Forex trading is probably the most ambiguous of all types of trading.
Here you will not hear “Good”, “Bad”, “Right” or “Wrong” but only a subjective trader’s opinion of the market and the things happening there!
It is not surprising that there are plenty of questions that cannot be ambiguously answered, for example:
- Why did a trade close at profit? The answer is that the market analysis worked well or it was just lucky since price could move in the right direction due to its own reasons.
- Released news pushed prices higher just because the announced data were good or it benefited a large market player.
- Does a trading strategy work or a winning series of trades soon to be followed by a losing one occur during a period of testing?
- Did a price bounce off a resistance level or an impulse is merely exhausted?
The list of such questions goes on and on.
Obviously, there is not a single and definitely not just one right answer for all these questions.
This is nothing compared to those 5 questions that can spark a heated discussion, fierce disputes and even plain abuse if they are spoken out.
1. Does Anybody Make Money on Forex?
Meeting a profitable trader is like finding a needle in a haystack.
At that, there is no guarantee that a yesterday’s profitable trader will not become a losing one today. It is very hard to find a trader who makes money precisely because past success doesn't guarantee future profit. At that, temporary success often remains hidden under gains.
A well-known phrase which people consider necessary to mention states that 95% of traders lose their money. However, we’ll never know what’s their exact number in reality: 95%, 99% or even 99,9%. We like the last figure since one profitable trader per thousand sounds like the truth – the same cannot be said of five profitable traders per hundred.
Plausible answer: for the most part, only temporary gains are possible in the Forex market. For example, if we look at the traders’ profitability statistics on various brokers, we can see that a fairly large number of traders (~33%) manage to make money during a quarter. However, if we increase this period up to one year, the figure would reach closer to 5% and then to 1%, etc.
You can ride on the wave and make a certain amount of money; if you keep doing so
you’ll be “chewed up by a shark” you’ll lose everything you’ve gained before. So, if you hit the jackpot by, for example, opening a PAMM account and making a significant amount of money, it’s best if you stop and not continue.
While talking about regular Forex gains, it is possible only if you already know how the Forex market works and thereby possess the information that other or most traders don’t have.
Here is a simple example: imagine an organization willing to sell a very large amount of euro. Of course, it has an interest in selling it at the best price and saving a few hundred thousand dollars. To do that, it will play out such a scenario (price movement) to reach its goal with the existing market liquidity – including our trades – and thereby not crash the market itself. And now ask yourself the question: “which indicator or strategy can predict what this organization is about to do and when it plans to implement it?“
Mention should be certainly made of a “trading against the crowd” strategy which is one of the few that takes these scenarios into account.
Conspiracy answer. The probability of any given individual to make money in the Forex market is virtually zero, and those single instances where it seems as if he/she has gained are just to prevent his/her “faith in the gains” from dying. The Forex market itself is a better version of a Ponzi scheme where you don’t need to pay interests and accommodate withdrawals by depositors.
The impossibility to make money is due to the fact that price movement is almost chaotic and doesn’t have any regularities and thereby doesn’t make it possible to gain.
2. Who’s a “Market Maker”?
Traders have long been haunted by the idea that apart from them there is someone else – a much larger and powerful player who knows what they don’t – out there in the market. How can they safely trade realizing this? Maybe, they can do this if only they learn to look at the market as a market maker.
Can a more precise answer be given to the question: “who’s a market maker, and what’s it like? Is there one or many market makers?”
Unfortunately, ordinary traders including you and us will never be able to respond to these questions since they are simply beyond the reach of the organizations that can hypothetically be the market makers. It’s like the humankind that allows for possible existence of other civilizations but cannot tell exactly how many of them there are and what they’re like – and it might not ever tell it.
Plausible answer. All the market participants having sufficient capital to somehow influence the price movement in their favor fall into the category of “market makers”. It could be various corporations, funds, banks or even individuals from, for example, the Forbes rating. The national government can also act as a market maker on behalf of a central bank.
All the above mentioned participants craft an image of a “market maker” but their market actions are not coordinated, i.e. they are motivated by self-interests and rarely cooperate by agreement or just chance. The only thing they have in common is the need for benefiting from the market financially or politically.
Conspiracy answer. There is also a version of a single market maker or an organization which have such a powerful influence that even central banks are only a small fish for it.
There's a lot of talk about a secret society which comprises the most powerful people, and there are also mentions of the Masons. At that, the role of such a market maker is not only to take money from citizens – it deals with a much more ambitious goal that we cannot realize.
3. What is it That Drives Price?
There are ongoing debates in a trading community on what is the primary source of price: futures on euro, interbank market, Forex market or spot market? Which of these instruments is a leading one, and which does follow it?
Disputes become very fierce when it comes to the source: which data can be trusted, and which one to be ignored.
Here is a simple example: trading volumes. Can one give an accurate answer which volumes are more informative: futures or Forex, from exchange №1 or №2? Noting that the term “correctness” is not ambiguously defined in the Forex market, there is no answer to this question either.
Plausible answer. Every single source of prices has its own asset price determined by trading results inside the source. At that, prices from all sources are synchronized due to arbitrage trades.
Imagine yourself walking down the street and seeing two exchangers – at that, buying rate of the first one is higher than selling rate of the second one. Without hesitation, you begin to carry over money from one exchanger to another and benefit from the difference in their exchange rates. It will continue until prices become equal in both exchangers due to the dramatically increased demand in the second exchanger and excess supply in the first one.
This is how sources of Forex prices are interconnected with each other but in a little more technological manner. However, it's quite likely that there might be a great demand among population exactly in the spot market that results in moving prices up/down.
Conspiracy answer. Asset price is established in one market (stock exchange), and other prices just follow it. It’s interesting that Forex traders often believe that the Forex market is precisely the driven market but not the leading one. That's probably how they try to justify their inability to make money particularly in the Forex market; if they traded in CME (Chicago Mercantile Exchange), it would be different.
Centralized stock markets – but not the Forex market (due to its decentralization) – are most often considered to be the leading markets.
4. Are Your Trades Submitted to the Interbank Market?
How much blood was spilled in the battles on the subject, and all of this was for nothing since there is no answer to that question as well.
Why do traders care about this issue so much even though it doesn’t actually affect anything in practice? The point is that people, by nature, don’t really like when somebody makes money on them especially when that someone directly cooperates with them.
If a broker openly told you about making money on your losses, you would never open an account with this brokerage company. It’s a different matter when brokers declare that they charge only their modest fees; if you have incurred losses, a trader just like you but on the other side of a trade will make that money.
However, although a trader hasn’t yet learned to make money, it’s already important for him/her that trades – even the smallest ones – are submitted to the interbank market.
Is there any way to confirm submitting a trade to the interbank market? Even if we acquired contacts at the brokerage level and learned whether a particular broker submits trades to the interbank market, or rather, whether it submits all trades to its liquidity provider, it doesn’t mean that the liquidity provider itself passes them on. This provider often uses “bucket shop”-style methods but on a much larger scale as well.
Plausible answer. Nowadays access to the interbank market is by no means unique, and many brokers actually provide this service. As such, it’s nice when a broker itself specifies which of its accounts have access to the interbank market and which don't.
For example, if we look at the specifications of account of various brokers, we can see a selected number of accounts having access to the interbank market, and it is surely plausible.
Therefore, brokers might as well submit trades to the interbank market but they don’t necessarily submit each and every trade there. From a business perspective, it makes much more sense to introduce a series of filters so that trades of potentially losing customers remain inside a brokerage company, and that of potentially winning ones are submitted to the interbank market.This is a hybrid model – you can read more about this and other models in this article.
At that, there are also limitations on the order lot size. For example, it would be naive to think that 0.01 lot order will be submitted to the interbank market since it is cheaper for a broker to pay for it out of its own pocket.
Considering the above mentioned, the dilemma of selecting a broker submitting trades to the interbank market is absolutely unclear. While selecting it, it would be wiser to pay attention to its reputation, lifetime and reviews on the whole.
For example, when selecting a brokerage company with 10 years of experience, you risk much less rather than while opening account with a young broker that allegedly “submits” trades to the interbank market.
Conspiracy answer. The interbank market was established so that only banks could trade there. Forex trades are passed to as far as a liquidity provider and more likely meet their counter orders there or the provider itself acts as counterparty.
The only connection between Forex and the interbank market is the fact that a liquidity provider can open an aggregate position on every financial instrument in the interbank market for hedging its risks.
5. Does the Market Plays Against You?
When traders encounter a series of losing trades, they will begin to suspect that it is their trades that the market is hunting. There are many pictures proving that price pulls back to its initial level after triggering a Stop order.
Of course, it sounds ridiculous if the trade size is not larger than, for example, 50 lots. With a greater lot size, it’s hard to say which order the price really “stopped out” of the market.
This is why the question will never find a precise answer as with the previous ones.
Plausible answer. In 99 per cent of cases, price DOESN’T hunt your trades particularly. However, It’s a different matter if you place your trade at the level where all the other market participants have placed it as well. If so, you will see the entire cluster of, for example, Stop Losses, and that the price is very likely going to trigger. Besides, we have an indicator of such clusters.
There are cases where you open a chart of a specific broker and see that volatility occurs in the absolutely calm market and price immediately triggers your particular Stop Loss and comes back. It means rather a foul play of your broker against you but not the market.
Conspiracy answer. Even assuming that the market is governed by one instance, it’s hard to imagine the latter playing against anyone in particular. Indeed, when someone buys, the other sells at the same time, so the most that can happen is the market playing against the majority. The last phrase makes sense but doesn’t comprise a conspiracy since this is the market nature that the majority loses and the minority wins.
What to Do?
The questions cited above are very important for every trader, especially if he/she chose trading as a profession.
The fact that these questions have no answers can create a sense of incompleteness and psychological discomfort that can have an adverse effect on trading.
Imagine a trader coming to the market to make money and not knowing for sure if someone has gained in the market before and anyone can do it at all. At that, the trader has been doing trading for a while, but to no avail. Where to find the strength and motivation to go on?
First, you need to decide what is trading for you: a profession, a game of chance or a hobby.
- If trading is a profession for you, are you ready to devote as much time to it as necessary for any other profession?
- If trading is a game of chance for you, how much money are you ready to lose so that the game will not turn into a headache?
- If trading is a hobby for you, do you enjoy it even in scenarios of losses?
Of course, the last two options don’t require such a deep immersion in the subject as the first one but I believe that the next recommendation is fair to all.
You should find the comfortable answer to each one of these 5 questions or, at least, the point of view that you take in particular. Don’t pay attention to the disputes on this subject later. That’s enough to avoid being distracted from the primary objective of trading – making money.
Although we attempted to give answers to the raised questions, they represent only our subjective opinion which is not necessarily true.
And how would you answer these questions?