “is retail forex gambling” is endlessly debated on this forum, and others. And the battle-lines are always drawn between two factions: (1) those who object to gambling on religious or emotional grounds, who nevertheless want to trade forex, and therefore say that retail forex is NOT gambling; and (2) those who don’t have a religious or emotional bias against gambling, who say that retail forex looks like gambling, feels like gambling, and pays off like gambling — and therefore it’s gambling.

If you have issues with gambling in general, or with casinos in particular, you shoud study and resolve the question “is retail forex gambling”, based on your own set of values. Trading is hard enough, without carrying around some vague sense of guilt in the back of your mind.

Oanda is a market maker. They say so right on their website.

A market maker may, or may not, include all customer positions in their aggregation (as I described to [I]loganperillo[/I] in my reply, above). An STP broker, or an ECN broker, on the other hand, will aggregate everything.

Spreads (which you also referred to) are charged by all types of brokers. Brokers transact business with their banks based on the wholesale BID/ASK prices offered to them by the banks. The difference between the wholesale ASK price and the wholesale BID price is the wholesale spread, and (at a minimum) all brokers pass those wholesale spreads on to their retail customers. Most brokers add a retail mark-up to those wholesale spreads (say, 1 pip on each side), and those marked-up spreads are the ones we pay. The broker’s profit is the mark-up (not the entire spread).

No. When the market reacts to news, more than likely 96½% of the spike in supply or demand comes from players other than the retail forex sector. But, that doesn’t mean that all the action is banks trading with each other. On the contrary, banks’ proprietary trading desks — like the retail forex sector — represent a small percentage of a very huge market.

When the market reacts to news, the major drivers are large speculators; and the minor drivers are bank proprietary traders (acting as speculators), and small retail speculators.

Essentially absent from the action are the multinational corporations who actually have commercial interests in the currency market. Almost without exception, they don’t speculate in the currency market. Instead, they use the currency market (1) to hedge against currency risk associated with their international operations, and (2) to convert funds either for deployment elsewhere in the world, or for repatriation to their home countries.

For a multinational corporation to try to scalp 100 pips out of the market’s reaction to an NFP report would be tantamount to gambling with the company’s money. Once again, there’s that issue of “speculating = gambling”.

Thanks again Clint. And I don’t have any bias against gambling I’m just curious as to how it works.

[shanza]

This detailed explanation really clears the air entirely or rather it blew my mind.

So assuming oanda(my broker) is a real market maker, it will aggregate my trade along with all the others and earn from the spread?

But when the market “reacts” to a news you are saying it’s all(96.5%) the actions of the banks?

As far as I know the market makers win when we lose. So their try is to chase our stop losses and make money for themselves. I might be wrong but that is what I know.

[Trasimaco]

Don’t think about BUY and SELL.

Think about going LONG or SHORT.

When you have money in your account you can basically convert it into anything you like for the matter of trading. Your broker will do that automatically for you. You just bid about it to go LONG (buy) or to go SHORT (sell) and earn or lose money.