[mathematician]

The following are inescapable truths about trading (in my opinion). These are very important facts that cannot be avoided and should not be ignored.

Here's my list. Feel free to add your own.

Axioms

A1. It's a zero-sum game:

Your gain is another's loss (or a group of others). Similarly, your loss is another's gain (or a group of others). In his book, Trading for a Living, Dr. Alexander Elder explains that it's actually a minus-sum game because of broker commissions. He considers "the game" to be played only between buyers and sellers, so money is constantly leaking out to the brokers as commission. Thus, it is actually a minus-sum game. However if you consider the brokers as participants in the game, then it's a zero-sum game.

A2. Banks and brokers are profitable in the long run.

If they weren't, they wouldn't keep doing it. They're businesses, not charities. In fact, the ones that aren't profitable (very rare) go out of business, so you're only dealing with the ones who know what they're doing.

A3. Banks have much better resources than individual traders.

Just to name a few:

• They can see the order flow (because they're the ones processing the orders): This is probably their biggest advantage.
• Deep pockets: Very deep!
• Talented, experienced, professional traders: I imagine they only keep the ones who are profitable. I assume the rest eventually get fired.

A4. (The Golden Axiom) Price moves in waves.

By "waves" I simply mean that it doesn't move in straight lines. It's always alternating between ups and downs. Ok, so this axiom only applies to liquid markets. I suppose there are certain times, viz. during news announcements, when this is not quite true either. However, looking at any chart reveals that this is true almost all of the time. I suppose the reason that price moves in waves is because as price goes up, some traders will take their profit. Their selling (and desire to get out) pushes prices slightly lower. Whatever the reason is, there is clearly strong empirical evidence that this is an inescapable truth. Price moves in waves.

Theorems (Implications)

T1. We can't all win.
Proof: This is a direct result of A1.

Implications: You must literally steal money from other traders! Trading is extremely competitive. It's not supposed to be easy.

T2. As an individual trader, the odds are stacked against you.
Proof: A1, A2, and A3 —> T2.

Implications: In order to succeed you need a very clever strategy. (Clever does not necessarily mean complicated.)

What about A4?
Axioms A1, A2, and A3 and Theorems T1 and T2 are pretty discouraging. Axiom A4 gives us hope. That's why I called it the golden axiom. The fact that price moves in waves is, well, a fact! It tells us something very important about the behaviour of price movements, and we can try to use that to be on the plus side of this zero-sum game.

[Craig]

Originally Posted by mathematician

Whatever the reason is, there is clearly strong empirical evidence that this is an inescapable truth. Price moves in waves.

Can you point me at this evidence? (I'm hoping that it does not consist of a carefully chosen chart).

[mathematician]

Originally Posted by Craig

Can you point me at this evidence? (I'm hoping that it does not consist of a carefully chosen chart).

I will not point you to a carefully chosen chart. I will point you to any chart, ever. Wouldn't you agree that price doesn't move in straight lines?

[Craig]

Originally Posted by mathematician

I will not point you to a carefully chosen chart. I will point you to any chart, ever. Wouldn't you agree that price doesn't move in straight lines?

You're not answering the question, you said quote: 'strong empirical evidence'.
Where is this 'strong empirical evidence'?

[mikekneip]

If the currency marekt as a whole were a zero-sum game, then how do all the participants with no speculative interest fit into that equation?
(e.g. corporate hedging, or just necessary conversion for paying for imports, central bank actions, tourism).
They all provide liquidity to the market and could, to some extent, be on the other side of your trade. I think this is something that is very particular about the currency markets, namely its pretty big share of non-speculative activity.

[>Apocalypto<]

not a chosen chart just GBP/JPY for today and some of last night.

Nope no waves there at all......... all straight!

[mathematician]

Originally Posted by Craig

You're not answering the question, you said quote: 'strong empirical evidence'.
Where is this 'strong empirical evidence'?

The evidence is every single chart I've ever seen and every single chart you've ever seen too (and you know it).

A4 is supposed to be an axiom, i.e. it's supposed to obviously true. I thought it was obvious to everyone that price doesn't move in straight lines. It's probably the first thing people notice when they look at a chart for the first time.

It's ok, Craig. I know you like to play the devil's advocate.

[smjones]

Webster's definition of wave there are many, but all are about the same meaning..

Wave: To curve alternately in opposite directions; have an undulating form.

So any movement at all in opposing direction could be considered a wave. Interesting, but how is it helpful? Not being sarcastic, just thinking out loud. It is an interesting question.

[mathematician]

Originally Posted by mikekneip

If the currency marekt as a whole were a zero-sum game, then how do all the participants with no speculative interest fit into that equation?
(e.g. corporate hedging, or just necessary conversion for paying for imports, central bank actions, tourism).
They all provide liquidity to the market and could, to some extent, be on the other side of your trade. I think this is something that is very particular about the currency markets, namely its pretty big share of non-speculative activity.

You're right. It's very interesting how there's a large percentage of non-speculative activity in the forex. These participants are certainly a part of the same game.

When multinational corporations use the forex to hedge their projects (for example, by entering into a forward or futures contract), they are well aware that they might lose money on the contract. Their goal is not speculative gains. Their goal is to eliminate, or at least reduce, the uncertainty in the cash flows from international projects. The uncertainty that comes from exchange rate risk, that is. Of course there are other uncertainties they have to deal with.

They certainly could be on the other side of the trade. If they go long in a futures contract, they will make money if the price of the underlying currency appreciates (taking money from the short side). They will lose money if the underlying depreciates (giving money to the short side). Their goal is to have a guaranteed price that they can count on. Most corporations are trying to make money from investing in profitable projects, i.e. by doing what they do, producing what they produce, selling what they sell. For corporations wishing to hedge, they're happy to take the risk that they might lose on the trade. For then, having more stable cash flows makes it worth the risk. In fact they think of it as a way to reduce risk.

It is similar for options. Many companies and people use options as a form of insurance. They pay a premium to have the option to buy or sell at a particular price. They can exercise that option in the future if it is beneficial to them (in which case they are taking money from the option "writer", i.e. the other side). Otherwise they just let it expire. The person on the other side, the "writer" of the option, is speculating that he will make more money by collecting the premiums that he will lose when the option-holder exercises the option.

Isn't it great how all these different perspectives come together to make a market?

[smjones]

Originally Posted by smjones

Webster's definition of wave there are many, but all are about the same meaning..

Wave: To curve alternately in opposite directions; have an undulating form.

So any movement at all in opposing direction could be considered a wave. Interesting, but how is it helpful? Not being sarcastic, just thinking out loud. It is an interesting question.

What I mean by this is, just because I have identified a wave structure does not necessarily mean I can find something to exploit in that wave. It is difficult to decide which is the right wave and the right shape and amplitude and in the right point in time and context. Having said all this, I certainly do know and am well trained in Elliot's wave theory, and have found some use, but am not entirely sure if the success I found was nothing more than luck. We humans are designed to see patterns in the perception we call our reality.

[price]

Originally Posted by mathematician

In order to succeed you need a very clever strategy. (Clever does not necessarily mean complicated.)

A 'clever' strategy. Well put. I agree with that.

.....empirical evidence ?? I don't need to know what that means, but it seems to be the cause of the wave discussion. Price does move in waves, it is certainly an "inescapable truth". So, let's leave it at that.

Now..... we just need to work out the clever strategy. You've developed some ideas on this I assume ??

[mathematician]

Originally Posted by smjones

Webster's definition of wave there are many, but all are about the same meaning..

Wave: To curve alternately in opposite directions; have an undulating form.

So any movement at all in opposing direction could be considered a wave. Interesting, but how is it helpful? Not being sarcastic, just thinking out loud. It is an interesting question.

Yes, as I said, by "wave" I mean just not moving in straight lines. It doesn't always move in a perfect wave like, say, a sine wave. It usually much more jagged and irregular than that. But in general, it does alternate between opposite directions, up and down.
(Again, this doesn't mean a perfect alternation either. It's not always up/down/up/down/up/down... sometimes it's up/down/up/up/down/up/down/down/down/up/down/up/up/down/...)

"...how is it helpful?" Yes. That's the multimillion-dollar question.

[NewFX]

Originally Posted by mathematician

The following are inescapable truths about trading (in my opinion). These are very important facts that cannot be avoided and should not be ignored.

Here's my list. Feel free to add your own.

T1. We can't all win.
Proof: This is a direct result of A1.

Implications: You must literally steal money from other traders! Trading is extremely competitive. It's not supposed to be easy.

IMHO it is better to say, we can all win but not simultaneously.

[mathematician]

Originally Posted by NewFX

IMHO it is better to say, we can all win but not simultaneously.

I guess that's a polite way to say it. Still, in the long run, the skilled/experienced/luck siphon money off the unskilled/inexperienced/unlucky.

[mikkom]

Originally Posted by mikekneip

If the currency marekt as a whole were a zero-sum game, then how do all the participants with no speculative interest fit into that equation?
(e.g. corporate hedging, or just necessary conversion for paying for imports, central bank actions, tourism).
They all provide liquidity to the market and could, to some extent, be on the other side of your trade. I think this is something that is very particular about the currency markets, namely its pretty big share of non-speculative activity.

It's still a zero-sum, those players lose and win too but they are ok with it because they are only looking for stability, not profit.