Got into a discussion with someone, he says forex is inherently a losing game | Forex Factory

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Got into a discussion with someone, he says forex is inherently a losing game

  • #1
  • First Post: Mar 12, 2010 10:50am Mar 12, 2010 10:50am
..compared to stocks

Here - http://forum.bodybuilding.com/showpo...&postcount=136. And here - http://forum.bodybuilding.com/showpo...&postcount=174

Quote
With both stock investing and forex trading, there is a commission, right? There is sometimes a flat fee, but also a percentage fee. Like you might buy 910 Yuan for $1.00, but if you sell the 910 Yuan back immediately you will only get $0.995. That is called the bid-ask spread. So, if you bought and sold repeatedly, one million times a day, your money would eventually dwindle to $0, with stocks and forex.

The difference between forex and stocks, is that forex has an EXPECTED return of zero. Over time, you expect that currency rates will be pretty stable, but with plenty of volatility. So, if you buy 901 Yuan today, it will likely still be worth about $1 in 5 years. A stock, however, has an expected return of about 8% annual. That is because there is an underlying company behind the stock trying to make profits. So if you buy $100 worth today, it will likely be worth $147 in 5 years (could vary greatly).

So if you trade currency, you will likely have ups and downs, but in the end, you will break about even. Then, when you factor commissions, you will lose money. It is similar to playing roulette, in that eventually the house (market makers) will win. But if you buy and hold a diversified portfolio of stocks, you will likely make money over the long-term.

Questions?
Can you show me a study of forex traders making money on the average?
Quote
1. My contention is that you cannot know where the exchange rate is going to go during that short time. It might go way up, it might go way down. But, the expected exchange rate on average, will be exactly what it was when you bought it. So that doesn't really change anything.

2. I understand the commissions can be lower. Thus, I would expect the average trade to lose 2 pips, which would very slowly lose you your money.

3. Why would you do something where the odds are so stacked against you? Did you know that there is no 30 year period in history where stocks lost $ overall? If you buy and hold stocks for the long-term, you are almost guaranteed to make $ over the long-term.
What do you guys think? I disagree, but I don't know enough about how the markets work to really explain.
  • #2
  • Mar 12, 2010 11:07am Mar 12, 2010 11:07am
I would think the bigger question is which market is easier to find an edge. A stock might appreciate 8% in one year, but a trader with a good edge might grow an account by 15%. Currencies have no real up or down, but volatility is generally greater and swing for larger %'s. With a good edge a trader can do very well.

There is also leverage, which is cheaper in FX, for better or worse...

I have spoken with several big traders over at elitetraders.com who would never recommend FX trading to anyone. Their philosophy is that there are so many different stocks to trade that you are better off finding inefficiencies among them. Whereas the FX market is so big that it is simply too efficient to trade.

I have not found success in either market so I have no real input of value, but those are just some thoughts.
All I ask for is a chance to prove that money cannot make me happy.
  • #3
  • Mar 12, 2010 11:15am Mar 12, 2010 11:15am
The guy your talking to obviously hasn't been investing in stocks for very long. He makes a HUGE leap of logic to assume that since the market indicies have increased an average of 8% over the last 30 years that the underlying product must have done so as well. He fails to account for the fact that something like 75% of the major market indicies components turn over every 30 years. ie- 75% of todays dow companies will be out of business and thus out of the dow 30 years from now. The index will be higher, but in general people dont buy indexes; they buy individual stocks. You have no more guarantee that any particular stock (or basket of stocks) will produce 8% then you do that a currency (or basket of currencies) will produce 0%.

This is a discussion related to the zero sum nature of financial markets. You will find lots of people who advocate that stocks are positive sum because the underlying companies pay dividends, which in some sense is true, but that fact alone will not make you any money. You still have to pick the winners and know when to get out of them.

The hard truth is that ALL financial markets are zero sum. No matter how awesome a stock or a currency or a bond is, if market participants don't invest their money into them, their prices will not move higher. If participants move money out of the securities, prices will fall.

To counter your bodybuildig friend you may want to mention that he may be right but he would still need a hell of a lot of $0.22/share dividend payments to account for a $20 drop in a stocks price.
  • #4
  • Edited 2:06pm Mar 12, 2010 11:36am | Edited 2:06pm
Quoting lolpie
..compared to stocks

"1. My contention is that you cannot know where the exchange rate is going to go during that short time."

What do you guys think? I disagree, but I don't know enough about how the markets work to really explain.
Its obvious this investor is assuming the stocks he owns can only appreciate in value... how about when they do the opposite? Will he become a trader that holds losing positions in the stock market for a very long time with the 'hope' of resuming trend?

Find and edge and I'll show you profit in any market.
  • #5
  • Mar 12, 2010 11:39am Mar 12, 2010 11:39am
That MISC brah is neither good at Stocks nor Forex. Buy and hold in stocks can be a disaster.
  • #6
  • Mar 12, 2010 11:49am Mar 12, 2010 11:49am
We all know why we are here trading forex , with forex you have a chance/a small chance but a real one to change your life while in stocks you have a better chance of a decent retirement .
  • #7
  • Mar 12, 2010 11:50am Mar 12, 2010 11:50am
Stocks is an investment. Forex is speculative, it is trading not investing except if you're a carry-trader.
  • #8
  • Mar 12, 2010 2:02pm Mar 12, 2010 2:02pm
Sounds fun.

Try

"Companies go bankrupt, currencies don't."

Then laugh and say,

"Invest in a bank recently?"
  • #9
  • Mar 12, 2010 2:13pm Mar 12, 2010 2:13pm
My advice - If You believe in what You are doing - then just believe in Yourself..

There is too much people who says that nothing like that work, but in reality - they DON'T HAVE any expierence.

I just don't talk with those people anymore - just saying - I am learning and its going ok ..

Simple answer.. and i am tired of discussions and trieng to tell to someone that this or that is working and it doesnt matter that i am not yet profitable..

I know what i am doing and i believe in what i am doing.

Best,
Tom
  • #10
  • Mar 12, 2010 2:18pm Mar 12, 2010 2:18pm
Quoting Marsh
I would think the bigger question is which market is easier to find an edge. A stock might appreciate 8% in one year, but a trader with a good edge might grow an account by 15%. Currencies have no real up or down, but volatility is generally greater and swing for larger %'s. With a good edge a trader can do very well.
Yeah this is what I was thinking too, thanks.
  • #11
  • Mar 12, 2010 2:40pm Mar 12, 2010 2:40pm
Bullsh!t

Forex goes up and down so how can't you make money...yeh it's leveraged, unleveraged trading and you wouldn't make much unless you have a huge account. Stocks is unleveraged, but like some have said lots of choice so you can be dead picky
  • #12
  • Mar 12, 2010 2:47pm Mar 12, 2010 2:47pm
Cant you just argue that by his logic if you pick a bad currency pair that you will eventually end even (or be down what ever the spread is) yet if you pick a bad stock you will end broke. That is what he is saying correct, forex moves relatively flat, yet stocks make large moves be straight up or down (you could also add that by his logic since currencies move in a flat channel FX trading should be simpler, ID the top and bottom and buy/sell accordingly). You can also add to the fact that when risk aversion kicks in people dump stocks and buy money.
Like a few said unless your a carry trader your not really going to make money buying and holding currencies, its easier to be in and out a few times a week/month rather then holding for 30 years. Also as for the banks go out of business comment, banks are traded on the stock exchange, so if a bank goes out of business a currency still has value, while the stock does not. Now if a country were to go out of business, that could be a valid argument.

FX, futures and options are for active traders/investors. Generally speaking, stocks attract long term buy and forget investors (yes I know people also daytrade in the stock market as well)
  • #13
  • Mar 12, 2010 2:54pm Mar 12, 2010 2:54pm
The iceberg is too big in stock trading. You never know what's hidden on the balance sheets of the company you are trading, so you can't trust technical indicators.

I knew a guy who was a stockbroker, and he said to buy when price was above the 50 SMA, and sell when it was below, and that was as complex as he would get with it.

Forex does have black swan moments, but most knowledge is in the open and priced it before news events.

Also, if you want to trade unlevered, you can do that with forex and hold your trades for months just like stocks. Comparing stock trading to levered forex day trading is not a good comparison. Just as stocks mostly go up, currencies mostly go up following the carry trade principle.

You have to be careful of the elevator shaft on both though.

So if you bought AUDJPY in Jan 2009 at 65, and sold it in Jan 2010 at 85, you'd have made a 31% capital return plus another 3% or so interest.

Levered it at 2x, and you made 70% last year. And this took as much prognostication as stock trading.
  • #14
  • Mar 12, 2010 2:57pm Mar 12, 2010 2:57pm
Don't assume stocks have any more intrinsic value than any other financial instrument. Don't assume stocks enjoy a certain price 'floor' just because there is a company trying to make a profit. Financial instruments don't sell for what they are worth, they sell for what people think they are worth. Just because you buy stock and get the feeling that you are a shareholder in a company that is generating cash flow doesn't mean the stock can't drop 50%.

Let me share with you a story I had with a buddy of mine around November 2008. I knew he traded stocks so I asked him what he was playing. He told me he was buying Citigroup Shares. He told me that with the way the stock dropped from $50 that it was a bargain now. I told him that yeah the selling might be overblown but that when a stock drops 75%+ a large chunk is due to their being legitimate problems with the company. He told me had been buying Citi around the $10 range and been averaging down all the way to $5. I'm like why do you think the company is going to perform well? He told me its going to do good because Citi had $2 trillion in assets or something like that he told me. I'm like you need to also look at their liabilities... I asked him what his exit strategy was and he told me that he was in it for the long run.

Anyways Citi hit $1.00 a share a few months later and has been languishing under $5 for over a year now. I am not sure whether he held through the insane drawdown or cut it loose.

Hope it helps
Private message me for a link to my order flow website.
  • #15
  • Mar 12, 2010 8:00pm Mar 12, 2010 8:00pm
Quoting ha-pattern
Sounds fun.

Try

"Companies go bankrupt, currencies don't."

Then laugh and say,

"Invest in a bank recently?"
  • #16
  • Mar 12, 2010 9:01pm Mar 12, 2010 9:01pm
Quoting lolpie
What do you guys think? I disagree, but I don't know enough about how the markets work to really explain.
He's absolutely correct, although his logic is a bit off.

Stocks do, in the (sometimes very) long run, have a net positive expectation. This is not because their underlying companies are so great. It is because the stock market (like the real estate market) is NOT a zero-sum game. In other words, it is possible - in fact, over time, quite likely - that ALL stock market traders profit in aggregate.

The stock market is really a formalized version of a confidence game. If you buy Stock X, and you can convince thousands (or millions) of other people to buy Stock X, then it is entirely possible that ALL of those people could make money on the transaction (assuming that they don't all try to dump the stock as fast as they all purchased it).

This happens because most or all of the players in a stock market can, in theory, place the same bet (e.g., going long on Stock X). This is because stocks are a commodity and it is entirely possible for the populace as a whole to desire a given commodity (and thus, drive up its intrinsic value).

This is entirely untrue for futures markets. For futures markets to work, you must have two counter parties to each and every trade. You can't go long on EURUSD unless someone can be found who is willing to go short. Once that trade is consummated, by definition, one of you MUST lose. In other words, forex IS a zero-sum game.

This happens because in forex you are not trading a commodity (the underlying currency). You are trading a contract based upon a future price of that commodity. If we were all just buying currency, it would, in theory, be possible for us all to win. But since we're buying contracts, we cannot win unless the counter-party to that contract loses.

This is why so many amateurs wash out of futures markets. It's absolutely cutthroat. In the stock market, during boom years, every idiot looks like a Wall Street Wizard because most of all the stocks are going up, up, up. So it's no real challenge to pick winners. Even if you're throwing darts, you're likely to get a large number of winners. But in futures markets there is always a 1:1 ratio between winning and losing contracts.

None of this is to say that you can't make money in futures. It's a question of risk reward. A successful stock trader might make 10% per year. A wildly successful stock trader might make 50% per year. Because of these diminished returns, the stock trader at least has some basic security. As long as you're spreading your money out amongst a basket of stocks, it is extremely difficult to go broke. But it's also extremely difficult to realize massive gains.

The futures trader is the high-stakes gambler. He is actively seeking huge returns, but there is a very real likelihood that he could go absolutely broke in the process if he doesn't know what he's doing.
  • #17
  • Mar 12, 2010 10:51pm Mar 12, 2010 10:51pm
Quoting Bytebodger
It is because the stock market (like the real estate market) is NOT a zero-sum game. In other words, it is possible - in fact, over time, quite likely - that ALL stock market traders profit in aggregate.

The stock market is really a formalized version of a confidence game. If you buy Stock X, and you can convince thousands (or millions) of other people to buy Stock X, then it is entirely possible that ALL of those people could make money on the transaction (assuming that they don't all try to dump the stock as fast as they all purchased it)....
This is a contradiction... Even with your confidence game explination, at the height of the market, whoever is holding the stock is going to take the losses that offset everyone elses gain. Someone still loses, it just might not happen on the same day.

Your spot on about the futures markets, but the stock market from a capital gains perspective is absolutly a zero sum game. Dividends are the ONLY factor that tip it towards positive sum.

Theres an arguement to be made that interest rate differentials contribute to a positive sum aspect of currency markets, but thats a subject for another time.

I can tell you have given this some thought and I'd be happy to explain it more explicitly if your interested, but I'm guessing with some additional consideration you can figure it out on your own.
  • #18
  • Mar 13, 2010 12:57am Mar 13, 2010 12:57am
One of the most important things to learn about trading is to stay the f@#$ out of conversations about it, unless that person does basically the same thing you do, ie trade FX, and even then approach it carefully.

It's all mental masturbation and why waste your time on it when you could be doing the real thing.
  • #19
  • Mar 13, 2010 1:41am Mar 13, 2010 1:41am
Quoting Dopey
One of the most important things to learn about trading is to stay the f@#$ out of conversations about it, unless that person does basically the same thing you do, ie trade FX, and even then approach it carefully.

It's all mental masturbation and why waste your time on it when you could be doing the real thing.
amen LOL
  • #20
  • Mar 13, 2010 1:49am Mar 13, 2010 1:49am
Quoting Darkstar
Theres an arguement to be made that interest rate differentials contribute to a positive sum aspect of currency markets, but thats a subject for another time.
Not all brokers will allow you to do it........but some will
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