Why Do You Keep Losing Money?
We face a very hostile environment where the profit of the participants is the sum of the losses of others.
About the author: Sergey Shirko has been studying the forex market for about ten years, and has been working in the FX industry since 2009. He has worked at a number of companies, including TeleTrade and Soft-FX. He has been the Chief Dealer of FXOpen since December 2012.
When people ask me what I think is the most important for understanding the financial markets I confidently reply that it is important to understand what a profit is and with whom you have to compete when it is received.
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One – your profit is someone else’s loss
You need to realize this before you decide to engage in an exchange trade or over-the-counter trading because this statement is true and not only for the forex market.
Whatever asset you trade, whether it’s shares on the stock exchange, currency futures on CME or a gold contract on the spot market, everywhere your profit will be based on the losses of other traders.
You should have no illusions that money in the market somehow multiplied. There is a simple redistribution of money from some participants to others and nothing more: mostly from less experienced players to more experienced.
I’m sure people simply do not take into account this feature when they begin to deal with speculation in the financial markets. Otherwise we wouldn’t hear so many disappointed stories about how hard it is to earn money in the financial markets, but I think the answer is obvious…
There is no doubt that to be engaged in traditional business is a very serious task. Production, delivery, sales, customers, employees and so on. All this requires specific knowledge and specific actions which in general are clear for everyone. However, when people come to financial markets they think that it will be easier and fall into the trap. The secret is that making money here is harder than in traditional business, despite the apparent simplicity.
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The fact is that the traditional business model works like a ‘win-win’ for both the seller and the buyer of goods or services, while the financial markets are ”win-lose’. This explains the difficulty in making profit and the negativity associated with failed expectations.
In my opinion this is the most important feature of the financial markets and everyone who considers being a profit oriented trader and getting an income from speculation in financial markets should be aware of this.
Two – In the forex market you have to compete with the largest financial institutions in the world
No matter if you have an account in the dealing center across the street or with a broker with access to a real market. In both cases you are opposed to the largest financial institutions in the world with their financial and intellectual power. When I mention major financial institutions I mean: Deutsche Bank, UBS, Citi, Barclays, HSBC, Bank of America, Goldman Sachs, JP Morgan and others.
Why do I say that in all cases you are opposed to these structures?
Because these financial institutions provide the market with liquidity by acting as market maker and it is they who directly or indirectly act as counterparties to many transactions. In addition, it is no secret that they are able to manage the price and lead the market in one direction or another if circumstances require, or if they simply want it. For those who didn’t know this, you can find out more about it here.
In cases where the counterparty of уour trade is your broker that leaves your trade in his B book, in general the situation remains the same. Your broker does not control the price and can’t move the market against your position even if he really wants so, he is just making a bet that you will lose to these financial institutions because your behavioral characteristics in the market do not differ from many other participants’ that have opened the same or similar deals…
Here I would like to make an analogy with sports, where in every competition there are winners and losers. However, as we well know, in sport competitions athletes of a similar level compete. That is, if you are a beginner you will not competing with an Olympic champion, because the result will be predictable. There are no such restrictions in financial markets. Once you opened a deal you became a full member along with other participants where on the same field you have to compete with masters of sport and world champions.
Conclusion
Thus we face a very hostile environment where the profit of the participants is the sum of the losses of others. In addition, you directly or indirectly compete with the largest financial institutions in the world. This does not mean that you cannot earn money in the market. I wish people have a more deliberate approach to this activity and understand that speculation in the financial markets is not a walk, but hard work and if you are not ready to dedicate all your life to it, you’d be better off without it.
I disagree to some extent with the views of the author. “In the forex market you have to compete with the largest financial institutions in the world” The advantage the “Big Boys” have is their order book, seeing corporate flow and access to multiple liquidity sources. A private investor (Trading on margin with a retail broke) has access to better TOB and DOM liquidity aggregated (for the majority) to give the best bid/best offer For the most part Sell Side institutions are no longer Market Makers but simply “executors” of trades. Whilst they may provide executable price feeds these are… Read more »
When you long at 10, another party is short at 10, no?
No not necessarily. In the case of the exchange traded ccy futs – then yes the counterparty is short. In the case of an OTC market it depends on the nature of the counterparty selling at 10. If its a one off flow that doesn’t need to be reversed then they are not short. eg if the seller at 10 is importing a piece of machinery from abroad, would they consider themselves short? Or the last time you went to Europe from the UK in 2009 and purchased 10k of EURGBP to spend at 0.95 – does it concern you… Read more »
I assume the author was referring to retail spot fx trading through a broker, where no physical exchange of currency. Obviously not referring to the Brit visiting Paris who is parting with his sterling for some Euro.
He was, and there in lies the problem with his argument – liquidity at 10 could be sourced from various pools, not strictly from a counterparty that needs to reverse the transaction to be square with a profit or loss
True that, Rich. .
Correct EdA – the author clearly is no expert in FX
Thank you for your comments. I have no doubt that you said the right things. Maybe I should be more objective and to mention that not all market transactions are speculative. Some part of them ends with the actual delivery of the goods. Just like not all cases, Market Maker acts solely for the purpose of a profit. However, the article is meant to give a general idea to form the correct expectation from trading.