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The greatest Forex questions ever asked

  • Post #1
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  • First Post: Dec 28, 2005 3:49pm Dec 28, 2005 3:49pm
Here is a list of questions that I am working on. I believe that these types of questions are absolutely crucial and have to be dealt with in order to proceed with successful FOREX TRADING, not gambling. Unfortunately dozens of books on trading that I've read, by many authors (Williams, Elder, Bain, Ross, and others) don't seem to focus on THESE questions... In fact those books seem to be concerned too much with these various indicators with exotic names, alchohol clubs, big green lizzards and dogs... Too much rehash and repackaged material, which avoids aswering these questions in detail and non-vague terms....

1)How EXACTLY are the brokers compensated? Just by spread,slippage and swap? How do they finance our high leverages and manage to give us such a sweet deal??? And what are their financial interest in spot forex?

2) What procedures do brokers have to make sure that they don't go bankrupt? What procedures do marketmakers have to make sure that they don't go bankrupt and What procedures do Big Banks and corporations have to make sure that they don't go bankrupt through floating currency rates?

3)What happens if the broker can't find a match for a position? Do they take the other side of it? Or do they look for clients orders from another brokers?

4)How much control do they brokers have over the quotes that they give to their customers.

5) How big should the order be for it to leave the brokerage house and with which leverage?

6) How many feeds is there? Is there just one or two?
7) When price moves lets say one pip, what EXACTLY does that mean? What is the mathematical model behind it? WHo calculates the pip change.

8)Can there be price action (ie candles, or a movement) without any orders/deals being made? if so, how and why?

Here is an example: Suppose a Euro/USD moves, that move will cause USD/HKD to move to the other side without any trades required to be made in HKD! Or Eur/NZD vs NZD/JPY ...

9)What is the mathematical model for Forex currencies over popular time frames? Anti-Persistent, Random Walk, Persistent? To what degree (in Hurst) and how does it differ between various time frames?
10)How long is there price memory (crucial to know the values for MA's and indicators) and what is autocorrelation over various currencies and their timeframes?

11) How large should the order be to move lets say Euro 1 pip?

12) What is the real purpose of the Forex trading from the perspective of those who have made it? Some say it is to make the price more balanced. However that produces questions such as:
a)How can ordinary speculators be given such a responcibility and
b)How can our orders even affect the price in any noticible degree?

13) Who benefits and who loses in the Forex?

14) What percentange of VOLUME on forex comes from speculative trades(in other words from us) for profit.

15)How is liquidity provided and kept at the level?

Thank you all.
Excellent questions, and I for one would love to know the answers.

I think the books you have read are more to do with what you can do about your own success and take the 'gambling' aspect out of it as much as possible, rather than the machinations of the market, and therefore possibly of more value to you.

All the same, I agree that there are lots of grey areas that it would be great to have answers to.

The framework is there; we just have to work on our frame of mind.
  • Post #3
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  • Edited 7:49pm Dec 28, 2005 7:42pm | Edited 7:49pm
I know the answer for question #13. This is simple: Benefits in Forex the guy who buyes at a lower price & sells at a higher price. And the loser is the guy who buyes at a higher price & sells at a lower price.

And anyones profits or losses depend only & solely on his bying & selling price.
  • Post #4
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  • Edited 8:13pm Dec 28, 2005 8:06pm | Edited 8:13pm
Well that's a pretty big list I will try and answer a few at a time.


1. How do brokers make money ?

This is an easy one.

Brokers pay a cheaper price (this is done automaticaly by computer) and simply build the difference into thier charting platforms and charge you more then what they pay.

This is the number ONE reason I never trade forex and only futures!

No two forex brokers charting platforms will ever be the same and that's what makes it a very dangerous game to play as it's not regulated by ANYONE.

I will answer a few more but before I do I think it's imperative that you understand exactly why the Forex market exists.

It is here to foster trade between International corporations and that's it's MAIN purpose.

ABC Company builds widgets and they buy steel from Japan to make them.
Everyday they place an order for X number of tons of steel and everyday they need to hedge that position against the Yen/dollar so they buy or sell the currency.

This is what drives 90% of the movement of the forex markets NOT speculators !!!

Keep this in mind and remeber brokers are JUST middlemen and they invented this little game we now call Forex the futures markets have been around for 50 years + and they are the real deal because you pay the same price that ABC widget company pays for every contract, sure there's commission but these days it's nothing $2.40 per contract.

Some food for thought
Quoting Samfox

This is what drives 90% of the movement of the forex markets NOT speculators !!!
Isn't 90% of movement drived by speculators? especially big news released...
Quoting phildunn
Isn't 90% of movement drived by speculators? especially big news released...
Not to my knowledge but I would GUESS that the percentages would increase slightly in the first 10 minutes after a release but MANY corporations do exactly the same things we do and they have Limits and Loss's at various levels based on economic numbers.
Quoting phildunn
Isn't 90% of movement drived by speculators? especially big news released...
Yes, I would say so. If people were just buying & holding for a longer time the market would not move at all or move much slower.
I will have to make clear that my answers merely reresent my opinion, might be correct or incorrect..

Quoting Fanat
1)How EXACTLY are the brokers compensated? Just by spread,slippage and swap? How do they finance our high leverages and manage to give us such a sweet deal??? And what are their financial interest in spot forex?
Brokers and Market Makers are traders with automated systems running..They make their profits through the spread automatically...Slippage can work in the brokers' favor or against and the same for the swap and rollover interest...

Since they are also traders, they use leverage to finance our leverage...

They have no financial interest in spot forex whatsoever excpet making money through their spread automated system...

Quoting Fanat
2) What procedures do brokers have to make sure that they don't go bankrupt? What procedures do marketmakers have to make sure that they don't go bankrupt and What procedures do Big Banks and corporations have to make sure that they don't go bankrupt through floating currency rates?
Market Makers make sure that they don't go bankrupt by automating their trading and getting out of every position as soon as they have their spread...In case the trade went against them, they take the loss...There is no guarantee that they won't go bankrupt, because they are trading..They just minimize the possibility of going bankrupt by using an automated system that makes money on 90%+ of their trades...

Brokers rely on market makers, as long as market makers are in business, brokers won't go bankrupt, because usually they charge market makers commissions for executing orders, so they have a risk free revenue + they make money on those trades as well, because they take the other side of the trade as well...

Big Banks make sure that they don't go bankrupt by selling options against their currency positions, diversifying and manipulating the spot prices to their favor to cash in the options premium so that they won't lose in a position...

Quoting Fanat
3)What happens if the broker can't find a match for a position? Do they take the other side of it? Or do they look for clients orders from another brokers?
This is a crisis situation and I don't think that it might happen...I believe that brokers take the other side of the trade by default...They charge both spread and commissions, so they get risk free revenue and risked revenue..

In case the broker can't find a match for his order at a certain bank, he will immediately try another one, although I don't believe this can happen unless the order is extra huge, some several billions of dollars...

Quoting Fanat
4)How much control do they brokers have over the quotes that they give to their customers.
If we are talking about market makers who offer quotes to their retail clients, then theoritically, they have full control over what we see, although they practically can't deviate from the other market makers, because if they did, they will either get killed in an arbitrage position from another market maker or another broker, or they will lose credibility and if regulated by NFA and CFTC, they might face real hard times if it happened that just 1 client was watching several feeds at the same time and noticed how they are deviting to play against him...

Quoting Fanat
5) How big should the order be for it to leave the brokerage house and with which leverage?
As for the retail clients like us, I have seen that 100:1 leverage is the standard for large accounts, and the orders are max of 50 std lots or $5 M, and $10M with other market makers...I think it's available to open several $10 M positions at the same time if the account equity allows...I think an order of $50 M and above will directly leave the market maker just after the spread and that's it....

Please clarify what do you mean by leave?? Leave to where???

Quoting Fanat
6) How many feeds is there? Is there just one or two?
I assume that the mother of all feeds comes from the banks, because those are the people who really buy and sell currencies, so everyone is getting their feeds from the banking network, and then prices either lag or lead banks feeds...Probably, there are many feeds, but I do think that even the feeds of the banks do not deviate widely from each other...

Quoting Fanat
7) When price moves lets say one pip, what EXACTLY does that mean? What is the mathematical model behind it? WHo calculates the pip change.
When the price moves one pip, it can mean nothing and it can mean everything...Sometimes, your market maker will change the price by 1 pip without any valid reason, whatever...Sometimes the market maker will change the price by 1 pip because all other feeds he is getting from brokers increased by 1 or 2 pips...

In general, 1 pip change from a bank feed will propagate to 1 pip change in all feeds..Since banks are willing to pay 1 pip more or less for a currency, then everyone else should raise or lower their feeds by that 1 pip...So it's obvious that the banks are the ones who calculate the pips change, and they do it based on the supply and demand on the currency pair from their clients (Expected future supply and demand and not the spot supply and demand of course)....

There is no mathematical model behind that 1 pip change except that the bank is willing to pay 1 pip more or less for exchanging this currency with that one because they believe that hedgers will increase for the declining currency...

Quoting Fanat
8)Can there be price action (ie candles, or a movement) without any orders/deals being made? if so, how and why?
Here is an example: Suppose a Euro/USD moves, that move will cause USD/HKD to move to the other side without any trades required to be made in HKD! Or Eur/NZD vs NZD/JPY ...
Sure, if the banks believe that the reserve of dollars they have will be worth more tomorrow against the Euro, they will decrease their rates for the EUR/USD right now and won't wait till tomorrow comes...There shouldn't be any selling on the EURO side or buying on the USD side to make the quote change...

Quoting Fanat
9)What is the mathematical model for Forex currencies over popular time frames? Anti-Persistent, Random Walk, Persistent? To what degree (in Hurst) and how does it differ between various time frames?
The INTERNATIONAL TRADE and INTEREST RATES in which both of them translate into SUPPLY and DEMAND at the end of the day...

Remember that banks usually have a conflict of interest with their saving clients...People usually save when the interest rates are high, and banks hate those people because they deposit money, get higher interest rates and at the same time the banks find it more difficult to lend currencies of higher interest rates...

Saving clients hate currencies with low interest rates, but banks love them because they make more and much easier money on those currencies...

Quoting Fanat
10)How long is there price memory (crucial to know the values for MA's and indicators) and what is autocorrelation over various currencies and their timeframes?
I think we are talking about 3-5 years back, that's a good memory everyone will keep, on a daily time frame....

Quoting Fanat
11) How large should the order be to move lets say Euro 1 pip?
I don't exactly know, but I think it depends upon the liquidity at that time...It will differ from 1 time to another...

Quoting Fanat
12) What is the real purpose of the Forex trading from the perspective of those who have made it? Some say it is to make the price more balanced. However that produces questions such as:
a)How can ordinary speculators be given such a responcibility and
b)How can our orders even affect the price in any noticible degree?
The real reason for the forex market is to facilitate hedging positions for corporations engaged in the International trade...There must always be someone on the other side of the trade...When the banks, brokers and market makers are on the other side of the hedger trade, the risk is distributed between all of them in case the hedger wins, because he will win a heck lot of money...

Retail speculators rarely have an effect on prices in terms of orders in my opinion...Large speculators dealing directly with banks or large brokers might have some effect, like those who are trading in the round of several hundred million dollars...

Quoting Fanat
13) Who benefits and who loses in the Forex?
Corporate Hedgers are the main losers in the forex markets (Along with 90% of the retail traders of course)...

Banks, Brokers and Market Makers are the 90% of the winners of the forex market....

Think about it that way, hedgers pour in large amounts of money in hedging positions, they lose that hedging money to banks, brokers and market makers, and theoritically, to retail traders as well (This doesn't happen of course), so the end of it, that hedgers and retail traders lose to banks, brokers and market makers + sum few retail and institutional traders..

Quoting Fanat
14) What percentange of VOLUME on forex comes from speculative trades(in other words from us) for profit.
I believe it's in the order of 5-10%...Don't have any statistical reference however...

Quoting Fanat
15)How is liquidity provided and kept at the level?
Interbanking for sure...If liquidity is slim, banks can create it by buying and selling from each other in rounds back and forth without actually affecting the prices so much and without any of them making any actual profits or losses, they are just providing liquidity...This usually translates in 30-40 pips runnup and then 30-40 pips run down back...During the round, several sideline watchers actually participate...It's some kind of fake liquidity, but that's how is can be kept at that level...

How it is provided in the first place, the answer is in the International trade...Everyday, there are several companies who want to hedge against a currency, buy options, sell futures, or whatever they want to do to minimize their business risk....


Thanks,

Nader
again... another beautiful post nader
this post should be given to every person thinking about becoming a retail forex trader to let them know what forex is really about
another INTP
food indeed... excellent post samfox and nader


Quoting Samfox
Well that's a pretty big list I will try and answer a few at a time.


1. How do brokers make money ?

This is an easy one.

Brokers pay a cheaper price (this is done automaticaly by computer) and simply build the difference into thier charting platforms and charge you more then what they pay.

This is the number ONE reason I never trade forex and only futures!

No two forex brokers charting platforms will ever be the same and that's what makes it a very dangerous game to play as it's not regulated by ANYONE.

I will answer a few more but before I do I think it's imperative that you understand exactly why the Forex market exists.

It is here to foster trade between International corporations and that's it's MAIN purpose.

ABC Company builds widgets and they buy steel from Japan to make them.
Everyday they place an order for X number of tons of steel and everyday they need to hedge that position against the Yen/dollar so they buy or sell the currency.

This is what drives 90% of the movement of the forex markets NOT speculators !!!

Keep this in mind and remeber brokers are JUST middlemen and they invented this little game we now call Forex the futures markets have been around for 50 years + and they are the real deal because you pay the same price that ABC widget company pays for every contract, sure there's commission but these days it's nothing $2.40 per contract.

Some food for thought
another INTP
Quoting anthonybaker
again... another beautiful post nader
this post should be given to every person thinking about becoming a retail forex trader to let them know what forex is really about
Thanks a lot my friend...You made me speechless...


Thanks,

Nader
Quoting phildunn
Isn't 90% of movement drived by speculators? especially big news released...
How can that happen? How can speculators, even combined, work against Bank of England, or Bank of America, or Bank of Japan, etc???

90-99% of all volume on Forex probably is done through the large banks, banks that speculators cannot play against...
Quoting narafa
I will have to make clear that my answers merely reresent my opinion, might be correct or incorrect..

Brokers and Market Makers are traders with automated systems running..They make their profits through the spread automatically...Slippage can work in the brokers' favor or against and the same for the swap and rollover interest...

Since they are also traders, they use leverage to finance our leverage...

They have no financial interest in spot forex whatsoever excpet making money through their spread automated system...
I just don't understand... Usually the spread is 30-100 dollars... How can that earn brokers millions that they need to use in order to fund clients leveraged positions. Example: 1,000 clients using 1:100 leverage open up positions in one day.... That will mean that the broker will have to find 1,000x99,000 = 99 MILLION dollars. That is a hefty sum....

Quote
Brokers rely on market makers, as long as market makers are in business, brokers won't go bankrupt, because usually they charge market makers commissions for executing orders, so they have a risk free revenue + they make money on those trades as well, because they take the other side of the trade as well...
Brokers take the other side of clients or Marketmakers trades?

Quote
Big Banks make sure that they don't go bankrupt by selling options against their currency positions, diversifying and manipulating the spot prices to their favor to cash in the options premium so that they won't lose in a position...

Manipulation of the prices? How far do you think this manipulation goes? And against whom is there manipulation? Speculators make a minority of traders (in volume)??

Quote
If we are talking about market makers who offer quotes to their retail clients, then theoritically, they have full control over what we see, although they practically can't deviate from the other market makers, because if they did, they will either get killed in an arbitrage position from another market maker or another broker, or they will lose credibility and if regulated by NFA and CFTC, they might face real hard times if it happened that just 1 client was watching several feeds at the same time and noticed how they are deviting to play against him...
Can all the market makers make a deal with each other (where and when to move the rates?).... That way they will not get caught...




Quote
Please clarify what do you mean by leave?? Leave to where???
Leave from the brokerage house to the world wide interbank level.



Quote
There is no mathematical model behind that 1 pip change except that the bank is willing to pay 1 pip more or less for exchanging this currency with that one because they believe that hedgers will increase for the declining currency...

Sure, if the banks believe that the reserve of dollars they have will be worth more tomorrow against the Euro, they will decrease their rates for the EUR/USD right now and won't wait till tomorrow comes...There shouldn't be any selling on the EURO side or buying on the USD side to make the quote change...

These statements blow most if not all TA out of its pedestal... Doesn't it?



Quote
I think we are talking about 3-5 years back, that's a good memory everyone will keep, on a daily time frame....
I'd love to know mathematically calculated results....

Quote
Retail speculators rarely have an effect on prices in terms of orders in my opinion...Large speculators dealing directly with banks or large brokers might have some effect, like those who are trading in the round of several hundred million dollars...
So this means that most of mass psychology and such stuff that Dr.Elder talks about almost useless in the Forex? I doubt that Large speculators use TA like we do... (if they use it at all)...


Great answers!!!!! Happy Holidays!
Quoting Fanat
How can that happen? How can speculators, even combined, work against Bank of England, or Bank of America, or Bank of Japan, etc???

90-99% of all volume on Forex probably is done through the large banks, banks that speculators cannot play against...
Banks do speculate too. Speculate is basically synonym to short-term/day trading, hit & run strategies.
  • Post #15
  • Quote
  • Last Post: Jan 5, 2006 12:41am Jan 5, 2006 12:41am
Quoting Fanat
I just don't understand... Usually the spread is 30-100 dollars... How can that earn brokers millions that they need to use in order to fund clients leveraged positions. Example: 1,000 clients using 1:100 leverage open up positions in one day.... That will mean that the broker will have to find 1,000x99,000 = 99 MILLION dollars. That is a hefty sum....




This is a really difficult concept to explain, but that $99mil never really exists. There is only a cash differential settlement. I think an example would work better...



I make a buy order for $1000, the price changes by ten dollars, and the position is sold for $1010. It looks like $2010 was exchanged, but in reality it was only $10. The $10 I made was taken from someone else that lost it.



That process occurs over and over again between me, you, and everyone else with the same broker. The process occurs in the same way between the brokers and the banks or market makers. And again between the banks.



When a bank takes a tomnext settlement, they don't get a dump truck full of cash showing up at their vault (or it's electronic equivalent). The difference between their purchase price and the actual settlement price is all that gets transferred. So 2 banks may make agreements for billions of dollars, but only the net difference gets exchanged (which is a tiny fraction).



It's still probably not a great explanation, but I'm sleepy. I may revise this tomorrow if I can come up with a better way to explain it. Google up how CBOT or NYMEX handles overnight settlements for daily futures transactions and you can get a fully detailed explanation. Granted it's for futures, but it works on the same principle.
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