What is the Forex REALLY?

[speedie6]

Perhaps there is a FAQ somewhere that discusses these questions. If so, point me the way, please. I have same questions on how the Forex market really works.

1. Some people talk about the forex market being trillions a day. But, I understand that is really the ENTIRE foreign exchange that the forex spot market is just a fraction of. If so, roughly, how much is the forex spot market a day?

2. If I go long on, say, the EURGBP, in theory, I'm buying Euros and selling Pounds. In theory. Given that I have no Pounds directly, nor do I actually end up with Euros in my account that I could spend in Europe, I don't see how I could be doing that in reality. It seems like I'm just placing a bet on the EUR vs the GBP, and somebody else, like a bank, or another trader, is taking the other side of the bet, and the broker takes a commission for handling the bet.

3. I've heard it claimed that 90% of traders loose money in forex. Is this really true? And if so, with better software and better indicators, shouldn't this be changing? And if so, well, I know that it can't work if everybody is making money, so, if the percentage of winners to losers changes, wouldn't banks or brokers have to change the rules or commissions or something?

4. Speaking of winning and loosing, who is really making the money in this? I would figure its gotta be banks, or they wouldn't be doing it. Right?

 

[obe24]

Beginners Bootcamp

There's alot of good stuff in the beginner's bootcamp section of these forums. I would suggest you go there.

As to your specific questions, I don't know about #1, but for #2 it's important to remember that in your example you are BORROWING Pounds to buy Euros, which is where the swap comes in. If your account is in dollars, then your trading platform will automatically figure the exchange rate from dollars to Pounds, so that you can buy Euros with them. It's an important point. But yes, someone (theoretically) is taking the other side of the trade, that's what sets the price. Unfortunately, most retail FX brokers are bucketshops, meaning they take the other side of the trade instead of finding someone else to take the other side of the trade.

Which brings me to #3 and #4 - that's how they make money. They make it on the difference in the swap (which is crazy right now) plus the spread in the bid/ask, PLUS they are usually on the other side of their traders, who, for the most part, don't know what they are doing.

 

[speedie6]

Thanks for responding. I did look some at the beginners section, didn't seem to find the specific information I was looking for, but, I can try some more.

It so happens, at this moment, I've got a banner ad for Crown Forex saying "no swaps". I know what the spread is, but, I don't know what a "swap" is. What is that? And how does "Crown Forex" for example, not have any?

You used the term "bucketshop", and says it means the broker takes the other side of the trade. I knew it was used as a derrogative term, but, I didn't quite know what it meant. So, does "bucketshop" equate to "has a dealing desk"? Why is it called "bucketshop"? Thanks.

 

[obe24]

Swap

The swap is the difference in the interest rates between the two currencies in the pair you are either buying or selling. Again, because you are borrowing one to buy the other, there is a difference in the rate and that must be accounted for. The swap does this. For instance, in a pound/yen pair - if you are long this pair, you have essentially borrowed yen (and are responsible for the interest at the Japanese rate) to purchase pounds (you will receive interest at the British rate). Because Japan has nearly a zero interest rate, if you are long the pound/yen, you receive interest for holding the pound each day. This is called the swap and it's paid when contracts roll over each day at midnight GMT.

Don't even get me started on Crown. Do not use those guys.

As far as bucketshops go, it is a derogatory term, but from what I can tell just about all retail shops fall into that category. Some are more fair than others. But very few are actual brokers in the classic sense of the word - that the broker does not have an interest in the trade but only takes a cut to match up a buyer and a seller. It's probably a bit more complicated than that - I'm sure alot of these guys bundle up their smaller positions and then hedge them off in the true interbank market. But I would guess for 90% of retail trades, the broker is just filling and taking the other side.

 

[lion]

It will be good to earn that Forex which will study much on the market, it is a lot of to read books and clauses and will constantly watch the market.

 

[Agent86]

About Forex ?

Hi

I"m curious about this subject also,
Once more revision on this posters question

Why would the broker hedge against a long trade that I may take, doesn't the spread cover that for the broker, and isn't my funds the only fund really at risk ?

Why woudl the broker even need to hedge or take an oposite position.

I mean to say if the broker gets lets say 3 pips on the Eur/Usd and I take a long or short position ? Won't the broker get his spread regardless of any other trades ?

And the only funds being at risk as I understood it was my own.
However, I do see the logic in taking an opposite position as the subject of 90% losers comes in. It would be logical to take an opposite trade from that standpoint, however I"m not sure they have to to make money ? I guess my real question is won't they make money anyhow due to the spread ?

Please advise
Thanks

 

[obe24]

You are correct

Yes, if the broker is acting as a true broker and simply moving your trade on to the interbank market, then they will make the spread on your trade minus the smaller spread on the interbank market, plus the difference in the swap.

However, like I said, I don't think many brokers actually move trades on to the true interbank market - where another party would be on the other side of your trade. In the vast majority of cases, your broker acts as the counterparty, which puts them at risk unless they are hedging properly in the interbank market.

There are many retail brokerages in the last couple years who have folded for this reason. They don't hedge, they are on the wrong side, they lose their cap, customers withdraw profits, poof, goodbye. And goodbye to customer's profits if they didn't get them out before the "poof" stage.

 

[martin01]

It will be good to earn that Forex which will study much on the market, it is a lot of to read books and clauses and will constantly watch the market.

That is the way to go about it...first hand informaiton is invaluable of course as also learning from other peoples mistakes.