Every time you win, someone else loses, and vice versa?

I think I'm on a very questioning mode on everything about trading. You've read books, plenty of them, but they didn't help your bottom line. So logic says, the books just might be wrong. And I think we need to question everything to find out the truth ourselves. So here's another common teaching that I partially don't really agree with.

"For someone to win/lose, someone else has to lose/win."

That's literally true. Say there are 4 little people. And for the sake of originality, let's call them A, B, C, and D.

A opens a 1 lot long on EU. For this to happen, the banks must match it up with someone who is willing to sell 1 lot at the exact same time. Say B happens to be the willing victim. Then price goes up by 20 pips. A is now on +20 long, and B is on -20 short.

Now A wants to close the 1 lot position by going short on EU. For this to happen, the banks must again match it up with someone who is willing to buy 1 lot at the exact same time. Say B is not willing to close the position. So A is matched with C who now is on 1 lot long EU. But even if B is willing to close the position, considering this is a global market, B is very unlikely to be matched up again with A.

At this stage, A is out of the market with profit, B is on -20 short, C is on 0 long. Then say price goes down by 20 pips. B is out for a break even trade and get matched by D who is now 1 lot short on EU.

At this stage, A is out of the market with profit, B is on break even and out of the market, C is on -20 long, D is on 0 short. Then say price goes up again by 20 pips. C is out for break even, D is on -20 short.

So the bottom line is, A is +20, B is 0, C is 0, D is -20. Ok I get it... Maybe. I don't know how these 20 pips movement are made in the first place. There has to be winners and losers too.

Anyway, the part that I don't agree or understand is how this logic is supposed to explain the large majority of traders who are losing money.

How can this statement explain the transfer of wealth from the mass majority to an elite few?

For example, if most traders at one time (not only retail traders, but global whole traders), are bullish, then they will push price up and all the bearish traders will suffer a loss. But the loss of the bearish traders are not much because there are only few of them, and the profit to the bullish traders won't be much either as it will be spread out as there are many of them. So based on this theory, no one in particular should make a killing in this case, or in any other case, because that's how trend develops. IF..., this statement is true. But reality says otherwise.

My own suspicion is that there is a mechanism where price can be moved without equity commitment and one collective very powerful entity controls such mechanism. In that way, the explanation of majority traders losing money becomes clear.

you playing against market maker. They hate losing.

So, at the end you will lose.

Romantic idea that there are 1000's of real traders scrambling for your order is way into clouds.

Other source of losers are fund managers. They are intentionally selected for stupidity. So your retirement money ends up (mostly) in hands of informed traders and some corrupt officials/organisations.

Every time you win, someone else loses, and vice versa? then half of the trader should profit however why is that almost 90% of traders lose?
It is not how many times one wins or lose it is more of how much you win and how much you lose.

Does one need to know who takes the opposite side of their trade? It doesn't really matter. What matter is how much you make and how much you lose


"the part that I don't agree or understand is how this logic is supposed to explain the large majority of traders who are losing money."

Let's used your example above trader A,B,C,D though this is not the real way things happen on real market
trader A buy @ current market price 20 risk reward 60 pip
trader B buy@ current market price 20 risk 20reward pip
trader C sell at current market price 20 risk 20 rward pip
trader D sell at current market price 60 risk 20 reward pip


Trader A win +60, trader B +20pip trader C -20pip, Trader D -60pip

In this conclusion we could say Trader A have and edge in the long run even with low winning rate
Trader B,C having a 1:1 risk to reward ration would need above 51% winning rate or more
Trader D would have high win rate however with negative profit expectancy.

Most elite few used to be in the category of trader A, Retail traders tend to fall under Trader B,C or worst D.

This is just some analogy, There are many aspect affect trader to be profitable psychology, money management, experience, win rate, cost in trading, capital, and many more.

I like your threads, they make me think.

There’s a few things to this… the first is your assumption about “most traders”…

1) Most Traders

In the short run a large majority of traders actually win because yes Winners for a large part = Losers, someone quoted some figures around here recently it worked out to about 30% a quarter I believe, were profitable…. In the medium term a smaller number of that majority win, this is because of the way short run profits are erased by competition … and in the long run yes, most will lose… Why? It has nothing to do with the way inventories are balanced by dealers but the fact that the market by design is a mixture of psychological, technical (mechanical), and fundamental.


Most systems/ traders focus on one of these 3 things… When the market will employ any combination of these things over periods of time… For example if a strong trend has been set then slowly the market will ease into a technical stage as it waits for the next fundamental shift in sentiment… This may be over a period of 3-4 months… Slowly technical traders will start to profit and be lured into a false sense of security… Before the fundamental forces start to rule the realm again and the technical strategies that had worked for the past 3 months, where once it was good to buy, may now do the complete opposite and system entries where once out was good to buy may now be good to sell… Why? Because in order to transact daily volumes that is where brokers are now finding the liquidity they need. Just one example…


So if you take a group of profitable traders in the first quarter, chances are that the strategies they are employing to be profitable in that quarter by the end of the year will not exist as the market changes… Leaving a very large majority scratching their heads as the next wave of 30%s take their place.. See how this all happens?

2) Order Matching

Interbank dealers set the market rates at institutional levels, they hand prices down to the retail brokers who pass them onto the retail traders. A retail brokers main mission is to balance his inventory and therefore risk, because if he/she were weighted in one direction (not hedged) then he/she is exposed to the market.

So yes the main aim is to match buyers with sellers but, when this is not possible the broker will have to use some of its own inventories to match position as this is their job/service… To provide us with liquidity and allow us to trade whenever we want. If the brokers books are perfectly balanced then it can just profit from the spread/ commission…

If they failed to do this, i.e; “sorry Mr Cindy I cannot let you open that long EUR as I have no one who wants to short EUR”… then obviously I would take my business elsewhere and that broker would go out of business…

3) Transfer of Wealth from Majority to Elite few

I can answer this one in a sentence… 1 Mr. Elite = 100,000+ Mr. Retails
As 100,000 Retails were Buying the good news… Mr. Elite Sold their collective volume to them, before the market dropped. I guess that’s why they call him Mr. Elite!

So I think in a nutshell, you have to be on the ball if you want to be profitable for a long period of time and hopefully the above answers why so few are…

Thanks for such rapid and interesting responses.

Yeah, the question is really about how:

A can be +$100m, B is -$25m, C is -$25m, and D is -$50m. More importantly, how is that possible on such a consistent basis? I couldn't think of any other explanation than manipulation. I've always knew that forex market is rigged and every common teaching seems to defend the false randomness and innocence of the market.

Back to the topic. I think in reality, it is very possible to lose both as the buyer and the seller. When you make a loss, someone else can also make a loss and vice versa. If this is not true, then hedging would be 100% risk free strategy, yet it isn't. You can open opposite positions, and unless you're a master hedger, you can lose on both.

I also think a loss is like losing to a ticking time bomb game. You just make sure that it's not your turn to hold the bomb when it's finally exploded.

It's more like this.

When Trader A is long 1 lot then Market Maker is short 1 lot
When Trader B is short 1 lot then Market Maker is long 1 lot

Price goes 20 up

Trader A is up 20 and Market Maker is down 20
Trader B is down 20 and Market Maker is up 20.

But now lets expand on this using the ideas stated.

20 traders.

Trader 1 trades Sells 15 lots, Market maker is Long 15
Traders 2-20 collectively buy 16 lots, Market maker is Short 16
Market maker needs to hedge his position and does so because he is now exposed 1 lot short.

Trader 1 has a direct line to the buy sell desk at OpenMarketOperations.Gov and knows when price is gonna move.
Traders 2-20 use a variety of different analysis and have to generally guess when price will move and where it will move too.

Government jumps in and shorts 200 lots. Price plumets until enough take the other side. Spreads rise. Market Maker is happily hedged. Trader 1 is happily profitable. Traders 2-20 are in varying states of emotion. Some blew there accounts. Some are on to the next trade already. Some are holding for a longer outlook. Some are on the revenge trade train. Some have given up.


In that made up scenario 5% made money, 95% lost, and the Market Maker could care less because it got the spread on 31 lots.

That about sums it up .. good one

in addition to manipulation..

retail participants seem to be always on the wrong side of the market... i think its mostly psychology n over leveraged

net 30% short when market is bullish

...kinky

Yeah the higher we go the more try and fade the trend... overbought biases, top picking, and the more get caught short holding onto losses etc.
sell high, buy low... that's what we're told to do isn't it? Particularly in market conditions not so prone to trending, we get set in our ways.

Excellent post.

So we can conclude this discussion by saying that the statement is inaccurate simply because there exist a market maker who becomes the intermediary.

The more proper statement is then:

Every time you win/lose, someone else does NOT necessarily lose/win due to the existence of the market maker as intermediary who are capable to contain orders, and who are always hedged or in profitable position. Therefore every buyer does not always have a seller and vice versa.

One puzzle solved, one myth busted, many more to go =)

dont understand your post..

Oh I'm just saying that if you buy, it doesn't necessarily mean someone else is selling to your buy order. It could be the market maker selling to you instead. So to say that every time you win, someone else has to lose is not realistic.

if the mm wants to hedge.. he will have to find a seller for u. otherwise mm will be your counterparty. so someone, either the mm or another seller, will lose when u win

That could happen too. I'm just saying that it doesn't need to always happen like 1+1 =2.

If the MM knows where the price is going, they may take your order in regardless whether there is a seller or not. MM will do whatever it takes to minimize risk and maximize profit. Money is their weakness.

Why not just follow the ones who move the market and be one of those 10% whose actually make profit. It can be done!

good point.. think cos we like to lead n not follow.. haha

It is a cycle, that never ends. I saw long time ago teaching about how this cycle works, but my english is not that level, that I could explain it.

That's the ultimate goal in forex. And if there's an indicator that can tell what these market makers about to do then you have the Holy Grail. Trouble is, it must remain a secret. If too many are using them, the mms will sense it and change their strategy.

This cycle works because there is different players.

http://www.babypips.com/school/market-players.html

I always find it funny the whole "us and them" mentality around the forums.

Even "they" take losses.. look at the track record of hedge funds for example, many of them after bouts of success go broke... The banks are not out to get you (us) they are just doing business... They own the money that we lend through our leverage and allow us to trade. When people talk about manipulation and "rigging" I get uneasy.. Although in an unregulated market, scrupulous activity is inevitable.

The markets were never designed as a business opportunity for retailers, but that is how it is sold to "us" unfortunately. It remains true that opportunities to profit exist, but perhaps not in the way many of "us" may have first envisioned when we first stumbled across this FOREX thing.

The markets are open to us to trade if we so wish, and provide no other purpose but to create liquidity for those who need it... i.e Banks and brokers doing real business. We are in their world and they owe us nothing... They simply hold the light and the moths fly into it..

I feel like many assume a sense of righteousness in trading, I'm no different, of course I like to win, but at the end of the day as they say... Don't hate the player, hate the game.!

One of my favorite signatures on this forum is by I think his name is mofste;

"When you are on the side of the majority, it is time to pause and reflect"

Anyway... If you want to win, you're not going against "them", It's not Us vs. Them... you will never win that game, you have to become "them", think like "them", trade like "them"..



Just a thought.