Trading vs gambling
Can anyone tell me what's the differences btwn gambling and trading?
But currencies are different, Actually we are trading emotions not currencies, and these amotions are manageble by such events as fundamental releases or technical signals.
In trading the markets have a memory, in gambling usually there is no memory.
The markets might have an increased probability on one direction at certain price levels, such as previous support and resistance levels, the memory of what happened at that level before.
In Blackjack and some other casino games, if you are able to play perfect basic strategy and card count, you can move the edge in your favour, though generally over a large sample, the edge is at least 4% in favour of the house, depending on the game.
If you gamble on the horses or dogs there is a memory, which is previous form, though the sports books odds will be in their favour.
Discover an edge and stick to trading.
My wife and I go round and round about this topic, so it is a favourite of mine. What we are doing is speculating. We are making an educated guess about where the market is going and backing up that guess with cash. To me it is no different than going out and buying a chunk of land or a house in hopes that the price will go up. Most people don't think of cash as a thing like bread or a car or labor, but we trade cash for all of those things all of the time. All we are doing is trading one kind of cash, say yen, for annother, say euro, in hopes that we are on the right side of the trade. We do it all the time so it seems regular to us, but from the outside it does look kinda wierd. If one can brodden the deffinition of gambling to include taking any kind of risk. Then I can brodden it even it even further to justfy not even getting up in the morning to avoid the risk of driving in to work.
God, thats great, goyna tell the wife that.
- You can control your position size and control your risk only at the beginning of the game
- You can control your position size and control your risk almost anytime. You can get our at anytime, and thus you have a stop which can't be applied to gambling
- You actually play a game that has nothing related to whatever happening in the world
- You are playing a game which affects the lives of people all over the world and which is closely related to almost all the events in the world
- People see the whole thing as fun, they go there for entertainment, not a single gambler do it as a business
- If you don't treat trading as a business, then you are in a gambling mood and you will lose in 99% of the cases
- People never ever think that casinos tweak the games in their favour, while actually they do. All gamblers are not convinced that conspiracies exist in casinos to increase their odds, while this is the real and actual case
- People are almost certain that the markets are tweaked to the favour of certain people, market makers and brokers, and they strongly believe that the markets contain a very large and hidden conspiracy, while they actually don't
- People always think about probabilities, when they have a losing streak, they increase the bet size because they think that the odds now are in their favour more than before and they are having a better chance to get a win the next time. This of course has nothing to do with the laws of probability, because literally you can have a losing streak of 3, 5, 10, 25 or even a 100 losses..Yes to have a 100 consecutive losses can happen once in every 100 years, but it can happen
- People rarely think of probabilities, and worse they tend to do the same as gamblers do, increase the position size after a losing streak. Many people can't just accept that they might have done everything correct and taken the trade at the exact correct price, and yet the market moves the other direction
- People never think of using a calculator
- Everyone must use one
- People change the game they are playing because they think that the other one is better, yet they are all the same, they follow the laws of probability
- People change the pair or the market they are trading because they think that they can do better in the new market, yet all markets are the same as well, they work the same way, supply and demand, and when you are speculating, all markets follow the rules of probability as well
- They offer many things for free
- Almost nothing is free except charts, and they are not a great edge by themselves anyway
- People tend to get excited and happy when they get a win even if they are netting a loss
- People tend to get frustrated after a win because they didn't catch the exact top or bottom and missed some handsome profit
- There is a limit for your profit for every bet you make, and this is known at the beginning of the bet
- Profits are unlimited for every single trade, unless you are short and the instrument goes to zero value, which is the case in stocks, but not the case with futures and currencies
Gambling and trading are way 2 different things, but many people treat both the same way just because they have some similarities, it's exactly like you are treating your current wife the same way you was treating your ex just because you noticed many things in common between both of them, yet they are 2 completely different persons...
Very good job Nader,
Here's my look at it: I can walk up to a craps table, put $20.00 on the table and say, "Hard Eight!" In this scenario, I can't tell the dealer to give me back my $20.00, it has to stay on the table until the bet has finished. If the dice roll two fours, I get $180.00 plus my twenty back. If any other combination of eight appears, my $20.00 is gone. There's no way to protect that money.
When I trade, I make an educated guess based on information that I've learned how to use. If I go long the EUR/USD, I start out 3 pips negative. I can get out whenever I want, or stay in and see what happens. Once I recover my 3 pips and maybe a little profit, I can protect it.
Nafara - I am going to tell the wife that too. Love it. She will have no arguement anymore !
Have a great weekend !
For me, anything that isn't purely random falls in to the arena of trading. Its about risk as probability. In market trading, we believe we have some kind of edge that works in our favor, or that we can attain some kind of edge over time. When you roll dice, you can never attain an edge. I agree that everything is a trade, from the moment you wake up in the morning. Shall I cross that road? Its a risk-reward trade-off. Shall I wait in this queue or that one? Shall I buy this product or that one? Chance permeates our lives.
I trade with a clean conscience, but have never bought a lottery ticket in my life.
PS - I think many people who have discussions on whether trading is gambling have different definitions of what gambling really is, so the debate becomes one of semantics.
Keeping your emotions in check and sticking with your strategy also translate since with poker, the decisions I make in the game are +EV and although I receive the occasional badbeat, I know I will make money in the long run. I've already conditioned myself to play with in my means (the 2% br rule is universal) and my tolerance of risk is high (there's a saying that scared money is dead money).
I'm not defending gambling or proclaiming one is better than the other, I'm just saying, in my experience, they are very similar. One thing I can say of both, and I see it all the time, if you don't know what your doing, you will lose a lot of money.
As you can see, this is my first post. I am new to the forex game and I am amazed at the wealth of information on this forum. I hope to switch over to trading forex full-time. One thing I can say, trading forex gets a lot more respect than playing poker in the public's image.
I am glad you have risen the poker subject, as I have had a little bit of experience in it. Definitely not anywhere near your expertise, but none the less here it goes:
I play poker often with my friends. Once every week or two we gather up at my place and play some poker for small money (50 bucks each or so, just for the fun of it). None of us is really an good player, just amaterurs actually, but I always come on top. Some weekends I earn more, some less, but at the end of the evening I am always over my initial 50 bucks mark.
My friends ask me how is it possible that I always beat them since I havent really played more than any of us throughout my life, and I have come to the conclusion that my trading background plays in my favor: I am a conservative trader by nature, and I have the concepts of "keep your emotions at bay", "dont aim for the home run in every hand" and "think in terms of slow but steady small wins when your hand is strong, pass when it's not" nailed down, whereas they dont as they dont use any of this in their respective professional careers.
So yes, I do tend to believe that there are some universal ideas that can be sucessfully applied by both traders and poker players.
if you are betting with an edge, then you are investing. if you are betting without an edge, you are gambling. thats how i always saw it...
so i dont consider playing poker gambling, because you can actaully have an edge. counting cards in blackjack is also not gambling, becuase again you can get an edge.
I politely disagree... Forex IS tweaked against you, and it is a FACT. Spread is against you, slippage is against you, occasional strong move is against you... Leverage is another reason why the market has to play against you.
95%+ of people lose in order to make FX exist (and brokers paid).
And why does almost every book published on trading is 99% carbon copy of the other??? I have read DOZENS of books, articles, etc on trading. I have heard many lectures... Yet they all seem to be rehash and repeat of each other with the only difference is the style they are presented in...
And beleive me, you cannot control your risk.... I have backtested many strategies on TICK BY TICK basis and there were times when price has crashed 100-200+ pips and rather than having lets say 10 sl (I played with many variables), it was full 200.
I also tested indicators... Funny thing that they failed BADLY, even if I reversed the entries....
Risk reward ratios also do not work well....
Trading on the other hand has to do, if there is no one on the other side of a hedging trade, there won't be a hedge in the first place, and thus markets should be extremely illiquid...Even banks and large funds and money managers specualte in the FX market, thus taking the opposite position of a hedger who has no problem losing on the position, and sometimes might be happy to lose the hedge position, because this will benefit his business...
There is a difference between the rules of the game which everyone know and should take into consideration before actually being engaged in the game, and other hidden practices that can be made to make the percentage of winners a minimum...In trading, spread, slippage, strong moves, leverage and all other things are the rules of the game...If you accept them, then go ahead, play the game, if you don't accept them, just quit...
Why FX is not tweaked against traders..?? I will tell you why...Because no body can control this market to tweak it to his favor...Everyone is just a part of the whole big system, and really no one gives a shit who is on the other side of the trade...No body controls the market over the long term, on the short term, ya I might agree that the FX can be a little bit tweaked towards the favor of brokers and market makers, yet again, this is one of the rules of the game...Everyone know that the market is too big to be controlled by one single trader, but they know for sure that it can be controlled over the short term, or else, why do most traders avoid the asian session for example?? Because they know the volume is thin there and the possibility of manipulation is higher, so they simply avoid it, but you have 2 other sessions where the possibility of manipulation is at minimum....That's again one of the rules you get to know when you start trading the market, and many traders even know it from the very beginning...
In gambling, when you play a slot machine, you can calculate probabilities, but what you don't know, is that the machine itself is programmed to even reduce those probabilities below the random level...That's what people are not convinced of, and most of them won't even believe it...The roulette wheel is the same, it can be adjusted with many many methods to go against most gamblers everytime, and thus everyone loses and the bank wins almost in 97% of the time..
In gambling, every game you play has a random probability which can be calculated, if you played any game for a long time and wrote down the results and the outcomes, you will find that the results are very much beyond the random, it's being engineered to produce results against you all the time, no matter your position size is, no matter who you are, no matter when you play...
Take this as an example, a slot machine having 5 different shapes...What is the probability that you get 3 straight?? You have 125 different cases that can get out, in which only 5 of them can be 3 straights...So that's a 4% probability. 5 out of 125...Great...This means that for for every 100 times you play, eventually, you should get 3 straights 4 times, and 96 times mixed...If you actually went infront a slot machine like that, and sampled 1000 tries with a constant position size of 10 cents, which is just $100, and wrote down the results, you will find that you will find that this percentage is completely wrong, and that the real percent to get a 3 straights will be less than 1% in most of the cases, so out of the 1000 tries, you will only get 3 straights 10 times only...And since you are going to get only 1 straight out of every 100 tries, it's ok with me, as the machine engineer to give you 50 times your bet for each one, and more over, if you are betting with more than a certain amount, I will let the machine run in another mode which will even reduce this to 0.5%, so that you get only 3 straights just 1 time out of every 200 tries and I will increase your payoff to 100 times, just to let you feel more excited...Such a thing is not a rule of the game, because this is not a fixed rule, and people don't know it...What I expect to see is that I have a 4% probability to get 3 straights based on random, but the machine isn't working randomly....
See what's the great difference between the slot machine and the markets....The markets don't work as a slot machine, they might have a little tweak in the short term, but for sure they are not engineered over the long term, you can't engineer a trend like the one of the recent USD/JPY and sustain it for over 3 months, this simply can't work out even if you have the wealth of the top 10 on the forbes combined...
Books that don't tell the same things as others are "Market Wizards" and "Trade Your Way To Financial Freedom"...Those 2 books are remarkeable...They are telling everyone what you need to know to correctly make it through in this type of business, they are not telling how, you have to discover yourself, because everyone has his own way of doing it, you can't be a grand master in chess unless you have your own unique strategies and methods...
The chess board is never just pieces alone, it's a complete strategy, attack, defense, maneuver, psychology, and many other things that you have to consider to consitently win and make it...It doesn't make you a great player to know how pieces can move on the board, everyone knows how to move pieces the correct way, it doesn't make you successful to implement a strategy that is not right to be used with your opponent or is not right for you, but it makes you successful to make innovative moves with harmony between your pieces and in context with the whole situation...It doesn't make you successful to ignore your strengths and weakneses, if you master playing the whole game with your queen alive, then you should do everything possible throughout the game to keep the queen alive, or else, you know you are in big trouble...
Take for example, the Alba system which is being discussed over the Journal Factory Forum...It trades only during the US session, that's a time factor that should be taken into consideration...Also trades are not allowed before major news reports, so you might find that the system gave an actual real signal, but not taken, because a major economic report was on the way, this can't be factored into the tick by tick backtesting unless you either have a software which contains historic economic reports and can take them into consideration, or you do the backtesting manually, which I assume is not logical...
Events such as terrorist attacks, wars, assasination and all such events are totally random, and remember that they can work with your position or against you if they really affect the pair you are testing, so over the long run, they will probably cancel out each other, you will lose 200 pips in just 1 second on your order because of a major event, and on another occassion you will gain 200 pips in just 1 second for another major event..And mostly, I have noticed that major events like 9/11, London bombings and so on usually in 70% of the times work in the direction of the working trend...For example, the trend of the GBP/USD was down before the London attacks, so you would have probably been on the short side rather than on the long side...
During the London bombings, I was actually infront of my PC watching the market, specifically watching the USD/CHF pair...I was astonished that the pair dropped 120 pips in less than a minute and kept moving lower for another 150 pips as far as I remember...I don't think that you will get a lot of slippage in such a case if you were on the wrong side of the market, if your sl was initially at 25 pips loss, worst case scenario that you will get another 25 pips in slippage, and you get out..That's double your initial risk, not bad for a market condition like that, and this is to be expected every year or 2...Slippage is a part of the game...However, if you were on the right side of the market, it would have been even better, while I was watching the market that day, I was actually about to short the pair as it looked like it was a great short from a technical point of view...I knew nothing about the attacks, and even I didn't know why the market moved that crazy way untill 3 hours later when I knew the news from Bloomberg...Although I didn't make the move, but I wasn't going to be long the market at that time anyway, as it was already extended and making a base after a good advance...
Just to tell you something as well, I came up with a very simple trading system before, and formulated it, and one of the members here volunteered to backtest it for me in TradeStation...It was tested for the EUR/USD pair for the data of the past 2 years, tick by tick, this was in mid 2005, so the testing data was mid-2003 to mid-2005...Guess what, the system is profitable for those 2 years, long trades and short trades both returned a profit and I have the test results as a proof for that I can't remember more details about the results, but overall, the system was doing fine..So, there is actually profitable systems out there, everyone can find one to work with...
When you say that you tested indicators and they fail, this is normal, even if you reverse the entries, this is still logical...Because the issue is not the entries, it's the exits that make the difference...The Turtles, represent a clear and convincing model for system trading...They used to trade 20 day breakouts...If you backtest 20 day breakouts, they will probably fail, even they employed a well defined, and logical techniques for setups, entries, exits and position sizing...Not every single trade was made using the same position size, and not every trade was exited at the breakeven point...These are things that are usually missing when you backtest systems, even if you do it tick by tick...
Sorry for the long post, but I just wanted to make my point of view as clear as possible...
The more people fail, the more money they will give away to the organizers.
You can't win chess by not knowing your opponents, their goals, and the rules of the game. Simple observation of how pieces move is not enough... You need solid theory behind pieces (such as indicators, leverages, etc).
You are welcomed!
The times you are referring to when currencies tend to move the other direction against interest rates is because of over extension in my opinion...For example, the USD with rates at 1.5% at the beginning of the year, can move sharply up because expectations are high that we are going to arrive at 4% by the year end, but with rates at 4.25% today, the USD can move sharply lower in reaction to any further rate hike, because we all know that the demand driver is coming to an end, and thus we don't want to own something which is having a declining demand factor...
I assume that you are talking about the thread you started named "Forex as a system...Who benefits? What internal rules exist in FX?"...I agree with you that there must be some internal forces ruling the market and act as some rules of the game...One of these rules in my opinion is for sure the supply and demand for currencies...
Those numbers my friend are what make the tangeable things really eatable or usable..
...No I must stop now, before I go mad !
good discussion Nader and Fanat.
My only contribution is this: if forex is the chessboard, i look across and find that all too often, I am playing against myself. I am my strongest and most dangerous opponent.
Gambling or not, best to see how you are doing on paper or with meaningless money, over a large sample before you use meaningfull money.
Try 50 /100 trades, sticking to a system and see how you do. Even if it is gambling and I am doing well over a reasonable sample, I would continue and ramp up !
People who play slot machines at the casino for example, are gambling. They are playing in the hopes that they can catch a big win. However, over a series of pulls of the slot, you will always lose because the expectancy is in the casino's favor. Blackjack is the same. Unless you are card counting, then that marginal edge in the casinos favor represents positive expectancy for them, not you. In essence, you are gambling. In the end it all comes down to which way expectancy is turned.
FOREX has a liquidity problem!!! Meaning the brokers have to trade with you, and since your profit in many cases = their loss, then you can see where the money can be found... IN making people lose...
Forex may even be shut down (for little guys) due to inliquidity...
Ok For me it all boils down to intent. If you are trying to get something for nothing then it could be gambling. I know people trade Forex in a gambling style. They want the "Holy Grail" system, they trade without stops, they prop up failing accounts after repeated margin calls etc. They don't trade they just "throw the dice" and chase the trend. You can gamble on almost anything, just hang out with a bunch of guys cooped up on a ship in the navy, or in the baraks in the army. People will gamble on who has the fastest bug! So yes, you can gamble on the outcome of the movement of a chart, but most of us DON'T. We trade and speculate.
From the end of the euromoney article: But, ultimately, the real reason the venture will most likely come to nothing is precisely because market players feel they have little obvious to gain from it. "It canít possibly work. Why would you quote five other banks in large amounts? People will be much more prepared to take their chances on EBS (to shift volume)," says the global head of FX at a US investment bank. "Why would you want to make the strong stronger?"
I was surprised to learn that the average trade size on EBS is just 3 million ...thought it would be much larger. Anyway, I don't think we'll ever need to worry about our little casino being shut down. Even if this evil ring of master banks gets set up, EBS and the like will still exist and quotes will still be provided. They cannot taketh away!
As a side note, Oanda has taught the banks something in innovation: Euromoney talks of Barclaysí introduction of precision pricing, which is effectively trading in pippettes. Oanda has been doing this for yonks!
More to the point, for those who look at the trading arena as being similar to the gambling arena, you may want to read some of Victor Niederhoffer's books, or visit http://dailyspeculations.com/index.htm, his web-site (beware, it takes effort, but it pays). He takes a similar approach.
My view is that you don't make money from winning pots, anyone can win a hand with the right cards and flop, you make your money from folding when your beat. Too many players stay in the hand too long and it eats away at their profits.
I guess I don't consider poker as gambling. It is the only game in a casino that does not have a negative house advantage. You could argue card counting blackjack, but straight up Vegas Strip BJ is -.035 to -.055 depending on the number of decks used. Plus, casinos are cracking down on card counters big time. Merlin's quote is perfect. I guess it all boils down to basic gaming theory and knowing what your edge is.
Just a small paragraph to quote from "Trade Your Way To Financial Freedom" by Dr. Van Tharp...The following is a part from Chapter 11 named "The Opportunity and Cost Factors"
"The Market Maker Who Gets the Bid-Ask Edge on Each Trade, But Occasionally Gets Swept Along by the Market
Our last trader, who represents an extreme, is the market maker. This person tries to get the bid-ask spread on every trade that comes along. Letís say that the bid-ask spread represents a gain of about 8 cents per trade and that our trader gets it about 90 percent of the time. Another 5 percent of his trades are small losses of about 8 cents per trade. However, the last 5 percent of his trades represents the big losses (for him) that he sometimes needs to take when he gets swept along by the market. These losses might amount to $1 per trade.
When our last trader applies these data to the expectancy formula, he arrives at a figure of about 1.8 cents per dollar risked. After transaction costs, he clears about 1.2 cents per dollar risked. How does this particular person make a living? He probably does not have much chance compared with the person who knows how to make more than a dollar for every dollar risked. Or does he?"
Dr. Tharp is comparing 4 different types of traders using 4 different types of trading systems in here...In brief, they are as follows:
Trader 1: Long-Term Trend Following with a Large R-Multiple Objective
This trader has a system expectancy (Which is the dollar amount gained per dollar risked) of $3.32 before transactions costs and commissions, and $2.9 after costs..
He also has an opportunity factor of 0.05. The opportunity factor is calculated by estimating from historic logs of the system the amount of valid trading signals generated. The 0.05 opportunity factor in this example is based on 1 signal every 20 days, in which you get 0.05 by dividing 1 by 20...
Trader 1 also has an average volume per day in dollar amounts of $0.145, which can be calulated by dividing the net expectancy by the number of days required to generate 1 signal...Why is that?? Because simply this trader gets a signal every 20 days, and when your net expectancy is $2.9 per trade, so you will risk $1 every 20 days, and get a $2.9 every 20 days for that $1 risked....So per day, you are going to have on average a $0.145 in volume, just to compare all systems together on the same basis...
You can also calculate it the other way around by multiplying the net expectancy by the opportunity factor directly, it will yield the same result...
Trader 2: The Standard Long-Term Trend Follower with a 40 Percent Reliability and 2:1 Reward to Risk Ratio
Trader 2 has a gross expectancy of $0.776, net expectancy of $0.630, an opportunity factor of 0.5 (Meaning that he gets 1 signal every 2 days on average), and a dollar volume per day of $0.315...
Trader 3: High-Probability, Low R-Multiple Trading
Trader 3 has a gross expectancy of $0.5, net expectancy of $0.3, an opportunity factor of 5 (Meaning 5 signals every day on average), and a dollar volume per day of $1.5
Trader 4: is our trader in the quote, the Market Maker
Now, our big guy, the Market Maker has a gross expectancy of $0.018, a net expectancy of $0.012, an opportunity factor of 500, and a dollar volume per day of $6...
Just a little note before we go ahead, the expectancy is calculated by getting the following:
1- Average number of winning trades
2- Average number of losing trades
3- Average profit per trade in dollar amount (AP)
4- Average loss per trade in dollar amount (AL)
Simply, calculate the probability of winners (Name it PW) and the probability of losers (Name it PL)
Expectancy = (Prob winners*Average profit) - (Prob Losers*Average loss)
Expectancy = (PW*AP)-(PL*AL)
PS1: If your system has a negative expectancy, it's a loser over the long term, not matter what it can do in the short term...
PS2: Expectancies of the 4 traders were based on hypothetical risk/reward ratios and win/loss probabilities, but they fit the strategies followed by each trader, for example, for Trader 1, his winning probability is low because he is a long term trend follower, he makes all of his profits from very few selected trades that go with large trends, while at the same time, he employes a high risk/reward ratio because that's how can really make money with such a low winning probability..
Back to the main question which Dr. Tharp is trying to answer from the very beginning, which one of those 4 trading systems is really better than the others??
Quoting Dr. Tharp once again:
"Initially, the trader with the largest expectancy seems clearly to be the
the trader that one would expect to have the most success. Indeed, this traderís expectancy is far better than that of most long-term trend followers, so we would expect him to have a great track record. However, the opportunity factor clearly changes the element of expectancy.
Letís say that trader 1 generates one trade on the average every
20 days. Trader 2 gets a trading opportunity every other day, while
traders 3 and 4 generate 5 and 500 trades per day, respectively.
With this perspective in mind, trader 1 and trader 3 seem to generate about an equal volume of potential profit each day although trader 3 is less likely to have extensive drawdown periods. However, the total advantage clearly belongs to the market maker. The market maker, if he is smart, should seldom have a losing day.
Profits are a function of the expectancy times the opportunity? The result amounts to a dollar volume in expectancy generated each day That dollar volume is the most important factor in determining how much money you
will make on a daily basis."
Up to this point, it's really obvious that the Market Maker is the one who is really having the edge here among all the others..However, Dr. Tharp has not finished the book yet, that's why he said that the market maker (If he is smart) should seldom have a losing day...The remaining factor which is missing in here is the position sizing...If the Market Maker deploys good position sizing to his trades, he will be the one with the best trading system...
Remember, most floor traders on the futures exchanges are market makers and they are applying this strategy, yet, some of them make fortunes and some of them go broke, although they are all doing the same thing, getting out the spread out of hundreds of trades everyday...The position size is the critical factor which define those who make fortunes and differentiate them from those who go bankrupt...
Now, what has all this to do with the thread and the running discussion?? Obviously, it has nothing to do, many will think....But actually, it's strongly related, it's the core...
In the forex market, we are all apparently dealing with Market Makers who are always on the other side of every single trade we take..If I am long the Euro, then he must be short, and vice versa...There is actually a huge conflict of interest between me and the Market Maker, it's either his profit or mine...See why 90%+ of the traders lose money trading the market?? Because the strategy the market maker is using have a 90% win ratio, he wins on almost 90% of the trades...Unless you have your order routed by the market maker to a higher level, the interbank system for example, you will be in conflict with him, either you lose, or he lose, there is no other way as long as he is staying on the other side of the trade...
If the market moved in my favor, then he is losing, and if the market moves against me, then he is making money, and once he gets his spread by a small 3 or 4 pips move against me, he routes the order to the interbank system and we are not longer against each other, I am competing with someone else right now whom I don't know...For that exact reason, the market maker can't manipulate the data feed, he is just a part of the system, he is a trader like me, and he has boundries to abide to, he can't clear them or else he will be violating his own trading system, which generates good money for him...The Market Maker knows very well that if he violated his trading system, it can go against him violently, and because of his slim reward/risk ratio, he can't do this or else he could ruin the profits of a whole month in a few couple of hours...
So because of this hirerchy, the reatil forex can't dissapear, because if it did, market makers won't make money...Their opportunity will decrease if the total number of traders decreased, and thus their daily dollar volume will decrease...It will be a disaster for market makers to see the retail forex market dissapear, they will probably go bankrupt in some few weeks..
The big banks however, don't give a shit if the retail FX market grew or dissapeared, they actually make money from selling options on currencies (Which has almost the same win/loss ratio as the market maker, almost 90% winners vs 5% breakeven and 5% big losers), hedging against big clients who seek protection against currency rates fluctuations and don't mind taking a loss as long as their business is showing good profits larger than the losses of the hedge position...
So as long as the world trade is going on, growing and increasing both in importance and in value, the retail forex market is going to be there, just as the futures market will be there as well...It will be open for hedgers, corporations, hedge funds, money managers, banks, market makers, and finally small retail traders like us...
Please don't be frustrated...I don't want to make the picture gloom, but I think knowing the reason behind the 90% losers in the FX retail market is not going to make any difference to anyone, we all know the fact, question is how to move towards the 5% arena?? That's the real question
Hope you haven't got bored from the long post...Sorry fellows....lol...
One more thing which requires clarification....I have to admitt that I have been ignorant when I was disagreeing that scalping is eventually a bad trading methodology...I would like to completely change this opinion, scalping is eventually the same way the market maker is doing the business...A good scalping trading system similar to what the market maker is doing might be a good one, but it eventually will need a huge amount of effort and time to trade, and better it be automated...
The reason why many scalpers lose money over the long run, ruin their months of earnings in just 1 trade is because they are not having all the components of a good scalping system right...They might be having a problem with expectancy, win/loss ratio, reward/risk ratio, opportunity factor, position size, or even all of it...
I am not changing the my opinion to adopt that scalping is the way, sure there are better ways to make money in the market and live a normal life without starring at the screen all the time, but I am saying that a good scalping system can work, but for those who really can tolerate it...
very interesting reading, thank you
Thanx, Narafa. Sometimes the conspirsy talk makes me nuttier than I already am. The brokers are on our side, they want us to trade, they count on it, they make money when we do. That is capatilism at work. The system is in everybodys best intrest. I am just thankfull that we have someone on board who can explain it as well as you can. Thanx again!!!
However, I don't want to dissapoint you, the brokers are not on out side, on the other hand, they are always competing with us, if they make money, we lose money and if we make money, they lose money...
The issue is that somebody MUST lose for someone else to win, it's a zero sum game, All money won + All money lost = ZERO
The reality in my opinion behind all this system of the forex market is that everyone is a trader, someway or another, we trade, the market maker trades, the brokers trade, the big banks trade and so on...So since we are all traders, we for sure must have conflict of interest against each other...The market maker who is executing my order and who is holding my money is in conflict with me in every single trade until he gets his spread, then he doesn't care if I go to hell or I made a $1M profit for the trade, he is already out of the position with his profit, the spread. Once the market maker takes his profit, he already throws the order to someone else higher, a broker for example, which is still waiting for his profit to show up...The market maker slipped himself from the middle, took his profit and went away to get another trade...I am now against this broker, he wants his profit as a trader, and after he gets that, he will throw the order to someone else higher, and so on...
If you know how the retailing business works you will get this concept very easily, but it's reversed...There is a manufacturer, Wholesalers, Distributors, Retailers and finally customers who really buy the product to use it rather than make a profit from it...
If the manufacturer sells to the wholesaler 100,000 units for $100,000, the wholesaler then breaks down those 100k units and sells 10k units to 10 distributors, make his profits and get out of the cycle...The Distributor then sells the retailers in 1k units, makes his profit, and then goes away...Now, the retailer is left with the consumer, and he is supposed to make a profit also, so he sells in units of 1 or 5 or whatever smaller than the 1k he buys from the higher level (The Distributor), makes his profits and then gets out of the trade...
The forex works exactly the same but with reversed direction...The customer is the one who usually buys the largest quantities of the currency by hedging and other strategies...Those are the companies involved in the world trade, import and export issues...
The bank is on the other hand the retailer which those customers shop at, the big bank collects small portions of currencies in order to sell them to his big clients, usually from lower level brokers...Those brokers collect those money from thousands of smaller market makers, and those market makers collect those money from even hundreds of thousands from retail traders like us...
So basically, you initiate a 10k trade, the market maker have 100 trades like those, throws them off to the broker after he gets his profit, the broker is now left with $1M from one market maker, he collects 100 trades like those from a 100 market makers, he makes his profit and throws the $100 M to the bank, the bank is collecting 10 of those trades from 10 different brokers, amounting for $1 B, throws them to his client (Usually in the form of selling options against them while keeping the actual amount in his safe), the customer buys, and either he loses or wins, he doesn't care, he is not speculating like everyone on the cycle...
I thought I would just correct the miss-conception that the broker is on our side....If you recall the discussion between me and fanat, we were talking about the chess board and who are we playing against, knowing the ones on the other side is very important, and it's very important that we don't get caught that someone is on our side while he is actually not...
Oh, and one last thing to mention as well, the cycle mentioned in the last post starts to reverse when the ones at the higher level makes real money in profits...
Meaning that when the client who doesn't care to lose or win happens to win, everybody in the whole cycle takes a loss, distributed among everyone by volume, all this amount of money is collected and goes back to the client which sums a huge amount of money....In 95% of the cases, the client loses small amounts of money relative to him and when this happens, the profits (The loss of the client) are distributed down to everyone in the cycle which diminishes down as we go until they reach the minimum when they reach us (The retail forex traders) because we are the ones trading with the lowest volumes...
The other very important thing to be said in here is that everyone in the cycle makes money 90-95% of the time except the retail traders...Why is that??? Think about it...90-95% of the retail traders usually don't operate this thing as a business, they are not having good trading models and systems to use, that's why they ruin themselves, sooner or later...
On the other hand, think about everyone in the cycle, Market Makers, Brokers, Banks and even clients, they are all doing BUSINESS...They don't do it with emotions, they don't want to get rick quickly, they don't give a shit if they lost 5 times in a row (Though this is very very rare in their case since they employ trading models that seldom create such loss streaks)..They are doing BUSINESS, they are doing it automatically with some research, but they are doing it automatically...They know that what they are doing works, and that they will use it because it works...
When the profits come down from the clients, everyone is usually waiting for them, except the retail trader who usually got out of the market, either too early, so he misses his portions (Which will be distributed among others all the way long), or worse, he is on the other side now in another cycle, so he takes a loss instead of a profit...Lack of confidence, patience and hesitation, coupled with not having a defined trading model and mostly not knowing what's going on in the world of trading results in this 90-95% losers..In fact, this percentage can be reduced significantly and the number of winning traders increase if and only if a large number of traders think of it as a long term business...The profits come just from 1 source, and everyone gets his share, so there is money for every market participant, but only WHEN the profits are coming back...If you early, then you already gave up those profits away to someone else in the ladder..
i have a very good under-standing with my broker, i give him so many contracts to buy/sell then tell him to work them with a base price to myself. We dont rip each other off, we offer the scalpers the position with the broker i'm using.
I just had a better Discussion with my so called broker, he told me they are a market maker not a broker, but they did admit if i work with them rather than against them it would probably work better for me based on 100 contracts.
crucial posts narafa, i can see youve learned a lot from dr. tharp. thanks for the refresher course
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