Is it just me, or are many pairs choppy this week?

Just looking at patterns, everything seems really choppy at most of my time frames (daytrader) this week, excluding the /JPY explosions.

Have a good rest of the week.

It’s called volatility.

This is something important to take notice of because it may be reflective of a change in the markets. Volatility has been quite low on a relative basis for some time now. Those of you who are fairly new to the markets really haven’t seen what the forex market looks like when it really gets moving. Since I’m as much a market commentator (day job) as a trader, I’m quite happy to see volatility picking up, but it does change the trading landscape considerably. Some trading approaches that have worked very well lately may start losing their effectiveness while others that have floundered could suddenly become much more worthwhile.

Are you referring to Implied Volatility? I read in the commentary from DailyFX that this measurement indicates the possibility of some breakout scenarios.

It appears the systems set forth by the primary contributors of babypips are also taking it on the chin this week.

Are you saying this type of volatility is normal? I haven’t been at this forever, but I can usually dial in on at least a few pairs on any given day. Some pairs like GBP/USD, or USD/CHF seem to be more prone to whipsaws typically, and harder to daytrade. That said, Tuesday and Wednesday this week seemed like I had no idea what I was doing lol. Whereas today it’s much better already. We had strong U.S. retail sales, and strong British PPI, but that was way back on Monday.

Any thoughts? Besides bleeding pips and checking p/l after the bloodletting, any suggestions to identify a particularly erratic overall market time? The only thing I can think of is kicking it up to much higher timeframes to trade on.

Best regards fellow pippers.

No. I’m referring to raw price action - the ups and downs in the rates.

I recall a conversation I had a couple of months back with the forex analyst in the office where I work. We were talking about how the events and market action in the early part of the decade scared lots of individual (retail) traders out of stocks, and many of them then and since have come in to forex. That’s one reason why stock volatility has been low. My colleague’s point at the time was that for the last while forex has been low in volatility as well and he wondered outloud how many relatively new forex traders would get shaken out when volatility picked up once more. That seems to be happening now, so I guess we’ll find out shortly. :slight_smile:

Well… Tue and Wed were the worst couple of days I’ve seen in my short time, and while I’m no expert… it seems premature to suggest the end of the trading world for new entrants.

But let’s say you’re right. The Forex is about to change to a state so volatile that a new pair of eyes couldn’t possible understand it. By what means would a new trader ever not be “shaken out” of trading the Forex, and become a successful Forex trader? Or is securities trading soon to be the only option for a person desiring a career as a trader? Are the current “experienced” Forex traders the only persons with any hope of success?

As you can probably tell, I’m skeptical about what you’re saying. It looks like a couple rough days in the market to me, and any market has rough days. It sounds to me like “old-guys-standing-around-the-water-cooler-talk”, lamenting all the young whipper-snappers invading their market and “messing it up”. heh.

What would be helpful is any advice from experienced traders on how to avoid bleeding pips on rough days. Perhaps by identifying high volatility earlier than later, if that is the problem. That’s what this site is about isn’t it? Traders helping traders, I read? I’ve read about Implied Volatility, but I don’t think my charting package can swing it. Further, I don’t understand how to intepret IV. Any help with IV, or other pip-slaughter-avoidance suggestions would be most appreciated.

Here’s what I mean.

When volatility increases, ranges increase, as you’ve observed. When ranges increase that means an increased probability of stops being hit. With more stops getting hit the performance of trading methods which feature stops falls. A lot of trading methods and approaches that were developed and used during the recent relatively low volatility period are therefore likely to have trouble as volatility increases. (It works the other way too - I used to have a very successful approach for trading S&P eminis, but when volatility dried up and the ranges narrow, that approach lost its effectiveness and I had to look elsewhere).

A very real tendency among less experienced traders is to use close stops because they think close stops means lower risk. As increasing volatility widens ranges, those close stops become more and more likely to get hit. The result is that a lot of weak hands will get shaken out either because they lose a lot of money or they get frustrated because what had been working for them doesn’t any more. By weak hands I mean people who aren’t capitalized appropriately to the size of trading they do and/or who are not able to adapt to the changing trading environment. Yes, that generally means newer traders, but not exclusively. Experienced traders who don’t see the shift happening can get caught out too.

Think about what happened in stocks. Everything was wonderful up until 2000. It was so easy. Buy stock and make money. The market was so strong that it hardly mattered what you bought. You didn’t need to have any real trading skills at all to do well. Then things changed and a lot of people realized that it wasn’t as easy as they found before and that the market can take money away as fast as it gives it. A lot of latecomers and inexperienced folks got washed away. Most probably haven’t come back.

Compare the hype and excitement about stocks in the late 90s to today. Forex has become the next hot thing. Part of that is for good reason. The problem is that a lot of people have come in because they’ve been made to believe that making money in forex is easy, just like it was in stocks. That’s brought a lot of people in who probably won’t stick around if the going gets tough.

And it’s definitely not oldsters moaning. I love the developments in forex. Trading it is so much easier now for everyone, and for folks like market analysts who’s living is based on the market the increased public exposure is a boon.

Why is volatility increasing? Changes in the interest rate market. Global rates are on the rise. Higher interest rates generally mean higher volatility. It’s just a hand-in-hand thing. Rates have been very low, now they are shifting higher.

How can you anticipate choppy days? The best way is to understand what’s driving the market. Right now interest rates are that thing. It changes, though. Next week it could be stocks. In a month it could be geo-political. If you have a handle on what the bigger influence is you can do things like look at the data release calendar for the day or pay attention to news developments and those markets and see what relates to that influence.

Implied Volatility is not something I ever use. I actually prefer to look at the actual price movement that defines volatility, not what the market thinks is going to happen. IV is going to be wrong at turning points.

Since rising interest rates is a constant, and since the influx of traders from the securities end of the trading universe as you’ve suggested is also a constant, then what you’ve said doesn’t explain why Monday beats Tuesday on one week and not another, or why one Wednesday is rough and another isn’t. You’ve suggested two constants as explanations for inconsistent results. Further, as I understand it, retail trading barely makes a dent in the total daily volume. In any case�

Watching the news is important. I think anyone can agree to that if they simply watch a chart during a major announcement. The volatility I referred to was not during, or close to, news releases. It was general, and differed from day to day. I�ve been watching the news very closely.

As for the issue you�ve cited regarding too-tight stops, I believe I addressed that in my initial post when I said that the only thing I could think of was larger timeframes, which does indeed means larger stops.

So since you�ve decided to reply to my initial post in the first place, and since you haven�t remotely begun to answer it, I�ll give you one more chance to show you have something helpful to say (and that you weren�t simply reveling in the failures of lesser experienced traders).

Here�s the question: How are [U]YOU[/U] going to trade differently, rhodytrader, in light of your view that the entire foreign exchange is experiencing increased volatility due to an influx of securities traders, and generalized global interest rate increases? How do you plan to navigate this volatility? Anything to suggest, apart from wider stops?


I just love how you’ve denegrated this discussion to a character attack. Pretty easy to do through annonomous posting, isn’t it?

I don’t revel in anyone’s trading results, one way or another. I’m happy to help people with their trading from an educational perspective, but I don’t get emotionally tied to anyone’s performance, my own included.

Since rising interest rates is a constant, and since the influx of traders from the securities end of the trading universe as you’ve suggested is also a constant…

I suggested no such thing. How exactly is something that is changing a constant? I’m no math whiz, but I’m pretty sure constant means holding the same value continuously. Unless you mean rising at a constant rate? If so, that’s not true. Changes in interest rates (and new trader inflow too, I would imagine) don’t happen in smooth, steady fashion. Interest rates are market driven, and as such are subject to moving slowly at times and rapidly at others. The volatility of rates and the changes in them are things that have carry-over impacts on other markets, sometimes as much as or more than the direction of rates.

…, then what you’ve said doesn’t explain why Monday beats Tuesday on one week and not another, or why one Wednesday is rough and another isn’t. You’ve suggested two constants as explanations for inconsistent results. Further, as I understand it, retail trading barely makes a dent in the total daily volume. In any case�

If it was easy to anticipate changes in price action and volatility from day to day I don’t think we’d need a forum like this one. We’d all be making money hand over fist. But it’s not, and we don’t.

So many different factors come in to play. There are seasonal influences, even on a daily basis, believe it or not. Sometimes that’s a driver. There are all kinds of potential external elements, some of which we’ve mentioned already. Sometimes it’s a kind of technical driver, like a big company needing to hedge a major trade transaction, or a big fund deciding to take a position, either in the currency itself or in some sovereign debt they are buying.

It’s true that retail action is but a small fraction of overall volume, but that doesn’t mean it isn’t important. While it may be a fact that retail traders will have limited long-term impact on prices, it can influence things in the short-term. Think, for example, about a sell stop level that gets hit intraday. The more stop orders there are at that price, the further down the market is likely to get pushed as a result of the selling that happens when those orders are hit. The lower prices may not be sustained if more selling doesn’t come in from somewhere else once the stops have all be cleared out, and prices may revert back to higher levels, but the impact of those stops has been to increase volatility. The more traders you pile in to those stop points (or to trade entry points and what have you), the more volatility you get.

Watching the news is important. I think anyone can agree to that if they simply watch a chart during a major announcement. The volatility I referred to was not during, or close to, news releases. It was general, and differed from day to day. I�ve been watching the news very closely.

But you seem to assume that the impact of a news event is singular and confined. There can be knock-on effects that last for hours, days, and even weeks after something has come out. They can impact the psyche of the market, coloring its reaction to future events, and even to price changes themselves. I’m not the first to say that during bull markets good news is generally an excuse to rally more and bad news is often ignored, with the reverse being true in bear markets. (Range trading markets can sometimes react to everything and other times react to nothing.) It’s a psychology thing, which to my mind is the biggest driver of short-term trade, an especially the reaction to news and events.

The situation we had with the NZD recently with the central bank coming in and selling its own currency to try to weaken it is an example of a carry forward impact of a singular event. The direct impact on other currencies of that move wasn’t all that significant, but it did get some folks thinking about other central banks doing the same thing. That sets up a market environment where major reactions to the suspicion something like might be going on became much more possible.

Japan is an example of that. No one really expected the BOJ to hike rates at their most recent meeting. Even still, when they made no move the JPY got beat up. Why? I’m sure at least part of it was the little notion put in traders heads by the action of the Kiwi’s that some kind of effort to support the JPY might be in the offing.

As for the issue you�ve cited regarding too-tight stops, I believe I addressed that in my initial post when I said that the only thing I could think of was larger timeframes, which does indeed means larger stops.

You did present that as an option, and it definitely is one way to go. I personally am more a position trader than a day or swing trader, but that has to do with my time available to trade. I just cannot consistently commit the requisite time each day to be able to regularly trade short-term.

That’s not necessarily the only way to go, though. Sometimes it’s just a question of being more selective with the trades you take from your current approach. If that’s not the solution, and you want to stay with the same timeframe, then you’ll have to explore other trading approaches to find one that suits you and the market conditions better.

Here�s the question: How are [U]YOU[/U] going to trade differently, rhodytrader, in light of your view that the entire foreign exchange is experiencing increased volatility due to an influx of securities traders, and generalized global interest rate increases? How do you plan to navigate this volatility? Anything to suggest, apart from wider stops?

My own trading approach is actually based on volatility, more specifically relative levels of volatility, so I don’t need to change it as overall market volatility changes on a structural basis in the way we’ve been discussing. A professor friend of mine once told me about some research he read or heard about that of all things in the financial market, volatility is the most correlated, meaning that low volatility periods tend to beget low volatility and vice versa. I’ve done some research on that myself and found it to be true. So when volatility changes on a relative basis (I mean within my trading timeframes), then it’s significant and signals a change in price action.

Losing money due to trading poorly hardly seems to merit a grin. This is where you appear to revel in the poor trading of others, which by the way means losing money on the part of other traders. Those �weak hands� you referred to, remember? If I�ve misunderstood the pomp in your smiling at the losses of others, then by all means, please clarify.

In reading your responses, I�m having trouble finding the value in your statements. There are indeed many self-proclaimed market experts around, and testing what they say against reality, simple logic, and their own statements helps weed out the gum-flappers. I�ve asked you questions, and heard a lot of generalized fluff in response. Even in regard to your own trading methods, and how they might or might not change, you�ve provided nothing useful that either me or anyone else reading this can apply. So why did you respond? My post was to seek information about how to better identify a rough day, before my pips fly out the window. I can�t imagine I�m the only one who would want to protect my pips in such a way. Even if it means not trading that day, I�m cool with that. Better to keep my powder dry for another time, than to waste it because I haven�t read the landscape correctly. Nothing you�ve said (apart from watching daily eco news which we all agree on) has addressed the question I�m raising, and I�ve found you condescending and pompous. Just calling it like I see it.

Your own statements are filled with generalization, and your responses with contradiction. You seem to be responding to my challenges to your statements as if I�ve made your own arguments to you, and now you�re refuting them. It�s enough to make the head spin. It is indeed you who said that volatility is rising, due to a generalized rise in global interest rates:

You clearly suggest this as being a constant effect. I pointed out that the volatility which you suggest is receiving a perpetual (or constant) boost from �Global rates� being �on the rise�, doesn�t yield a perpetual (or constant) effect on the market from open to close on a given week. Since �global rates� on the rise� is in effect from the beginning to the end of the week, the correlation between rising interest rates and volatility should be true on every day of the week. It is not. Therefore there must be something else to measure or assess, and while you�re satisfied with the �who can know?� crutch, I�m not. I�m sure there�s something to learn regarding my question, and I�m trying to learn it.

In your most recent post you went on to say my generalization (which was your generalization) of a constant rise in interest rates affecting the markets is not mathematically sound because interest rates aren�t rising at a consistent rate.

I won�t be dragged into a semantics debate over the meaning of constant. You�ve challenged your own generalization by pointing out that the rise in rates in itself is not constant, or even, across time. I was responding to what you said with skepticism, and you responded to me as though what I said was my own hole-filled argument. It�s your argument, and it is indeed riddled with inconsistencies.

Now you�ve set forth another explanation, which is that times of higher or lower volatility lead to further periods of higher or lower volatility, respectively. That might be true, but the same questions of Wednesday vs. Thursday vs. last Wednesday, persist. Since we�re getting nowhere fast, I�m going to step away from the conversation now. Any challenge I present to your logic will most likely be met with you poking holes (through the same hole I�m poking) in your own arguments, and we�ll continue to get nowhere. Do me a favor and if you see me asking similar questions elsewhere in the forum, please let other people respond. I really do what to know what other experienced traders are doing when they decide not to trade due to the market being too choppy, and you�ve offered nothing of applicability or consequence to that end. “Is volatility making trading difficult? Well that�s just how it is, and rhodytrader�s secret volatility embracing trading system makes the question of when to trade, or not to trade, irrelevant.” Please. Utter nonsense.

Thank you.

PipHunterE may not read or respond this as he’s indicated that he’s moving on from the thread, but I will reply because others may have, contrary to his view, indeed have gained something of value from the discussion. According to the numbers as I write this post, there have been nearly 200 views of the thread, so people have been reading it.

Firstly, I was at no point ever “smiling at the losses of others”. The only smily I used in this whole discussion was in regards to finding out shortly whether rising volatility in the forex market would cause a shake out among participants - and more importantly to my mind, the rampant marketing of the forex market in somewhat dubious fashion. It had to do with seeing the proof of a theory (and not even mine own at that) and absolutely nothing at all to do with the gains or losses suffered by individual traders, so he has indeed misunderstood.

Aside from that, I will not address personal attacks. I do not engage in character assassinations myself and certainly won’t dignify those aimed at me, especially by those who have never met or even spoken with me.

Let me get back to the question of anticipating changes in volatility from day to day. As I have indicated, aside from knowing what is on the calendar in terms of potentially market moving events (and not just for today, because sometimes the market acts today ahead of events that will happen tomorrow or later in the week), there is no one thing that can be singled out as something you can point to as an indicator of what kind of volatility you are likely to see in the market today vs yesterday vs a week ago vs next week.

By all means, if anyone out there has an indicator or something that they find consistently useful in picking which days to trade and which not based on anticipated volatility, please let us know. I suspect, however, the fact that no one has chimed in (and there are some very knowledgeable and experienced folks floating out there among the members) to the discussion up to this point indicates that just maybe, as I’ve suggested, there isn’t one out there. It’s just not that easy.

I’ve got literally hundreds of years of trading and market analysis experience sitting around me in the form of fellow analysts covering a bunch of different markets. Many of them have access to contacts in the market that can tell them about order flow and other bits of information significant enough to move prices, resources the common retail trader is unlikely to have. I can state with a very high degree of certainty they will tell you that even with that extra information and experience they have at their disposal to come up with an expectation, the market can do the complete opposite of what they would be looking for in terms of both price and relative level of volatility.

There are just too many things that influence price movement which either we don’t know about or happen but we cannot necessarily anticipate. Some of it is just order flow - the normal course of business. Some of it is events like a terrorist attack, a natural disaster, comments by a government official or market moving personality. And as I noted previously, sometimes things that wouldn’t be particularly impactful one week would be significant the next because of the way it ties in with things the market has on its mind.

If anyone can add to that, or suggest a different way of looking at things, please do.

I was asked how my own trading would change in the face of higher volatility and answered quite directly that it wouldn’t. The way I use volatility in my trading is no secret. I’ve written and published articles on the subject for a long time. I think the first one was in Stocks & Commodities something like 12 years ago. More resent articles have refined things a bit further, but the idea is the same. Changes in relative volatility can be significant and indicative of excellent trading opportunities. Do a web search and you should have no problem locating something I’ve written on the subject - maybe in this forum even, though I can’t remember specifically.

In regards to the question of interest rates and volatility, I misunderstood what PipHunterE was talking about when he brought up the idea of “constant”. In my last post I was actually trying to get a clarification on that subject, but obviously we weren’t seeing things the same there.

Yes, higher interest rates imply a higher structural or “constant” level of volatility, as I noted. It is also true that just because that is the case it doesn’t mean each day’s volatility is the same. Clearly, as noted above, there are a lot of things that contribute to the volatility of a given day. The structural volatility should be thought of more as average daily volatility.

The further point I wanted to make in that regard is that because interest rates are not constant, but rather in continuous flux, their impact on volatility is not constant. Additionally, the speed at which interest rates change is also a contributor to overall volatility. That’s why I had a problem with using the term constant in the disucssion.

For example. last week 10 year US Treasury rates went from about 5.12%, up to 5.24%, then back to about 5.17% to close out the week. So you can say that rates rose about 5 basis points for the week, but had a range of about a dozen bps. That choppiness in interest rates, especially since it was to the upside, contributed to higher volatility in the markets, but not evenly throughout the week because of the path of rates.

As I’ve also noted, the more people pile in to the forex market the higher they will push short-term (read intraday primarily) volatility. Just imagine what will happen when China actually lets their currency freely float and millions of Chinese start coming in to the forex market after their stock market finally stops going up 2-3% per day.

It would seem to me that the best path to market profits as we move forward would be to use an approach that puts volatility to your advantage, as opposed to one where volatility is a hinderance. I don’t claim to have any specific answers there, but you can be sure that I will be focusing my own research in that direction.

Since you’re trying to portray what I’m saying as though I’m searching for the risk-free-holy-grail-super-secret-trading-method (while suggesting you’ve “already got one!” yourself), Check this out:

Pick of the Day: None - Pick of the Day - Beginner’s Guide to Forex Trading, Free Forex Education, Learn to Trade Forex, Forex Training -

“No trade idea at the moment as it the market is looking pretty choppy.”

That’s an example of exactly what I’ve been talking about all along. There are times when the market, or a certain pair, is way too choppy to handle reliably, across a number of different systems no doubt. As opposed to eyeballing the charts to make that “too choppy” decision as I’ve done to-date, and I’m sure others have too, I would prefer to measure what “choppy” really means. If it can be measured, however loosely, then it can be flagged and responded to accordingly. Those not believing in technical analysis may disagree, but that won’t stop yer pips from bouncing off my pivot point.

As for the other comments since my last post, I’ve already addressed everything said so far, and I’m not one to repeat myself. I will add simply that while you’d like to obscure what you’ve said in regard to the “shake out” of inexperienced traders by saying it’s only an abstract theory you’d like to see tested, I’ll remind you that those inexperienced traders are losing real, not abstract, money. I care about that, and don’t want to see people losing. If you don’t, well that certainly explains your insensitivity and pomp on the matter, Mr. Spock. In any case, I’m sure we understand each other a little better now.

… and I’m still seeking ways to measure “choppy”.

Best regards.

In order to come with some way to flag choppiness, as you say, you need to first define what that means. I’m guessing you mean some measure of increased ranges in the timeframe(s) watch. Sound about right? If not, how would you describe it?

There are a number of volatility based studies, with Average True Range being the one that probably most hits the range idea. The problem with all of them, though, is that they are backward looking. They can tell you what’s been going on, but can tell you if today is going to be more choppy than yesterday or last week.

Implied Volatility, which you brought up before, is a combination of historical volatility (standard deviation) and traders’ expectation of future volatility. You make a pretty good argument that traders are just as likely to be wrong as right, so I’ve never put much stock in IV as a forecasting tool.

The issue that you are always going to run in to with studies is that while they can give you a general idea of volatility/choppiness direction, they can’t tell you what the next period is going to be like. As a result, you could find yourself trading on a day that wasn’t supposed to be choppy but is or that was supposed to be choppy but turns out to be an ideal trading period.

That prof friend of mine claims he’s got a way to forecast volatility (however he’s measuring it) from period to period, but he’s never provided me any proof, and academic proof is definitely not necessarily an indication of practical applicability in trading.

… I care about that, and don’t want to see people losing.

If it really bothers you that people are losing money in the market then you really need to reconsider your own participation. I’m not being snide or anything like that at all. I’m just talking about the reality of the situation. If you are one of the minority that ends up being a long-term trading success then that means you have done quite well for yourself being on the other side of the majority of traders who lose money, especially in the mostly zero-sum game that is forex. It’s a competitive environment, after all, and you are doing your best to beat the other guy. That certainly doesn’t mean cooperation is out of the question. These boards are an expression of that. But let’s not fool ourselves in to thinking that we can win without others losing.

Not that I really think the losses of others bother you, though. Your pivot point comment suggests you are quite ready and willing to take pips from other traders.

I didn�t say anything about taking someone else�s pips. I was just making a joke about how prices bounce off pivots, even if you don�t believe in pivots. Nice try.

Trading (anything) is supply and demand. GAMBLING is a zero sum game. Consider sitting down with pals to play Texas Hold�em. You�ve got your roll of quarters (if you�re a high roller like my friends) with you. Everyone shows up with quarters, but only one person leaves with the quarters. That�s a zero sum game.

Investing in FX, or any other market, or any other business (your time, or your money) isn�t a game at all. It absolutely is not a zero sum game by any stretch of the imagination. There are plenty of �experts� such as yourself that would have people believing that, but it simply isn�t true, and I�ll prove it with a simple real-world example.

Consider an auto maker with facilities in multiple countries, let�s say Chrysler. In order to pay their European employees, Chrysler need to buy Euros with U.S. dollars (it might be the other way around for Chrysler, but skip that for the sake of the example). Payroll time comes, so Chrysler buys Euros, and they pay their employees whatever the agreed upon wage happens to be.
The employees traded their time and effort for their wage. Chrysler traded the employee wage and materials for a product, which will now be sold for (ideally) many times what it cost them in labor and materials. And I buy my van (with the sweet fold-down seats) for whatever price I buy it for, and I like my van.

So tell me, who exactly lost? Did the employees lose, since they received the wage for their time and effort? Did Chrysler lose, even though they multiplied the value of their investment? Did I lose? I like my van, so that seems unlikely, and in my house I find I am unable to construct a van (with sweet fold-down seats).

In my scenario, the laborers recognized the value for them personally, by investing their time and effort and receiving a wage in return. Chrysler recognized the value of paying for labor and materials in order to create a product that is worth more (due to demand) than the cost of labor and materials. And I bought my van (with the sweet fold-down seats), recognizing the value of driving my family around instead of walking, and of being able to transport things in a single vehicle instead of having to buy another for transporting large objects (due to the sweet fold-down seats).
So who lost? No one! Everyone traded up.

As a FX trader, if you are able to recognize excess supply as the laborers did (their time and availability could equal a wage for them), or recognize market demand as Chrysler did (people want vehicles to get around, and we can sell them for more than it costs to make them), then when someone wants to buy a van� all the needs are met. If you identify supply and demand tensions in the currency market correctly, then you can invest accordingly, and hope to make profit. It�s that simple, and that�s EXACTLY what I�m trying to learn to do. It�s NOT a game, and someone having to lose in order for someone else to win is simply not accurate. If money (all currencies) traded in the foreign exchange is never spent on anything ever, and all money exists in a complete vacuum, only then can it be a zero sum game. As it is, money is spent on things other than money, and as such, if you can recognize the need or excess for a particular currency, as with any other type of business, you can profit.

I thought about this at length before I decided to do this work since, as a Christian, I�m not comfortable with people having to lose for me to win. The Lord digs honest gain, not dishonest gain. Investing wisely, either your time or your money, is a good thing. Don�t believe the hype.

Best regards.

Just read the above, and thats actually a very good point!

The point about zero sum game - a generally used term, not a specific suggest that trading is actually a game - is that there are position holders on both sides of the trade and that the gain on one side represents a loss on the other side. This is true of forex and futures and some other types of markets, but it is not true of a market like stocks and other actual assets.

In the stock market when you go long you are simply buying something, just as if you were buying some gold, or oil, or anything else where you are just aquiring something out of an inventory of supply. No one has to go short in order for you to go long. While it is true that stock is a liability on the books of the company that issues them, that liability does not rise or fall with stock price, and the company is not required to ever buy the stock back, so it’s not the same as being short the stock. Shorting stock means that you actually have to borrow the stock from someone who is long in order to sell them. You can’t just sell something you have no possession of as you can in other markets. That’s why stock trading is not considered zero sum. I you buy Google at $10 and it runs to $10,000 then it represents a growth in your assests, but not a growth in someone else’s liability.

The same is not the case in forex and futures. I’ll start with the latter and address the former more specifically in a second.

In futures, because you are exchanging agreements and not actual assets when doing the trade, in order for you to go long, there must be someone on the other side of the trade willing to go short. That is the definition of the futures contract - I agree to buy something from you at a certain price and you agree to sell to me. Yes, it is true that the original buyers and sellers can close out their positions by making offsetting trades, but it comes down to the fact that for each long position there is a matching short position. That means for each point of profit by one of them, the other must lose a point. That’s the definition of a zero sum game.

Now as to forex, the speculative market acts the same as the futures market. Yes, it is true that you can actually aquire physical currency, but that’s not what you’re doing when you trade spot forex. Technically, spot forex trading operates the same as futures, though on a very short duration basis. If you buy USD/JPY you are technically making an agreement to exchange JPY for USD in two business day’s time at an agreed upon price. Of course you won’t actually do that, just like most futures traders will never take or make delivery on the positions they run. That’s where the rollover comes in to forex trading. Your broker essentially offsets your open position, closing it out, and enters a new position - all done at the current market rate. In some brokers this is very clearly done, especially when you’re talking about interbank trading.

Most retail brokers don’t really work that way, though. Instead, when you buy USD/JPY you actually borrow JPY, convert it to USD and deposit the USD, with the guy on the other side of the trade doing the inverse. That’s where the interest rate differential comes in. Again, you have a situation where any gain you make is a loss for the other guy, and vice versa because you both have a requirement to repay the respective loans you have taken out. It’s not as if you could actually take the USD you bought and walk away.

One way or another, there is always someone with an opposite position to you matching your trade. If your broker cannot directly offset your position against another internal account, it will do so in the market.

That is why forex is a zero sum game.

Easy boys, no need to get all hostile.

Anyhow, I’m gonna throw myself into this intriguing debate just for learnings sake.

I think Piphunters example is misleading. General economics as I understand, is not necessarily viewed as zero-zum, because people enjoy the thing they acquire through money (like piphunters van). And you can’t put a monetary value on people’s joy. So for the example to be correct, a person must be happy with whatever position he holds in forex, which i offcourse possible, but not very rational.

Try to picture your van as a stock (with very special abilities :stuck_out_tongue: ). When you buy it, you have the pleasure of owning it, and doing with it whatever you like. But when you sell it, the market price will most likely differ from what you bought it for. Hence the money is shifting around in a close to zero zum game. Remember the words of Gordon Gekko: Money is not made It’s simply transferred. (It is not ALWAYS true)

Take a look at i.e. Black Wednesday 1992, George Soros made about a billion dollars, betting against the Bank of England. Those money did not just pop out from some mystical place. He indirectly stole $ 1 000 000 000 from british tax-payers. (even said so himself) How morally (or immorally) justifiable this is, can be questioned, but it is the way it is. Jaques Chirac has supposedly called currency speculators the AIDS of global economy. :stuck_out_tongue:

Anyway, John, you seem like a very knowledgeable fellow on the subject. Can you please specify what you meant with stock-markets not being a zero-zum game? I have heard a lot of rather successfull traders like Ed Seykota and John W. Henry say it is (when you take dividends out of the picture).


Are you sure Seykota and Henry were specifically talking about stocks? They both have primarily been futures traders, and that market is absolutely a zero sum one.

As to stocks not being zero sum, refer to the first part of my previous post. It’s because they are an asset, not a contract for future purchase/sale.

I think they where talking about financial markets in general.

In for example a boom/bust sequence, my brain tells me that no money is being generated or lost in this event, that cash is being shot into the market and out again at some other time. That they are simply transfered between participants. Let’s say that after a serious bull market, there comes a violent crash (to simplify things we imagine that there is no leverage used by any participant). Would not this be an event where money is transfered between he who sold out first, and he who bought at the way down. I mean, I don’t think that money appear or disappear from/to nothing.

This became an awfully messy post, but my point is that I’ve always believed that all financial markets are places where wealth is allocated, not produced.

I mean, in magazines like The Economist they pointed out that some countries has an economic growth that is mainly an illusion because that it is caused by rising asset prices (like houses) so that the innhabitants of the country feel richer, and are more willing to spend through loans.

Is this all wrong?


The financial markets, first and foremost, exist to facilitate the allocation of investment capital and business transactions (like currency exchange, hedging, etc.). We speculators just add liquidity - and some would argue volatility - to the system because we are willing to take on risk in persuit of speculative returns.

The reason it is that that rising stock prices, just as rising home prices, increase wealth is because they are assets which are owned by individuals and for which there is no corresponding liability somewhere.

When you buy a house, there is a seller on the other side, but they aren’t shorting the house. They just transfer ownership to you. Their financial position is no longer attached at all to the price of the house (unless they’ve financed your purchase, but that’s a different thing all together).

It is exactly the same for stocks, or for gold, or any other kind of asset in which ownership is transferred. When you own an asset and the value of it rises, your wealth increases. When the value of that asset decreases, so to does your wealth. That’s what they are talking about in terms of wealth creation and distruction during boom/bust cycles.

Think about it this way. If you bought 100 shares of Google at $100 and it’s now at $500, your wealth increased by $40,000. Right? But that profit didn’t come at the expense of someone else who lost $40,000.

This is not true for futures and forex and other derivative type instruments where what is traded is an agreement, not an actual asset. When you are talking about exchanging agreements, then the market is two-sided and zero sum.

Make sense?

I see, thanks for the detailed replies. :slight_smile:

But from an accounting perspective, won’t the money going into the market equal the amount that goes out of the market? So that when there comes a crash, there will be winners collecting what will be the potential loss of others? (only that it will probably be absorbed by many different participants)

This leads me to another question. Are bull markets dependant on a flow of fresh capital to keep peaking?

I have always thought of the stock market as a market that reflects what people are willing to pay for an asset, but not a market which by itself generates “real” wealth by the increase of asset prices.

still slightly confused :stuck_out_tongue: