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A trader does not have to lose before you make profit in the Forex market

  • #61
  • May 18, 2010 9:02pm May 18, 2010 9:02pm
Extract from my last post:

The next thing I am going to show you is how you the trader and the broker profit together, even without your fellow trader taking any opposite direction in the market. This includes some figures. So, if you like, you may get a calculator, a pen and a sheet of paper.

Now, let's say you see an opportunity to buy EUR/USD. let's also assume that your broker shows its clients (on its platform) a spread of 3 pips on EUR/USD, for instance 1.2270-1.2273. You the client (or trader) then submits an order requesting to buy at 1.2273 via the trading platform. This order is relayed by the broker to its back-end bridge. Then, the broker gets the following simultaneous tradeable prices from say, three liquidity providers:

Bank 1 Quote: EUR/USD 1.2271-1.2272
Bank 2 Quote: EUR/USD 1.2270-1.2271
Bank 3 Quote: EUR/USD 1.2272-1.2273

We will assume in this case that of course, you are trading standard lots.

So, your broker confirms the trade at the quoted price of 1.2273 for you, and charges you $30 (spread) per $100,000. The broker then offsets the trade risk by buying at 1.2271 from Bank 2 (the lowest asking price). The reason for offseting the trade with the interbank market is so that the broker remains indifferent to whether the client makes money or loses money. This is simply called ARBITRAGE within the interbank system.

Now, let's go to what happens when the trade is to be closed.
When you request to get the trade closed, the broker looks at its liquidity providers quoted prices again. Let's assume that it sees the following:

Bank 1 Quote: EUR/USD 1.2372-1.2373
Bank 2 Quote: EUR/USD 1.2369-1.2371
Bank 3 Quote: EUR/USD 1.2371-1.2372

The broker then decides to show you (the client or trader) 1.2369-1.2372.


The Arithmetic:

I am sure some of you might have done this yourselves, but, I will still do it for the benefit of those that may not have bothered to trouble themselves doing the calculation.

1. If you close your position at 1.2369, then, you have made a profit of 96 pips (I guess you are happy).

2. but the broker will close its own trade at 1.2372 (the lowest BID price quote qith Bank 1)

Now, we know how much you have made, but, how about the broker? Let's see how much the broker has made:

a. Broker opened its own position at 1.2271 and sold at 1.2372. So, it made 101pips
Ok. 1 pips is $10. So, it means broker has made $1010 while you have made $960. So, it gives you your $960. So, it has $50
b. The spread of 3pips also in the quote to you represents money for the broker. that is another $30. So, broker now has $80. Note that brokers also pay some fee to the liquidity providers. it is always in per million. So, in this case, it will be around $10 per $1000000 or $1 per $100000. So, in our example, the broker will pay $2 to the banks for the 2 transactions. So, the broker has $78 for "brokering" Because of some other costs that may be associated with administering the transaction in the area of technology involved, the broker may end up with about $70 in this example. This is the case whether you the client gain or lose in your trades all the time everytime.

You may now be wondering what happen to the banks. Are they the looser? Not totally true. We'll talk about that later. I am off on a few days holiday. I'll connect over the weekend.

God bless
  • #62
  • May 18, 2010 9:38pm May 18, 2010 9:38pm
I wanna say thanks to helper and i hope you continue with this nice post

And people show some respect grow up!
  • #63
  • May 18, 2010 10:30pm May 18, 2010 10:30pm
sigh...the mechanics of the forex market is simple

somewhere out there, a businessman/company is looking to hedge it's/his forex risk, and is willing to pay a premium for the insurance.

The market seeks to match his desire to hedge with the risk taker's desire to buy the risk.

It's indeed win-win. Both get what they want.

If this is what you're trying to get at, i'm pretty sure most ppl already know that. It doesn't mean that the hedger doesn't lose money. He's simply paying the money for service provided. On an accounts sheet, it's still zero sum.
  • #64
  • May 18, 2010 11:28pm May 18, 2010 11:28pm
In my eyes zero-sum is a illusion, the market is dynamic and influenced by wealth. Wealth is/can be created, therefore it cannot be a constant fixed amount.
  • #65
  • May 18, 2010 11:43pm May 18, 2010 11:43pm
Quoting Tempus
In my eyes zero-sum is a illusion, the market is dynamic and influenced by wealth. Wealth is/can be created, therefore it cannot be a constant fixed amount.
It is a fact humans lack the ability to understand big numbers. We generalise once the number becomes too big for our minds to handle. That's why we have ppl talking about abstract things like wealth generation.

The wealth generated you speak of is a function of value. It has no place on the balance sheets. The market is a zero sum game because every order has to be matched. If you're making money, someone in the world is either willingly paying or unwillingly losing that money to you. That's the cruel fact of the markets. Every dollar you make in a market crash from shorting a stock increases the probability that somewhere else, someone is being bankrupted. There's no free money in the market.

The myth that wealth can be created from nothing needs to stop. It's what's drove our generation to excess consumption in the first place. It's the mindset that did in Greece, and it's what will do in the USA.
  • #66
  • May 18, 2010 11:51pm May 18, 2010 11:51pm
Quoting AstonDan
Well if Carlsberg made traders...

(Brit joke BTW, check here to get an idea of the theme...)
lol.....probably
  • #67
  • May 18, 2010 11:54pm May 18, 2010 11:54pm
Quoting doblece
Note: A chart would be helpful to understand your entry calls and exits.
Nearly 60 posts and not a single clue...
I agree, can we see your thinking behind these trades, otherwise what's the point of posting them (especially as they're after the event!).
  • #68
  • May 19, 2010 12:06am May 19, 2010 12:06am
Hi all

I will be back sometime. i am off to Dublin on a short holiday. Running to catch up now. I will talk about the trade when I come back. I the trade real time, but it is not possible to get them real time on FF. May be I will look at Yahoo messenger for everyone that is interested or twitter. But holiday first please. I will be back say in 2 days.

Rgds
  • #69
  • May 19, 2010 12:10am May 19, 2010 12:10am
Quoting The Helper
Hi all

I will be back sometime. i am off to Dublin on a short holiday. Running to catch up now. I will talk about the trade when I come back. I the trade real time, but it is not possible to get them real time on FF. May be I will look at Yahoo messenger for everyone that is interested or twitter. But holiday first please. I will be back say in 2 days.

Rgds
Enjoy your holiday, don't drink too much Guinness!
  • #70
  • May 19, 2010 1:34pm May 19, 2010 1:34pm
I sure hope anyone that took the EURAUD call held it... nearly 700 pips in two days
  • #71
  • May 19, 2010 4:11pm May 19, 2010 4:11pm
Quoting deathbait
It is a fact humans lack the ability to understand big numbers. We generalise once the number becomes too big for our minds to handle. That's why we have ppl talking about abstract things like wealth generation.

The wealth generated you speak of is a function of value. It has no place on the balance sheets. The market is a zero sum game because every order has to be matched. If you're making money, someone in the world is either willingly paying or unwillingly losing that money to you. That's the cruel fact of the markets. Every dollar you make...
With all due respect, that would conclude that demo trading is a zero-sum game as well.
  • #72
  • May 19, 2010 8:11pm May 19, 2010 8:11pm
er...how so?
  • #73
  • May 19, 2010 8:24pm May 19, 2010 8:24pm
Quoting deathbait
er...how so?
Let me ask you this despite the unlogical absurdity, why not? Because the numbers are infinite therefore it cannot carry a value?
  • #74
  • May 19, 2010 8:55pm May 19, 2010 8:55pm
you totally lost me in your previous post

How exactly did you draw the conclusion that demo trading is zero sum from what I said?

Your last post of course, makes less sense to me. You're going to need to clarify your questions if you expect an answer
  • #75
  • May 19, 2010 9:31pm May 19, 2010 9:31pm
Quoting The Helper
I have seen a lot of articles that claims that 5% of the FX traders in the market are the ones making profits and the remaining 95% are just losing, and their monies are being transferred to the 5% winning mafia. This is not totally true. I have found out how the price engine of the brokers work, and I can let you know how possible it is for everyone including the bankers and the traders and the brokers to be happy, all at the same time. If you really want to know this, you can reply, or follow the thread. I will come back later to give you full...
Let me guess, Forex is Matrix and you are Neo who came here to save us all.
  • #76
  • May 19, 2010 9:39pm May 19, 2010 9:39pm
What was the last arsehole who told us that everyone in the market could make money called? The one who caused a big fuss, said he was CEO of a NY hedge fund, used bollinger bands etc.
Living the adventure in my head.
  • #77
  • May 19, 2010 9:53pm May 19, 2010 9:53pm
  • #78
  • May 19, 2010 10:24pm May 19, 2010 10:24pm
Quoting deathbait
you totally lost me in your previous post

How exactly did you draw the conclusion that demo trading is zero sum from what I said?

Your last post of course, makes less sense to me. You're going to need to clarify your questions if you expect an answer
Sort of tricky to explain if you don't understand the connection, but that could be my fault of reasoning.

Live trading uses real currency opposed to virtual money in demo trading. Now obviously the virtual money carries no value, the supply is unlimited since its only ment for simulation purposes. Now live trading uses real currency which obviously has value (depending on your perspective), there you could draw the conlusion that it is limited.

From that assumption you could say that, since everything which has value is limited, so real currency from live trading is indeed a zero-sum if value equals a finite amount of 'X'. Well, what if 'something' is added without value to the pool. Does value have to be substracted from something that has value in order to give 'something' without value, value? If not, then the zero-sum is not a constant but a dynamic.

This is also why i believe technical analysis is a fallacy, and bound to its applied method.

PS: Apologies for my english
  • #79
  • May 19, 2010 10:48pm May 19, 2010 10:48pm
Quoting Leonlorenzo
What was the last arsehole who told us that everyone in the market could make money called? The one who caused a big fuss, said he was CEO of a NY hedge fund, used bollinger bands etc.
Can't say his name, but it rhymes with Pike Marker.
  • #80
  • May 20, 2010 12:28am May 20, 2010 12:28am
Quoting Tempus
Sort of tricky to explain if you don't understand the connection, but that could be my fault of reasoning.

Live trading uses real currency opposed to virtual money in demo trading. Now obviously the virtual money carries no value, the supply is unlimited since its only ment for simulation purposes. Now live trading uses real currency which obviously has value (depending on your perspective), there you could draw the conlusion that it is limited.

From that assumption you could say that, since everything which has value is limited, so real currency...

eh?
I'll admit I only partially understand what you just said, so this may be way off mark..

Like I said, value and wealth are abstract terms used that have no place on balance books. I'll explain it in both ways I suspect you're arguing against it.

1) On a balance book(strictly numbers), it should first be understood that the markets are zero sum. Money in, money out. If you're stuck on this concept, there's no need to move on to the 2nd

2) Most ppl who try to break apart the whole zero sum argument usually argues in the direction that there is value above money at play in the market. Now, as I mentioned before, wealth and value are abstract terms, which is why ppl like using them to argue against math in the first place.

Let's look at this supposed "value" added into the market. Would it be the joy of winning? That's negated by the regret of loss from someone else. Would it be the value of insurance from hedging? but you're paying for that insurance.

If you really get down to it(and want to become really depressed), u'll realise that everything in the world is zero sum. If you're not getting the equation to balance, you're simply missing a variable.


I should add that I have no idea what this has anything to do with technical analysis
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