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Where does my profit come from?

  • #1
  • First Post: Apr 24, 2010 5:11am Apr 24, 2010 5:11am
Hello

I am new on this site, and have been trading FX for a few months now, and I am doing okey.

I have been a professinoal pokerplayer for a few years, but have now started trading as a hobby, and I have a few questins I hope you can help me out on.

1. Are there any people who make alot of money on FX?
How much?

2. If i make money on trading online, does that mean that the owners of the tradingprogram loses money because they have me as a costumer? Or do I win other Traders money?

3. If i get realy good, and make alot of money will Brokers be happy to have me as a client since i pay alot in spread, or will they try to avoid me since i make money?

4. This is a followup question:

If it`s so that the brokers lose money on me if I am a good trader. How much money can I make on a monthly base before they start caring? Is $50.000 a month considred alot for a broker? Or do they make many millions a month.

Sunsi
  • #2
  • Apr 24, 2010 6:38am Apr 24, 2010 6:38am
Quoting Sunsi
2. If i make money on trading online, does that mean that the owners of the tradingprogram loses money because they have me as a costumer? Or do I win other Traders money?
I think in general you will not be taking the dealer's money. Simply, you buy from dealer, so dealer sells to you at his offer, dealer buys back position at his bid from another uninformed retail trader who sells, and makes the spread. The dealer won't mind if you win big (I'm not talking about millions mind you, just big for retail trader) like that, he still makes the spread and offloads your position to some other trader(s) who took the opposite position and will incur the loss. News trading can be different, again I think this is how it would work, there's going to be a lot of one-sided buying or selling so dealer may not be able to offload what they bought from you/buy back what they sold to you to other retail traders before price moves past the spread, in that case you'd be taking profit from (or inflicting losses on) the dealer.
  • #3
  • Apr 24, 2010 11:02am Apr 24, 2010 11:02am
Quoting Sunsi
If it`s so that the brokers lose money on me if I am a good trader. How much money can I make on a monthly base before they start caring? Is $50.000 a month considred alot for a broker? Or do they make many millions a month.

Sunsi
Call any of the major marketmakers and ask them, they'll all tell you pretty much the same, they hedge their risk/exposure on aggregate.

-
  • #4
  • Apr 24, 2010 1:04pm Apr 24, 2010 1:04pm
Sunsi,
welcome to the forum.
your questions are important.
FX trading as like e.g. real estate business when they sell/buy houses.
But do not worry much about it, worry how to become successful...
it is a big challenge...
The more experience the closer to the reality
  • #5
  • Apr 25, 2010 4:23am Apr 25, 2010 4:23am
Hi Sunsi.
I am a poker player myself although I never went professional, I am using my poker profits to get started in forex.

The forex world is a lot like the poker world - it is a zero sum game in that the amount of profit made by the winners is equal to the losses made by the losers. Forex sites act a bit like poker sites - they dont take the other side of your trade, they match buyers to sellers and take a spread which equates to the rake in poker. If anything, forex sites want you to keep winning so you keep playing and keep paying spreads, just like poker sites.

As a pro poker player I am sure you will have a good understanding of bankroll management, EV, variance, psychology, risk v reward etc.. - these things can give you a good head start in forex. The biggest difference between the two is that forex doesnt get harder as the stakes increase - if you can win with play money you can do the same things to win with larger stakes.
si hoc legere scis nimium eruditionis habes
  • #6
  • Apr 25, 2010 5:04am Apr 25, 2010 5:04am
Quoting numbnuts

The forex world is a lot like the poker world - it is a zero sum game in that the amount of profit made by the winners is equal to the losses made by the losers. Forex sites act a bit like poker sites - they dont take the other side of your trade, they match buyers to sellers and take a spread which equates to the rake in poker. If anything, forex sites want you to keep winning so you keep playing and keep paying spreads, just like poker sites.

lol, wrong on pretty much every point as far as forex goes.
  • #7
  • Apr 25, 2010 5:09am Apr 25, 2010 5:09am
Quoting pipmutt
lol, wrong on pretty much every point as far as forex goes.
I am talking about the big picture here - the industry as a whole, not how each individual trade is handled. Perhaps you wouldnt mind being a bit more specific and pointing out the error in my ways?
si hoc legere scis nimium eruditionis habes
  • #8
  • Apr 25, 2010 5:36am Apr 25, 2010 5:36am
Quoting numbnuts
I am talking about the big picture here - the industry as a whole, not how each individual trade is handled. Perhaps you wouldnt mind being a bit more specific and pointing out the error in my ways?
Quoting numbnuts
it is a zero sum game in that the amount of profit made by the winners is equal to the losses made by the losers.
Not all participants who provide liquidity are in the market for speculative reasons, winning or losing is not the primary motive for their transactions.

Quoting numbnuts
Forex sites act a bit like poker sites - they dont take the other side of your trade, they match buyers to sellers and take a spread
All marketmakers are counterparty to your trades ie they take the other side, they hedge their risk/exposure on aggregate depending on their business model, risk management model, and algos.

Quoting numbnuts
The biggest difference between the two is that forex doesnt get harder as the stakes increase - if you can win with play money you can do the same things to win with larger stakes.
Demo trading is not representative of live trading for a number of reasons, for example psychology, fills, slippage, quotes.....and as size increases so does the probability of experiencing liquidity issues, no fills, partial fills, slippage etc.
  • #9
  • Apr 25, 2010 2:01pm Apr 25, 2010 2:01pm
"Not all participants who provide liquidity are in the market for speculative reasons, winning or losing is not the primary motive for their transactions."

Thats true, but they are still losers - importers/exporters and tourists etc who get screwed by exchange rate fluctuations are included here. It is still a zero sum game minus the rake/spread, there isnt money/value being created as there is in the stockmarket for example. Not all poker players, especially at lower limits, are intent on making long term profits either.


"All marketmakers are counterparty to your trades ie they take the other side, they hedge their risk/exposure on aggregate depending on their business model, risk management model, and algos."

market makers = trading platforms?
I was of the idea that trading sites hedge their risk by buying to one and selling to another with spread, once they have done that they dont really care (financially) which side wins and which loses.

"Demo trading is not representative of live trading for a number of reasons, for example psychology, fills, slippage, quotes.....and as size increases so does the probability of experiencing liquidity issues, no fills, partial fills, slippage etc."

Again you are correct but missed my point I think - I am strictly talking game theory here, since this guy is a pro I kind of assumed he wont have problem with psychological or technical issues. In forex a strategy which is profitable with micro account will in theory be profitable with larger sums of money. This is not the case in poker, where the dynamics change at each level and new skills and strategies are needed each time you move up.


Perhaps I could have been more clear in my first post, sorry
si hoc legere scis nimium eruditionis habes
  • #10
  • Apr 25, 2010 6:19pm Apr 25, 2010 6:19pm
Hello again!

Thanks for some good answers! Even though It seems that people have diffrent opinions

Am I trading against the dealer or not? I feel thats important for me to know. I think its hard to make alot of money if the dealer loses money on me if I win.
But if its like poekr that I win from other traders, Its very diffrent.

Are anyone 100% sure about how this works?

And btw are there any ppl who make alot of money on daytrading forex? I mean ALOT! Or is that nearly impossible if the dealer then loses alot of money.

Again thanks for good answers, but would love to get "a answer that is a fact"

Sunsi
  • #11
  • Apr 25, 2010 9:25pm Apr 25, 2010 9:25pm
Quoting numbnuts
"Not all participants who provide liquidity are in the market for speculative reasons, winning or losing is not the primary motive for their transactions."

Thats true, but they are still losers - importers/exporters and tourists etc who get screwed by exchange rate fluctuations are included here. It is still a zero sum game minus the rake/spread, there isnt money/value being created as there is in the stockmarket for example. Not all poker players, especially at lower limits, are intent on making long term profits either.
No, he is talking about central banks and monetary manipulation, and yes, money can be created from nothing and also destroyed, that's in fact like financial system works.
  • #12
  • Apr 26, 2010 12:56am Apr 26, 2010 12:56am
Quoting numbnuts
Thats true, but they are still losers - importers/exporters and tourists etc who get screwed by exchange rate fluctuations are included here. It is still a zero sum game minus the rake/spread, there isnt money/value being created as there is in the stockmarket for example.
Importers/exporters aren't getting screwed, in a global economy they've needed to devise ways to hedge currency risk to protect themselves against those fluctuations.

As Trad3r said, money is being created, literally! All central banks use quantitative easing.


Quoting numbnuts
market makers = trading platforms?
I was of the idea that trading sites hedge their risk by buying to one and selling to another with spread, once they have done that they dont really care (financially) which side wins and which loses.
You're right, the mainstream ones don't care, they hedge their risk. Think of them as bookmakers.


Quoting numbnuts
Again you are correct but missed my point I think - I am strictly talking game theory here, since this guy is a pro I kind of assumed he wont have problem with psychological or technical issues. In forex a strategy which is profitable with micro account will in theory be profitable with larger sums of money. This is not the case in poker, where the dynamics change at each level and new skills and strategies are needed each time you move up.
Ah ok, sorry I was thinking more in practical terms, to be honest I don't know much about game theory.
  • #13
  • Apr 26, 2010 1:25am Apr 26, 2010 1:25am
Quoting Sunsi

Am I trading against the dealer or not?
The dealers system is filling your trades, yes. They quote based on their book and on the underlying market.

Do they trade against you? No, even though they are initially counterparty they have no interest in seeing you lose money, in fact quite the opposite, they want you to keep trading because without you they don't make any money!

Brokers need to be counterparty to your trades, they are the ones with the lines of credit, not you.
  • #14
  • Apr 26, 2010 2:34am Apr 26, 2010 2:34am
Quoting pipmutt
The dealers system is filling your trades, yes. They quote based on their book and on the underlying market.

Do they trade against you? No, even though they are initially counterparty they have no interest in seeing you lose money, in fact quite the opposite, they want you to keep trading because without you they don't make any money!

Brokers need to be counterparty to your trades, they are the ones with the lines of credit, not you.
Okey But if they are filling trades against me how can they not lose money on me winning? Is it other traders money that are beeing used to fill trades agaist me?

Just hypotetical if i make 1 million dollars a week from trading, will my broker still be happy to have me as a costumer?

Sorry asking again, but I realy need to figure out how this whole trading thing works, and i realy apriciate all the help I get
  • #15
  • Apr 26, 2010 3:39am Apr 26, 2010 3:39am
Quoting Sunsi
Okey But if they are filling trades against me how can they not lose money on me winning? Is it other traders money that are beeing used to fill trades agaist me?
They're filling your trades but that doesn't mean they're holding them, they hedge their risk on aggregate. Ok, firstly do you understand the meaning of words like hedge, risk, and aggregate? If not then google them, then maybe this will make more sense to you.

If you make a million bucks a week then your bróker will be very happy to have you as a customer
  • #16
  • Apr 26, 2010 3:52am Apr 26, 2010 3:52am
The way forex trades are filled is probably more comparable to sportsbooks than to poker sites. If you bet on team A and I bet on team B at the same sportsbook technically we are both betting against the agency, but one of us will end up with about 90% of the others money. The bookie will take his cut no matter who wins.

And if you are confused by the disagreements between myself and pipmutt, keep in mind he is more experienced and undoubtedly more knowledgeable about forex than I am.
si hoc legere scis nimium eruditionis habes
  • #17
  • Edited 4:30am Apr 26, 2010 4:19am | Edited 4:30am
Quoting ha-pattern
Take a profitable scalper at a bucket shop on MT4 trading big news, and in enters no-fills, requotes, platform freezes etc.
Platform freezes could just be down to overloaded servers or the sheer volume of price updates your platform software is trying to process across times like news releases. There are rogues in every business of course and forex is no different, some brokers are up to all sorts of tricks, that's the importance of picking a properly regulated mainstream broker and not some dodgy outfit based in Cyprus or somewhere!

The other two issues are really non-issues. No fills, slippage, and requotes are simply the execution risk you accept when trading volatile times like news releases. Why would you expect your broker to fill your order at a price which either doesn't exist or at which he has no opportunity to hedge? At volatile/illiquid times he'll do his very best to fill your orders because he wants your business, but he's not stupid.
  • #18
  • Apr 26, 2010 4:25am Apr 26, 2010 4:25am
Quoting numbnuts
The way forex trades are filled is probably more comparable to sportsbooks than to poker sites. If you bet on team A and I bet on team B at the same sportsbook technically we are both betting against the agency, but one of us will end up with about 90% of the others money. The bookie will take his cut no matter who wins.
Right, and if there's an imbalance where more people are betting on say team A then he'll simply lay off some/all of those bets with other bookies. Like you say, it's a win/win for the bookie!
  • #19
  • Apr 26, 2010 4:44am Apr 26, 2010 4:44am
In small brokerages, positions are aggregated and the net is taken to the market... at least in general (assuming it's not a pure bucket shop).

Ie:
Between all of your traders there's a 100 lot long position.
Between all of your traders there's a 30 lot short position.

That's a net of 70 lots long. As a broker, if you hold that position you're basically counter-party to that 70 lot long. If price drops and shakes people out, you make a mint. On the other hand, with so many people long, it's probably because of a major trend. If you don't offset that risk, it could destroy you. That's always been the problem with bucket shops.

So most brokers these days will just get a broker of their own, and instead of holding the long position themselves they'll go long 70 lots to offset their risk. This way, if price continues to go up then they're not losing money. If price goes down, they lose money on the long w/ their broker, but they make it up with their customers. These days, most of this is automated.

In that case, the broker makes it's profit off the difference between what you get in at, and what it charges. This can take the form of bid-ask spread, or it can take the form of slippage, or it can take the form of a difference between the price at your broker's and the price at their broker's.

If you're one of those 70 lots long, and you make money, who's really paying you? Well the broker. But who's your counterparty? Is it one of the other customers at your broker? Maybe. But it could also be your broker's broker, if they're acting as an aggregator. Or, if they're not, then it could be the counterparty to your broker's trade with their broker.

All in all, you can't know who your counterparty is unless you're buying from an ECN. If you're doing that, then you can match the trade number and figure it out.

However, just because you make money off a counterparty does not mean they lose money. Money is made or lost when the trade is closed, so it's possible for both parties to have made money on the same trade despite taking opposite positions. In theory, forex is a negative sum game but in practice the losses are shifted to the weakest participants.
  • #20
  • Apr 26, 2010 4:08pm Apr 26, 2010 4:08pm
Thanks for some great answers, things are a bit clearer to me now.

I am so glad that you helped me and answerd my questions, cause i was afraid that if i got realy good the broker would lose alot of money, and if that was the case i guess it wasen`t something i would use my time on.

I feel like that would have been like blackjack, where you are playing against the house.

One more question, are there any ppl who are realy rich from only forextrading?
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