Interesting article thank you for posting. But I wouldn’t pay too much attention to it when it comes to how you trade. The key thing is to see how price is moving
I don’t understand and don’t agree with the view of most comments. They all assume, that forex market is an isolated island, which it is not.
Forex market is well connected with stock, futures and commodity markets, to name just a few. And as other markets grow, so does forex market. Profits and losses, investments and prices of which one of them affect the others and there is tremendous cash flow between these markets. Also experienced traders trade commodities, stocks, indexes, futures and commodities simultaneously and we all know, that markets are growing.
If you look at the big picture, forex cannot be zero sum game. It is highly dependent on growth of the world economy as any other market.
traders take the risk that multinationals are willing to pass on for a premium.
Well said in this staement,it doesnt matter about profit & loss in trading.But mostly traders main target is to earn more n more profit.But eventually their is no affects in market.If FOREX is a zero or negative sum game,then no one jumps in market to play it.
Rightly said and if you are good in picking up profitable trades, then trading can bring a great change in your life. Whether its a zero sum game or not, if you have a good strategy, you can earn regular income.
I would like you to answer the following questions:
Please explain this in simple terms, I am curious to know.
If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?
1.1) Will it be the broker or another retail trader?
1.2) If it is another retail trader, will the broker match us together?
1.3) If there is no retail trader that wants to SELL EURUSD at the same time with me that wants to BUY EURUSD? What will happen?
If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
2.1) If the other retail trader or broker waits and EURUSD price falls and their order gets into profit and closes their trade with a profit, who has suffers the loss?
We both can profit in the above situation but who is on the losing side?
Anyway, I’ve emailed these questions to 2 of my forex account manager, look forward to their reply…
[B]Your retail forex broker sells to you.[/B]
Your retail forex broker takes the other side of your trade. Your retail broker becomes the [I]counterparty[/I] to your trade, and remains the counterparty to your trade, [I]for the duration of your trade.[/I]
What your retail broker does to protect himself from exposure to your trade is another matter, and does not have anything to do with your trade.
[B]Your retail forex broker has suffered the loss.[/B]
Your broker has likely offset (or hedged) his exposure to your trade, so that the loss he takes on your trade is exactly balanced by a profit he makes trading upstream with his liquidity provider.
If you trade with FXCM (for example) and FXCM deals with CitiGroup as their liquidity provider (for example), then in the case of your winning trade,[I] FXCM suffers a loss[/I] on their side of your trade, but earns a profit in the form of the spread.
[I]And FXCM earns a profit[/I] (equal to the loss you inflicted on them) on their upstream trade with CitiGroup, but they pay a spread on their transaction with CitiGroup, which is a cost to FXCM.
However, the spread that FXCM collects from you is larger than the spread which they pay to CitiGroup, the difference being FXCM’s net profit on your trade.
It may appear that CitiGroup ultimately takes the loss in this scenario. But, banks are not in the business of losing money, so it’s safe to assume that CitiGroup passes their loss on to someone else.
You will never know who that ultimate loser is.
FXCM’s liquidity providers particularly like the order flow they receive from our clients, because retail traders (generally speaking) tend to trade against the trend (buying lows and selling highs). By contrast, many of the hedge funds that offset trades with these same liquidity providers tend to trade with trend (selling lows and buying highs).
This difference in the tendencies between retail and institutional traders means banks like to have variety in order flow to have more opportunities to offset their own risk.
in stocks it goes as this:
citigroup holds shares of the underlaying security (in case of stocks) they bound a leveraged product to it, no matter what position the retail trader is holding for citygroup it is a 0 sum game as when the leveraged product gains on a short city group is headging against it. if a retail trader gains on a long city doesnt even need to hedge as the stocks they are holding which are the backup of the leveraged product increase in their value and thereby offsets the loss taken on the leveraged product of this stock. in stocks it is a participation game and not a win/loose game.
options: city creates 200.000 call options on Tesla, in same time creates 200.000 put options on Tesla.
By regulatory law they have to hold tesla stocks to be able to do so, OR they have to buy-options from other stock providers on tesla stocks. if they “sell” their options good all 400.000 get sold and beeing held frequently in hands of traders so all losses/winns are being offset. citygroup earns on 3 points:
- spread on the options directly
- the cap/strike that is beeing changed on a daily basis due to interest rate that you have to pay on the option (high interest rate) (in forex terms that would be called ROLL)
- (optional depending if you buy the option directly from city or an external broker) provisions/comissions for selling
usual annual gain: 8-12% for city group only on the high interest rates
For forex its like this:
who earns money:$$$____$
(Winner)retail trader <- fxcm <- [B]city[/B] <- fxcm <- retail trader (loser)
so through fxcm and city one retailtrader wins against another retail trader who was on the other side.
that is on the big picture through pools created. in real no retail trader is given the chance to take the direct opposite position of another trader. the transaction risk is at citygroup but that is offsetted by balance of loosing and winning traders. as we know most retail traders are loosing and only few win it creates balance again as: for every sucessfull trader you need in average 10 loosing traders every year.
1 winning trader making 100.000 a year
equivalent: 10 loosing traders who deposit 10.000 each and get broke and stop trading forever
next year you need 10 more loosers
bucket broker are a different story again.
everyone can argue about that banks and big companies take losses but in fact they dont as forthem it is another game. securing itself from currency fluctuations of a country they are doing business with.
for example: city buys 2000 flats in europe on a KGV of 12 years (yearly profit of each flat= 8,33%), for them the rent is important and not the specualtion that a year later (due to euro getting worth more) they can sell those buildings for 5% more. so in the same amount they go long against $. if dollar looses value it will be offset by the euro rent (they now can convert into 5% more dollars) they are receiving from those 2000 flats. if dollar goes up 5% they will recieve a smaller dollar equivalent of their rents paid in euroe, but that will be offset by the profit of the long position on dollar.
so in this game only retailtrader are going against retail trader and bucket broker.
in the end both is a game of person versus person, winer against looser. just with the difference that in stocks you have a big bonus which is underlaying security that usually pays divident (creates value) of 3-4% every year, from this surplus most of the winning parts are beeing payed out and you dont necesarrily have to have a 1 looser for each winner.
In forex you have no underlaying security that creates any value, so for every winner you must find a looser.
So… the job of forex brokers is not the trading, their job is to constantly get new “loosers” into the game-field in order to keep the game running, the commissions and spreads paid (or in other words: bring 10 sheeps to 1 wolf every year)
it simply is a zero sum game, and the day a global currency (in 100 year or 200 or 300 doesnt matter) is beeing introduced this big Ponzi scheme that is going on since 40 years, called forex for retail traders, will dissapear.
While I can’t speak for other forex brokers, what you’ve described is not the case with FXCM’s No Dealing Desk (NDD) forex execution. On our NDD model, we immediately offset each client order one-for-one with the best prices from competing liquidity providers.
It’s these liquidity providers that take the market risk on the other side of our clients’ trades, not FXCM, and not other clients.
In the same way you can earn dividends on stock, you can earn interest on the currencies you hold. This appears as rollover interest (AKA swap) on your trading platform.
Each currency has an interest rate. If you are long the currency, you earn that interest. If you are short the currency, you pay that interest. (Stock dividends work the same way, though fewer people short stock.)
As an example, if I’m long 100k USD/CHF, I can earn $2.40 in rollover interest every day for holding my trade open. That’s because the interest I earn on the USD I’m long is more than the interest I pay on the CHF I’m short.
Currencies have value. That’s why any stock you trade is priced in currency.
Your forum profile says you live in Germany. I’m guessing you accept payment from your employer (or your customers, if you’re self-employed) in Euros. You probably take some of those Euros to the store to buy goods and services from others, because everyone sees the value in currency.
Currency not only has value, but it can also create value by earning interest.
please note that I was not reffering to FXCM directly, i only used it as example as it ewas mentioned before in a post. Aswell i did not reffer to FXCM as bucket shop broker, that comment was in general about brokers that are truly bucket shops.
I unserstand your point but it seems to me you did not uinderstand what i was trying to explain. i put that on my bad englisch skills. I was not reffering that FXCM is not wiring trades to their liquidity providers. What i was reffering to is that through FXCM wiring of trades to liquidity providers like city bank, the risk is given to city bank and not held within FXCM. A long position is wired throughn FXCM to citygroup, a short position is wired through FXCM to citygroup. Trying to explain that city group is not taking any risk aswell as it is getting long and short positions wired by their partner brokers and therefore hedging against any position automatically.
That means through 2 “hands” a retail broker is “betting” against another retail broker. But in fact those 2 retail brokers iwll never bet against each other directly. in stocks it i different, in order to be able to go “short” you have to have another trader on the other side who is willing to go “long” against you in the same time simultaniously.
With forex it is not like that, you dont need another trader immediately who goes against your position, instead the liquidity provder takes your opposite position and even if the liquidity provider looses, he gains in the same time (or a week later, it does not matter) in another trade with another trader his losses back. therefore: trader against trader through 2 hands which take commissions and spreads.
I could thou go into details and mention other things of FXCM that are not nice.
Like that the NDD is valid only for bigger accounts and bigger transactions. Minitrades and minitraders are not beeing wired to the liquidity providers but are beeing dealth with a dealing desk of FXCM. I remember reading that 4 years ago when i created a FXCM account, im not sure though if you guys changed that.
Another thing that upsets many professional traders with FXCM is your maximum contract size. 3 Years ago i was very annoyed that i was not able to aquire more contracts then 5000 on DAX of FXCM (500€/Pip-Point) then your support told me i have to buy them in pieces of max 5000 each trade. I dont quite understand (and a lot of friends who have had the same problem with smaller brokers) how a big broker like you is caping the maximum trade size to 5000 contracts. I mean, isnt it your target to earn on spreads and commisions? then why is there such a small maximum contract ammount in place? why not 500.000.000 like its pretty much normal with stock brokers?
So i dont quite understand why FXCM limits me to take trades only up to €50.000.000 i mean isnt it your target to have as much volume as possible and through that earn as much commission and spreads as possible?
On other brokers i am allowed to trade 500.000.000 (50.000 contracts at each trade) without even having to sign a seperate contract.
I know that. usually in average around 0,25% a year. of courase you can leverage it and get much more, but then the leverage aswell hits you when the trade you are hold is going against you. so it doesnt pay off, any bank account gives you more interest rate.
I know that aswell since the age of 3, that was not what i was reffering to or i was trying to explain, as i said, i put it on my poor englisch skills.
now let me be bit sarcastic here (and by that sarasm im pulling out some economical rules that do not apply to currencies simply because currencies have no value, when i say they have no value then i mean they are not backed up by anything: they have no underlaying security): currencies have the same value like paper (and since computers arrived even les) simply said if you need more then you only have to print more
when i say currencies have no value im reffering to something else which explanation would take a while to tipe and in the end everyone would say “youre talking crap dude” so i let that be unsaid and advice people to read books.
thank You for your reply Jason, and as i said, i didnt mean to offend FXCM or FXCMs credabilty.
Among other brokers i aswell have a account with FXCM and i am happy with the services of FXCM.
Thanks clint & turbonero…
thanks fxcm to chime in.
No offense taken. I’m glad you are happy with FXCM’s services. I didn’t think you were referring to us specifically. :57:
However, and please correct me if I’m wrong, it seems as if you are pessimistic about retail forex trading in general, and that is what I wanted to address.
While it’s true most traders lose money, I believe many of the factors causing this are preventable. This is supported by stats compiled in the DailyFX studies on the Traits of Successful Traders.
For example, it may surprise you to know how much impact a good risk:reward ratio can have:
[B]"We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it.
Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.
[U]Traders who adhered to this rule were 3 times more likely[/U] to turn a profit over the course of these 12 months—a substantial difference."[/B]
[I]Data source: Derived from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015 across 15 most traded currency pairs.[/I]
When you short a stock, it is not necessary for there to be another trader who wants to go long at the same time. In fact, stock exchanges have market makers which fulfill a similar role to the liquidity providers in the forex market.
[B]"In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as “specialists”, who act as the official market maker for a given security. The market makers provide a required amount of liquidity to the security’s market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders…
Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers."[/B]
FXCM provides No Dealing Desk (NDD) forex execution to all Standard accounts which can be opened with as little $2000. Furthermore, all orders on our NDD model, including mini lot ($1 per pip) and micro lot (10 cents per pip) orders, are offset one-for-one with the best prices from competing liquidity providers.
It’s worth noting that in addition to our Standard NDD accounts, FXCM also offers Mini accounts which use dealing desk (DD) execution. This in response to demand from traders who would like to start trading with less than $2000 and want higher leverage as a result. In fact, traders can open a Mini account with as little as $50.
For risk management purposes, FXCM limits the leverage we offer on NDD accounts to 100:1 (50:1 in the US to comply with CFTC regulations). That means a minimum margin requirement of 1% on open positions. For traders with less than $2000 in their account, our Mini accounts can be an attractive alternative because the margin requirements can be as low as 0.25% allowing up to 400:1 leverage (outside the US).
As with any market maker, FXCM faces market risk on the as a result of entering into trades with you on the DD model used for Mini accounts. That’s why we reserve the right to switch an account from DD to NDD execution, if a particular trading style presents a greater risk to the dealing desk than it wants to manage.
The fact that we have this option to switch DD accounts to NDD to manage risk means that FXCM doesn’t have to resort to dealer intervention practices that may occur with some market makers that only offer DD execution with no NDD alternative to manage their risk. That’s why you might sometimes see excessive spread widening during news events with such DD-only firms.
Trading volume is great. It’s how FXCM makes money. But when leverage is involved, we must balance the our goal of having more trading volume with the risk that clients may run out of margin in their accounts.
You mention that in stocks, you can place must larger trades than with our stock index CFDs, but you are not factoring in the leverage. Stock trading on an exchange does not offer the same leverage as CFDs, and so the risk is not the same.
If your goal is to trade larger size, forex will offer you the opportunity to trade much larger notional values than stocks. That’s why many of the largest hedge funds in the world focus on the currency market, because offers them much more liquidity than stocks for their massive trading positions.
You could say the same thing about stock dividends. Dividends are not guaranteed. They can change over time or disappear altogether. Even when you earn a stock dividend, it could be more than offset by a drop in the stock price.
It’s my pleasure, Babepips