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If you make money, does Oanda make money? 35 replies

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Where does the money come from?

  • Post #1
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  • First Post: Edited 1:50pm Sep 16, 2005 1:41pm | Edited 1:50pm
OK. all my friends who aren't anywhere near the financial markets are asking how i think I will be making money in forex. They said (and they are correct) that money doesn't grow on trees. What I want is owned by someone. So why would they agree to give it to me?
In stocks where profits come is obvious. The stock market is not a zero-sum game because there is the development of the world economy and the industry. There is money that flows into the system all the time and thus long term, even if you had both long and short positions, you would get more money than you had in the beginning. Combine it with the leverage of the ocasional options....
Now, about forex.
First, a small side remark. All my plans are based on not getting Soros rich in this business. I plan to get enough money to make myself happy, but I won't get to a trillion in all my life neither I want to.
As it looks to me now I have two options where to take the money from. First is playing against other players like me and getting their money (the "90% that don't succeed in forex"). I believe that I can outsmart many of the people. However, remember that we are all hoping to make money. Are there enough suckers to make us all rich?
Second way is following the trail of some large banks, who really move the prices. In a game of two giant sharks I can be a small fish that looks for the bits of torn flesh that are falling all around (my apologies for the vivid description). Since I need a very small sum this might be a valid strategy. On the other hand, institutions have the best people on salary watching the maret on any given moment and devising algorithms for market movement predictions. Why don't they just take my money as well as that of other banks? Could it be that there are many banks that are also "suckers" and don't have an efficient market following system or execution system?
Even from a theoretical point of view I don't get it. The market should tend to perfection. i.e. it should be totally unpredictible. Then why can we make money speculating?

What about you? How do you picture to yourselves the garden with money trees in forex?
Could somone change the thread title to make some sense? I accidently cut it short
Quoting ivenger

What about you? How do you picture to yourselves the garden with money trees in forex?
I thought all I had to do was pick the money off the trees growing in my forex garden!

There was an article or book that I got off emule called something like "Winners and Losers of the zero sum game" which describes in detail what you've just said. I can dig out the link for you if you want.
Quoting Isotonic
I thought all I had to do was pick the money off the trees growing in my forex garden!

There was an article or book that I got off emule called something like "Winners and Losers of the zero sum game" which describes in detail what you've just said. I can dig out the link for you if you want.
I'd be glad to. However, I understand the zero sum game. The question how it settles with the forex trading as we know it?
I have read some interesting stuffs from Michael Covel's trend following stuff, and I would say that where we are going to get the $$$ from ...

is from the hedgers .. Sure, its zero sum, but if you think about it further, there's always those who are in the market, not to trade and make money, but to hedge their earnings, think large producers/retailers/importers/wholesalers/etc ...

also think travelers/tourist ...

Just my opinion..

Ken
Trade what you see, not what you believe.....
I suppose it all boils down to timescales.

If a bank is short USD well into the rest of 2005 because they can see that debt is crippling the US economy plus all the other factors, then there will be plenty of points along the way where their trade is down - in these freak bursts of dollar strength the profits instead are picked up by speculators i.e. short term bank traders and retail traders like ourselves.

The bank has taken a long term risk and say that they come out with a decent profit at the end of the day.

The speculators (which includes the 90-95% of retail speculators who reportedly lose trading forex) have made many trades in that same timescale ploughing money back into the market which will ultimately fuel the longer term USD short.

As I see it - money flows into and out of different traders (and "investors" - don't forget the banks) pockets at different times and that's what keeps the whole system on this crazy merry go round.

I seem to recall reading somewhere that the vast majority of forex trades are speculative - hedging only accounts for a 1 digit percentage of all activity.

When we're trading it's a battle against other speculators like ourselves (though many are trading on behalf of banks with seriously deep pockets) - some are trading 1min charts, some 30min charts, some 1day charts etc. - everyone has a different perspective on risk and reward.
Quoting forexbasic
I suppose it all boils down to timescales.

If a bank is short USD well into the rest of 2005 because they can see that debt is crippling the US economy plus all the other factors, then there will be plenty of points along the way where their trade is down - in these freak bursts of dollar strength the profits instead are picked up by speculators i.e. short term bank traders and retail traders like ourselves.

The bank has taken a long term risk and say that they come out with a decent profit at the end of the day.

The speculators (which includes the 90-95% of retail speculators who reportedly lose trading forex) have made many trades in that same timescale ploughing money back into the market which will ultimately fuel the longer term USD short.

As I see it - money flows into and out of different traders (and "investors" - don't forget the banks) pockets at different times and that's what keeps the whole system on this crazy merry go round.

I seem to recall reading somewhere that the vast majority of forex trades are speculative - hedging only accounts for a 1 digit percentage of all activity.

When we're trading it's a battle against other speculators like ourselves (though many are trading on behalf of banks with seriously deep pockets) - some are trading 1min charts, some 30min charts, some 1day charts etc. - everyone has a different perspective on risk and reward.
I'm not sure I understand it. I don't think that the only thing that happens here is money changing hand at different times. Sometimes we withdraw it and spend it on food, drink and women. Also the hedgers want to hedge in order to keep their money - not to lose it.
I remember reading a George Soros comment just recently about the "zero-sum" gain analogy.

His take on it was something like...it isn't a zero sum gain.

When he made his run on the pound, he caused some consternation in the London financial community for sure. But, they also gained from it. A devalued currency has benefits, that I'm sure most of us can understand. Those benefits could in fact be a longer, and a much stronger plus for that nation. Not to mention the "learning" experience such an action has. I know I've learned quite a bit from similar (if slightly smaller) currency losses

It's not hard to imagine a country purposely devaluing their currency to benefit themeselves...and enriching someone else in the process.

So, where do you take the money from?

I would think, "anywhere you can" would work

SF
I think it really depends on how you want to look at it. It is definitely zero sum in terms of all the participants in the one 'market' that you are talkin about.

BUT, it is not zero sum, if you also include all the intermarket relationships.


Ken
Trade what you see, not what you believe.....
Quoting SouthernFried
I remember reading a George Soros comment just recently about the "zero-sum" gain analogy.

His take on it was something like...it isn't a zero sum gain.

When he made his run on the pound, he caused some consternation in the London financial community for sure. But, they also gained from it. A devalued currency has benefits, that I'm sure most of us can understand. Those benefits could in fact be a longer, and a much stronger plus for that nation. Not to mention the "learning" experience such an action has. I know I've learned quite a bit from similar (if slightly smaller) currency losses

It's not hard to imagine a country purposely devaluing their currency to benefit themeselves...and enriching someone else in the process.

So, where do you take the money from?

I would think, "anywhere you can" would work

SF
So you try to say that the speculators might gain money directly from the economies of the countries whose currencies we trade? An interesting view, hope I got it right.
Quoting ivenger
Are there enough suckers to make us all rich?
this is a great question man, your post presented enough to think about for weeks.

once you truly realize you are playing a zero-sum game, your attitude really starts to change. thats why its so damn hard to make money! when people talk of making "easy" money in forex, you can conclude that they dont realize they are playing a zero-sum game. to call forex trading easy is to disrespect the thousands of hedge funds and brilliant money managers all over the world, because if you are making money it is coming out of their pocket! every time you make a dollar, somebody lost one. who lost one is such a great quesiton. i dont know the answer exactly, but i do know that "dumb" traders make up a VERY small part of the market, so the dollar you made most likely came out of an experienced trader's pocket.

with limited tools and manpower, it seems almost impossible for the small fry to make money in this market. the market is an amazing thing though, there always seems some opportunities laying around. especially if you trade where the big guys cant (ie low liquidity times). ive heard Tony Saliba describe it as "threading a needle through the strategies of the most prominent market players". to tell you the truth, i dont really get why its possible to make money in this market. i just thank the lord that it is! LOL
Relax and be happy.
Quoting merlin
this is a great question man, your post presented enough to think about for weeks.

once you truly realize you are playing a zero-sum game, your attitude really starts to change. thats why its so damn hard to make money! when people talk of making "easy" money in forex, you can conclude that they dont realize they are playing a zero-sum game. to call forex trading easy is to disrespect the thousands of hedge funds and brilliant money managers all over the world, because if you are making money it is coming out of their pocket! every time you make a dollar, somebody lost one. who lost one is such a great quesiton. i dont know the answer exactly, but i do know that "dumb" traders make up a VERY small part of the market, so the dollar you made most likely came out of an experienced trader's pocket.

with limited tools and manpower, it seems almost impossible for the small fry to make money in this market. the market is an amazing thing though, there always seems some opportunities laying around. especially if you trade where the big guys cant (ie low liquidity times). ive heard Tony Saliba describe it as "threading a needle through the strategies of the most prominent market players". to tell you the truth, i dont really get why its possible to make money in this market. i just thank the lord that it is! LOL
I totally agree with Merlin. We are all playing a zero-sum game, but since the whole sum inside the game is too huge, the opportunities for profiting are also huge. Plus, don't forget new comers. They bring new fresh money to be included inside the zer-sum game, so the whole slice is getting larger every now and then.

Just don't play with sharks of the market

Thanks,

Nader
Hi

Here's another question that came to my mind when i thougt about thissome weeks ago. What about those of us who are not trading on the "real" markets or interbank forex (i suppose that's most of us ) but in retail forex or cfds on stocks, commodities etc.?
I mean we are not directly in the market, interacting with the other players in the market but rather "betting" on differences in the rates. Betting on the rates moving up or down. So we don't actually "take" money from the guy we sell a stock to at the tip of the curve when we bought at the bottom. We just place our bet at the market maker and depending on his rates he will write a higher or lower number than the original number in the balance of our account once we close the position.
Now the market maker will probably interact with the real market to hedge themselves or whatever they do. But i don't really understand their part in the game yet.
So if our wins is somebody else's loss then it can only be via the trades the market maker takes but not by our personal actions directly.
What do you think?
Hi,

Here is what Nassim Nicholas Taleb said in his book "Fooled by Randomness". He is talking about the hidden role of chance in the market and in life.
Taleb is a man who is obsessed with the role of chance, and he gives a very thorough treatment. He also has a gift for expressing complex statistical problems in a very understandable manner.

An example from the book:

Assume you have 10,000 people who flip a coin once a year. After five years, you will have 313 people who have come up with heads five times in a row. If you put suits on them and sit them in glass offices, call them a mutual or a hedge fund, they will be managing a billion dollars. They will absolutely believe they have figured out the secret to investing that all the other losers haven't discerned. Their 7 figure salaries prove it.

The next year, 157 of them will blow up. With my power of analysis, I can predict which one will blow up. It will be the one in which you invest!
Quoting esfx
Hi

Here's another question that came to my mind when i thougt about thissome weeks ago. What about those of us who are not trading on the "real" markets or interbank forex (i suppose that's most of us ) but in retail forex or cfds on stocks, commodities etc.?
I mean we are not directly in the market, interacting with the other players in the market but rather "betting" on differences in the rates. Betting on the rates moving up or down. So we don't actually "take" money from the guy we sell a stock to at the tip of the curve when we bought at the bottom. We just place our bet at the market maker and depending on his rates he will write a higher or lower number than the original number in the balance of our account once we close the position.
Now the market maker will probably interact with the real market to hedge themselves or whatever they do. But i don't really understand their part in the game yet.
So if our wins is somebody else's loss then it can only be via the trades the market maker takes but not by our personal actions directly.
What do you think?
Does it really matter who placed the trades?
The fact is that the money you gained has been transfered to you from someone else's pocket.
Quoting ivenger
So you try to say that the speculators might gain money directly from the economies of the countries whose currencies we trade? An interesting view, hope I got it right.
Is everyone involved in the Forex market a speculator? Semantically speaking, I guess so.

But, are there people who get involved with Forex, who do so for other reasons than to make money from it? Could, possibly...the Bank of England, Japan, or others have reasons besides making some bucks? To them, I would think the value of their currency has deeper implications for their nation as a whole. Are there others in the markets who are more interested in currency valuation, than actually winning a trade?

I truely don't know. But, it seems not out of the realm of possibility. So for them, this would not be a zero-sum gain. They, in fact...could be getting more out of losing trade than those winning that particular trade. Still, looking at the trade by itself...yes, someone won, and someone lost. Zero-sum. I just was interested in Soros's take.

Overall, it seems it could make sense. Whether or not it is true...I'll let someone wiser than me comment. And, even if true, I'm not sure how I'm knowledgeable enough to make my 10 pips from it

SF
Quoting SouthernFried
Is everyone involved in the Forex market a speculator?
no, not at all. hedgers make up a huge portion of the forex market, around 80% i'd guess.

so you could make the argument that you are taking your dollar out of a hedger's pocket, and he should be easier to trade against. i dont look at it that way though. when a big hedger moves the market, it creates a trading opportunity, and there is only a limited number of seats for this opportunity; the competition being other traders. this is how i picture it, like huge game im playing with the smartest people in the world.
Relax and be happy.
Quoting merlin
no, not at all. hedgers make up a huge portion of the forex market, around 80% i'd guess.

so you could make the argument that you are taking your dollar out of a hedger's pocket, and he should be easier to trade against. i dont look at it that way though. when a big hedger moves the market, it creates a trading opportunity, and there is only a limited number of seats for this opportunity; the competition being other traders. this is how i picture it, like huge game im playing with the smartest people in the world.
Exactly. I am always thinking that way.
While I know my view on this is uneducated and probably untrue I can't help but continue to think it. There doesn't have to be a loser for there to be a winner in the forex market. It appears that as forex traders we only exchange currrency, one for another, then back again.


If I were to walk into my bank with $100,000(USD) and ask for them to exchange it for euros. OK, I know this is unrealistic but bear with me for it has a point. They would do it at their rate which is based on the current exchange rate with their own cut taken out. If I walk back into that bank lets say 6 months later. In that time the euro has gained in strength by 10% overall and I ask them to exchange my euros for dollars again. I would have gotten 10% more dollars back than I started with(roughly). Who lost money on me making money there? The bank I exchanged with? Some other bank who exchanged with them? Some guy in china whose cursing my capitalist a$$ because he just realized he lost 10grand? It looks like nobody really get screwed directly in either the first trade or the second trade. Whoever got that unit on either end of the trade likely had their own reasons for it. To assume that it was a loss because I gained is an oversimplification that might not be accurate.

We are working with exchange rates. Not price to purchase. We don't own anything trading forex. We just shuffle money back and forth from one currency to another hoping to keep putting our chips into the demonimation that is gaining in strength while we possess it. While it is termed a 'contract' it is really an open one in the spot market because we can begin or terminate that exchange at any moment we choose within the abilities of the trading method we use and many of us use electronic which is seconds to execution.

So to me I don't see anyone having to take a loss for me to gain. Each half of the exchange seems to be somewhat independent of each other even tho for our involvement we have a loss or gain associated with the timeframe that we hold the position open. I may have bought or sold a unit to close the position. Whoever got that unit on the other end of the exchange may actually closing a position themselves. One that was held for a different time interval and that person could be closing with a gain even as I'm closing with a gain with the same exchange. Does that mean there was two traders in another exchange that both of them experienced loss?

I may have misconceptions about how forex works even as I have much success trading it. Although you don't have to know how a car works for you to be able to drive well.
  • Post #20
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  • Edited 8:30am Sep 20, 2005 8:01am | Edited 8:30am
Quoting merlin
no, not at all. hedgers make up a huge portion of the forex market, around 80% i'd guess.
I don't think this is true. If by "hedgers" we are talking about people involved in importing/exporting who are looking to reduce their exchange risk, then it's impossible for them to account for 80% of the market, simply because daily world trade is nowhere near 1.5 trillion dollars.

According to the book "The Winner's Curse" (a fantastic book, did anyone read it?), forex world trading was 500 billion dollars a day (at the time it was published), while international trade of goods and services was about 10/12 billion a day.

So probably 90% of the market is made of speculators. Maybe it's the famous 90% that lose money ?

Best regards,
Bonete


edit: By the way, there's another interesting (off-topic) fact mentioned in this book: most research papers find no correlation between currency movements and interest rate differentials, not even in the long run.
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