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Inescapable Truths

  • #121
  • Nov 19, 2009 11:45pm Nov 19, 2009 11:45pm
I guess I did get a little overheated for no reason. My apologies. Anyway with respect to randomness, in the markets it's not like a simple coin flip. Power laws come into play. Price clustering takes place because of the scale invariance market prices exhibit. Risk isn't evenly spread out, but rather concentrated more in certain areas than others, relative to time. I'll leave it at that for now.
  • #122
  • Nov 19, 2009 11:48pm Nov 19, 2009 11:48pm
It's cool, no problems.
You are right, markets do all sorts of weird stuff jumps, skews, kurtosis, but not all the time.
I tell ya, I used to think it was all non-applicable BS as well, luckily I had someone point me in a different direction.
The breaking of a wave cannot explain the whole sea.
  • #123
  • Nov 20, 2009 4:39am Nov 20, 2009 4:39am
Quoting Lionstrike
Anyway with respect to randomness, in the markets it's not like a simple coin flip. Power laws come into play. Price clustering takes place because of the scale invariance market prices exhibit. Risk isn't evenly spread out, but rather concentrated more in certain areas than others, relative to time. I'll leave it at that for now.
For someone how cares about these concepts it seems pretty odd not to be aware of the large amount of quantitative (e.i. objective) automated trading that's being done by institutions, prop firms and so on...
  • #124
  • Nov 20, 2009 7:41am Nov 20, 2009 7:41am
Quoting mathematician
Hmm...interesting. Good point. But I think it might still be a zero-sum transaction:

The average guy goes to a bank so he can convert his money from his domestic currency into a foreign currency. The bank will exchange it for him at an exchange rate that is not optimal. They will take the current interbank FX rate (as determined by the spot forex market), and they will add a huge spread. (If you look at the spreads in a typical currency exchange booth, like you might see in a tourist area of a city, they have spreads that are hundreds of pips.)

So...
The day you show me a way to be able to open a trade then close it and somehow break even is the day I stop calling this a negative sum game and start makin serious money.

It's not about where whatever money goes after each transaction and how the pie is split. No one has ever said money mysteriously vanishes. Completely wrong focus. Irrelevant even. It's about each individual traders individual battle against the nature of the market. The rules of the universe currently state that in forex you always buy at the worst price and sell at the worst price. This is the spread. Each trade begins in neg profit. Any positive movement is crippled by the spread and any negative movement is enhanced by the spread. How can anyone not understand this most basic concept?

I think you can't see the forest for the trees :s

Oh and people, please come to grips on exactly what the spread is! Go study share trading. Guess what, share trading has a spread too, you simply have more options with it because quite literally you create the spread in a way. So for hopefully the last time the spread is NOT broker fees. The broker in forex simply increases the spread you trade with and pockets the difference between the spread you trade around and the real spread. Again, please go study share trading to understand what a market is and how it works. There is simply too much basic lack of knowledge sometimes that goes unchallenged.
Congratulations ScalaFX for coming out of the closet!
  • #125
  • Nov 20, 2009 10:51am Nov 20, 2009 10:51am
Quoting nubcake
How can anyone not understand this most basic concept?.
It's not that I really dispute what you are saying...but what became of the rather simple concept that forex ECN's where one can choose to supply liquidity do exist...?
  • #126
  • Edited 6:40pm Nov 20, 2009 6:00pm | Edited 6:40pm
Quoting BlackMage
For someone how cares about these concepts it seems pretty odd not to be aware of the large amount of quantitative (e.i. objective) automated trading that's being done by institutions, prop firms and so on...

Well, who knows exactly who's running what.

I'm not saying programmed trading can never be profitable. I think it can be profitable under certain circumstances. For instance, let's just say you have programmed a simple crossover signal through some indicator, and you even set up something for it like a simple 1:1 R/R for say, 20 pips on each side for stop losses and taking profits.

Where I think it can be profitable is if you run it in a "semi-automatic" mode. That is, run only the long signals at one time, or run only the short signals at one time. So if you think the market is rising, turn on the long signals only when you think the (big) trend begins and turn them off when you think the trend ends. But you still have to make that decision on trend discretionarily. You will have a a large amount of trades doing this so its not as efficient as manually trading.

At the end of the day you need to be able to take an intelligent risk in order to try to catch as much of a trend as is reasonably possible, and I continue to maintain that requires at least some level of human decision making.
  • #127
  • Nov 20, 2009 6:49pm Nov 20, 2009 6:49pm
My post was mainly a general rant towards anyone who hasn't taken time to even learn what a market is
Congratulations ScalaFX for coming out of the closet!
  • #128
  • Nov 21, 2009 12:04am Nov 21, 2009 12:04am
Quoting nubcake
The day you show me a way to be able to open a trade then close it and somehow break even is the day I stop calling this a negative sum game and start makin serious money.

It's not about where whatever money goes after each transaction and how the pie is split. No one has ever said money mysteriously vanishes. Completely wrong focus. Irrelevant even. It's about each individual traders individual battle against the nature of the market. The rules of the universe currently state that in forex you always buy at the worst price and sell at the worst...
I thought you and I agreed to disagree. And there's no need to be rude.
  • #129
  • Nov 21, 2009 12:18am Nov 21, 2009 12:18am
Quoting Craig
... but anyway the point is, if you (or anybody else who has been making assertions on this thread for that matter) can't tell me what is the difference between a random walk and a chart in any objective manner then how on earth can we have a whole thread of 'Inescapable Truths' given that we can't even define what we are talking about?...
It's not always obvious at a first glance, but sometimes the random walk is obvious if you look at the differences of consecutive prices.
  • #130
  • Nov 21, 2009 1:26am Nov 21, 2009 1:26am
Quoting Lionstrike
No amount of hedging or scaling in and out of positions will give you any kind of inherent edge. You can't circumvent the need for good timing with these methods.
Agree 100%, hedging and scaling are completely superficial measures. Hedging can be replicated by a single net position, and scaling in/out simply creates multiple positions, whose overall P/L is nothing more than the sum of the P/L of the component positions.

Timing is everything (along with getting the direction right, of course).
  • #131
  • Nov 21, 2009 1:33am Nov 21, 2009 1:33am
Quoting mathematician
For me it really emphasizes an important point: Good trading is not about predicting where prices are going. It's about taking a position and managing it.
I would say that both are capable of providing some kind of edge, and much depends on the way the trader chooses to approach his task.

Entry is largely about prediction, and has a big bearing on win rate. If there's no edge in our entries, then our win rate will suffer accordingly. Hence we will need higher R:R, i.e. superior trade management, in order to attain overall positive expectancy.
  • #132
  • Nov 21, 2009 3:13am Nov 21, 2009 3:13am
Quoting sgrig
The problem is that they cheated. When price goes up, they multiply it by 1.01, so add 1%, however when price goes down, they divide by 1.01. However this is not the same as a 1% downward move - it's a 0.99% downward move. So in essence they have a biased random walk, with a larger upward moves. If this is done correctly, i.e. when you have a downward move, you multiply by 0.99 (rather than dividing by 1.01), you will get...
You're right! Another way to see it is if you just look at the best case and worst case. In the best case (price goes up 4 days in a row), the final price is $4.0604 higher than the starting price (104.0604 - 100). In the worst case (4 consecutive down moves), the price is only $3.902 lower than the starting price (100-96.098). So their example is already skewed towards an up move.

Also, they are using an always-go-long strategy. Because their model is completely random where price goes up or down with equal probability, it shouldn't matter if you switch to an always-go-short strategy. But if you calculate the average return from always going short, it's negative. (Which makes sense because their numbers are skewed up).

Very keen observation, sgrig!
  • #133
  • Nov 21, 2009 3:41am Nov 21, 2009 3:41am
Quoting mathematician
I thought you and I agreed to disagree. And there's no need to be rude.
1. Was typing all of that on my ipod which takes far too long, so had to be brief.

2.Was not trying to be rude, see point 1.

3. Somewhere along the way we agreed on a few things and disagreed on others... seems neg / zero - sum is one we will disagree on

4. It seems as though a few people somehow think forex trading is zero sum. You can throw proofs around any way you like, and what you have given seems to not be flawed except for one part... and that part is that what you have discussed as zero-sum is not the same as what people discuss as negative sum. You discuss how the pie gets split, whereas the majority are discussing how an individual trader is immediately in the negative as soon as a trade is opened.

say you open a trade and it will absolutely guaranteed no questions asked go either 10 pips straight up or 10 pips straight down. seems like a 50/50 chance, but it is not due to the spread. you immediately start a long position the 10 pips minus the spread so for a spread of 2 you will only take 8 pips profit, but if it goes the wrong way you end-up losing 12 pips.

which brings me to my first statement previously in which if ANYONE can show me a way to open a position that is already at breakeven i will no longer call forex trading negative sum, and i will start my journey of smashing away pip after pip.

it is like you are talking about cars and their components etc, and what you have said is true, except everyone else is talking about jet fighters. you have not said anything necessarily untrue, but you have associated one thing with another which was a wrong association.

somewhere along the way i suspect someone has lead you astray and fed you terribly bad information, and from this you have built an image in your head of the different components that make-up forex trading and the market. Problem is that your image is flawed in at least a couple of places and the assumptions you make based on the bad information is then flawed as well. You are clearly capable of understanding things, it's just a case of dropping the bad information and replacing it with decent information so you can then formulate ideas based on good data.
Congratulations ScalaFX for coming out of the closet!
  • #134
  • Nov 21, 2009 8:43am Nov 21, 2009 8:43am
Quoting nubcake
1. Was typing all of that on my ipod which takes far too long, so had to be brief.

2.Was not trying to be rude, see point 1.

3. Somewhere along the way we agreed on a few things and disagreed on others... seems neg / zero - sum is one we will disagree on

4. It seems as though a few people somehow think forex trading is zero sum....
I agreed that it's minus sum if you just talk about the game between traders. Then, maybe this is where I went wrong: I assumed that since there is money being lost, it's not simply vanishing, so it must be going to someone. In particular, when you open a trade and immediately it's negative, THAT money I assumed was going to the broker/dealer. So then my conclusion was: If you include whoever that money is going to as part of the game, then it's a zero-sum game.
  • #135
  • Nov 22, 2009 2:27am Nov 22, 2009 2:27am
Quoting mathematician
I agreed that it's minus sum if you just talk about the game between traders. Then, maybe this is where I went wrong: I assumed that since there is money being lost, it's not simply vanishing, so it must be going to someone. In particular, when you open a trade and immediately it's negative, THAT money I assumed was going to the broker/dealer. So then my conclusion was: If you include whoever that money is going to as part of the game, then it's a zero-sum game.
iPod again.

The spread is a funny thing to try to follow where the gap money goes. Some goes to new traders just starting some to traders doing a final trade some to the rest who trade all multitudes of timeframe. The players constantly change and so to try to equate trader a profit to trader b loss is a mistake many make. Yes to win someone potentially lost, however their game started earlier than yours and they may also have won against other traders again and so on etc.

It is all relative. To what you say? Players and time. Take a room of 3 traders. Trader 1 buys at a dollar where trader 2 sells. Ten minutes later trader 2 offers to buy at 90 cents to make a 10 cent short profit. Does this mean trader 1 lost? No, because trader 1 has no desire to sell just yet and instead trader 3 joins the game and sees price falling so thinks shorting is profitable. Trader 2 offloads his short position to trader 3 and makes a profit. Now trader 3 wants to profit so looks to buy back at 80 cents.

To be continued.
Congratulations ScalaFX for coming out of the closet!
  • #136
  • Nov 22, 2009 2:53am Nov 22, 2009 2:53am
iPod still. Ran out of text memory or something.

Continued.

So trader 3 wants out of his short position. Offers 80 cents but both trader 1 and 2 sit tight. Suddenly a new trader walks in and sees a bargain so buys at 80 cents. Now trader 4 wants to profit at 70 cents but no one buys. Instead trader 2 offers to buy at 80 expecting this to be resistance and a good long strategy. Trader 4 gives up and so sells at 80 cents for a 10 cent movement loss, uses the last of his savings to buy a gun and tops himself.

Traders 2 and 3 trade amongst each other and also with whoever else walks in. After an hour trader 3 walks away for a profit or loss. It matters not which.

Trader 1 still has his original long at a dollar. Price since taking long has gone down and up and wherever as other traders trade amongst themselves. He sees price is up to 2 dollars so decides to finally sell to whoever wants it. Makes the sell. Buys the universe and buys a harem of Martian women to tend to his every desire.

All the money moved around. Some traders made money and some lost and some held their position until they either had to let it go or it was time to offload. It was all relative to each player and the amount of time they played. At some point someone has to have lost for others to have profitted. Some players simply had more time and or money to overall make profit from others playing a different timeframe and start and finish etc.

It's all relative.

Ok that's the end of storytime.
Congratulations ScalaFX for coming out of the closet!
  • #137
  • Nov 22, 2009 9:42am Nov 22, 2009 9:42am
this is weird.. the spread is not the commission.. in a market there are bidders and offerers.. in order for a transaction to be made, either the bidder must match the offer, or vice versa... the spread is there in order to market makers to be able to offload positions with less risk.. it has to deal with liquidity issues. Notice the spread widens for exotic currencies..
We always sell to the market makers bid, and buy at the market makers offer... participants in the interbank market takes turns to be the market maker and price taker...

Example, EUR/USD trading at 1.5001/ 03.
You sell to the broker at 01.
Broker is given EUR at 01, broker is long EUR at 01.
Broker goes to market to square the EUR at what level?
01.
He can offer the EUR at 03, but that does not mean it will be taken at 03.
If it is taken at 03, then broker has made 2 pips from you, but runs the price movement risk.

I am new to retail, i dont know how brokers make their money.. some of the spreads are even better than interbank spreads.. I am going to take a wild guess here and say that the prices that are fed to retail traders are probably not a true reflection of the interbank prices.. coz really, who really knows what the EUR/USD is trading at? whatever the price your broker feeds you, it becomes your reality.

The FX market is shady.. shady business.. there are no regulations. Know the roles of marketmakers, there is no exchange for this.. it is stricly Over The Counter..Find a broker that allows you to place bids and offers in the market.. instead of just hitting the spread.. then you become a market maker..

Example,
EUR, 1.5001/03.
You want to sell,
typically, you would have to hit the spread and sell at 01
If you place an offer in the market, you might get taken and be short at 03.

I dont know if this all makes sense to you guys...there are no rules to this game.. too many players involved because of the natural requirements for currency.. from corporates, central bankers, hedge funds, foreign investment funds and etc... and knowing the order book is the only way that guarantees you make money... because you are able to hold the market with your bids and offers..

Cheers.. i hope i was able to provide clarity and not anymore confusion.
  • #138
  • Edited 4:14pm Nov 22, 2009 1:58pm | Edited 4:14pm
I think people are trying to make sense of where the spread goes, so here is my take. Suppose we have proper exchange trading (something that doesn't exist for FX):

Then if we see a bid/ask spread of 99/101, this means that we have

Trader A who is willing to sell at 101
Trader B who is willing to buy at 99

If the spread didn't exist, say both A and B were willing to buy and sell at 100, then they would make the transaction among themselves, and instead the current price would be the bid/ask prices offered by traders C and D, who aren't willing to buy/sell at 100. So whenever there is a match in bid/ask prices, a transaction is made, and this "zero spread" disappears, and we are back to a non-zero spread.

Back to traders A and B, they wait and wait, until some sucker E comes along, who thinks that prices are going to go down anyway, so it makes sense to sell at 99. So he makes the offer, and Trader B accepts and E sells stock to B at 99. Now B holding a long position at 99, and E is holding a short position at 99.

Suppose now E realized that he made a mistake, and want to quickly cover his short position. So he is looking to buy back the stock. However, the best ask price is 101 offered by A, so E has to pay 101 for the stock which he originally sold for 99. Thus E makes a loss of 2 and A makes a win of 2. Therefore, the spread didn't disappear anywhere, it just went to a different market participant. So it's still a zero-sum game overall among the market participants.

Of course, if there are broker commissions on top of the spread, then if you don't think of brokers as market participants, it becomes a negative-sum game. Of course, there may also be transaction taxes involved (like the stamp duty in UK for stock trading), and this makes the game zero-sum even if you count the brokers in. Luckily in Forex we don't have transaction taxes yet (although I fear they may be introduced at some point).

Now, back to the original set up. In retail Forex you don't have a proper market - your broker is your market maker most of the time. So A and B are in fact the same entity. So whatever you do, they pocket the spread. Even if the Forex broker hedges the net positions of its clients on the interbank market, they still get most of the spread.

Suppose on some retail forex broker, C goes long at 101 with 2 lots, and D goes short at 99 with 1 lot. The broker partially matches C and D, and hence keeps the 2 pip spread on 1 lot. The overall client position is 1 lot long. So relative to its clients, the broker is 1 lot short. To hedge this, the broker goes long on the interbank market, however due to lower spreads they get in at 100.5. So on this second lot they make 0.5 pips. Then they make the same money again on when C and D close their positions.

So net result for a round-trip transaction is - C pays 2 pips on 2 lots, so an equivalent of 4 pips on 1lot, and D pays 2 pips on 1 lot. A total of 1lot 6 pips. The broker gets 2 1lot pips each way from matching C and D, so that's a total of 4 pips, plus the make a total of 1 pip on the difference between their spread and interbank spread. Another pip is made by the banks which provide liquidity for the broker. Everything is accounted for, it is a zero-sum game overall.

Note that even if the broker provides the same spread as the interbank market, if it has a large enough customer base, it will still make money from the spread just by matching customer orders internally. Moreover, depending on the patterns of trading by its customers, the broker may afford to provide lower spreads than the interbank market. They can afford to do this if they only ever have to hedge a very small net position on the interbank market.

EDIT: Actually thinking about this more, I realised that in the first scenario, both A and B profit from the spread, 1 pip each. If not for the spread, and if not for the trader E, they would probably have to settle at the price 100. However, thanks to E, B manages to buy at 99 (saving 1 pip) and A manages to sell at 101, (making 1 pip). Thus overall, E loses 2 pips on the spread, which is split between A and B. In the Forex market maker scenario, the argument still holds because A and B are the same entity, making 2 pips in total. Also note that for the broker, banks on the interbank market act as market-makers, but a broker usually has a choice of banks to use, in order to get the best deal.
  • #139
  • Nov 23, 2009 4:23am Nov 23, 2009 4:23am
Heh my head hurts. I think you basically said what I said. You seem to have a handle on things.

Weeeeeeeeeeeeeeeee

Forex is all voodoo.

First one learns everything. To succeed one must then forget it all. Or something like that.
Congratulations ScalaFX for coming out of the closet!
  • #140
  • Nov 23, 2009 6:16am Nov 23, 2009 6:16am
Quoting 012
this is weird.. the spread is not the commission.. in a market there are bidders and offerers.. in order for a transaction to be made, either the bidder must match the offer, or vice versa... the spread is there in order to market makers to be able to offload positions with less risk.. it has to deal with liquidity issues. Notice the spread widens for exotic currencies..
We always sell to the market makers bid, and buy at the market makers offer... participants in the interbank market takes turns to be the market maker and price taker...
If you are using limits, you are on the side of "market makers" and are providing liquidity. If you are using stops/markets then you are consuming available liquidity.

I also think the spread = comission comes from the fact that some (most mt4) brokers pad spread to include commission there. Commissions (and probably swap margins) are the ways honest brokers make their money. dishonest brokers can spike the price by widening spread and do other dirty tricks to stealy our money.

About zero-sum, FX is a zero-sum game, before arguing about that it's a good idea to read the actual definition of zero-sum and non-zero sum games

http://en.wikipedia.org/wiki/Zero-sum
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