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As Mark has kindly pointed out, there are a lot of scams out there, so
CAVEAT EMPTOR.
The chances of someone who, took a course or two, read a few books and spent
a few years trading forex and making in excess of 1000% a year with > 70%
winning trades is close to 1E14 (1 with 14 zeros behind it) to 1 odds. There
are, of course, aliens that live among us on earth that we don't know about
and have technology that we can't even comprehend... should I go on???
As someone who has taken many, many courses at one of the better educational
establishments that money can buy and read many, many books on the subject
and who has traded forex for top banks and himself over many years, let me
say that I am lucky if I break even on money and %. But then again, I'm a
idiot so don't use me for comparison...
You want to make money in the forex market? Have a few billion dollars in
the bank(s), have billions of dollars of trading lines with those same
bank(s), wait for a quiet day with one or two markets closed (preferably
London and New York together), call all the banks you have dealing lines
with and buy or sell a few billion dollars and you'll probably move the
market 50-100 points... Ahhh, the problems is getting out the next day...
On a serious note, to answer your questions.
1. The forex markets are the biggest, deepest markets in the world. I
haven't checked the numbers recently but there have been surveys performed
by the fed and other central banks that show that the daily volume is
somewhere between 1 to 2 trillion dollars. Compare that with the dollar
volume of all the major stock exchanges around the world and you'll start to
appreciate the depth of the foreign exchange market. Because of this, you
don't see 5-10% moves very often as you can probably see in individual
stocks. A recent example of a large move was when USD Yen dropped from
around 145 to 100 in about 2 days but that's another story.
The average daily movement is around 1-1.5%, very steady eddy. That's why
banks, trading houses and "bucket shops" especially are willing to give
small investors (read punters) a 100 to 1 leverage. You can't loose too much
in one day that they (the house) can't call your margin or cut your position
without losing too much money. Think of it this way, can you get a line for
a million dollars at a Las Vegas casino? Probably not. Could Li Ka Shing
(one of the riches man in HK)? Probably Yes. He can afford to lose a few
hundred million and everybody knows that. If you lose a million bucks and
can't pay, how do the casinos their money?
Another important factor is that the forex market (read casino) is opened 24
hours a day from the Asian open on Monday morning to the New York close on
Friday afternoon. This means that they can call you anytime (day or night)
when your margin runs low or out and if you don't pay up, then they cut or
'hedge' your position immediately. So from a risk management point of view,
this is manageable risk bet for the house.
2. The spreads are usually very reasonable, partially because of the
liquidity but also because of market traditions. Interbank deals on
reasonable size is usually quoted in 1-2 pips. The market has become
extremely efficient since the advent of electronic trading systems like EBS
and Reuters matching, etc where all participants can see the other side so
the spreads are very tight. A lot of times, the bid and the ask price is the
same, waiting to see who's willing to pay the brokerage.
The narrow bid-ask spread is also a trap. For example, the interbank market
is 10-11, I quote you 9-12 which is a very narrow spread without knowing
what side you are going to trade on. You pay 12 and I pay 11, making 1 pip
for me. However, when you want to get out of that trade, the market is 30-31
and I quote you 25-28, still a narrow spread but I 'read' you as a seller
because I know that you had bought previously from me. Without much choice,
you sell at 25 and I sell at 30, making 5 pips for me... Starting to see the
picture?? By the way, I was being pretty nice when I quoted you 25-28. I
could've quoted you 20-23...
3. Forex markets do exhibit directional persistence because they are the
'stock certificate' of countries instead of companies. When a country, like
the US or Japan or an economic trading bloc like the EC wish to push their
'stock' price around, you bet they can do it. They own the printing
presses... Various central banks are key players in the forex markets,
either to speculate (MAS, etc) or to intervene (Fed, Buba, BoJ) to effect
government policy... Will major developed countries let their currency (read
stock) value fall to zero? No way! Would various countries try to manipulate
their currency value to get an advantage over their trading competitors?
Absolutely!
4. As Mark suggested, try Goggle and the internet. There should be a ton of
stuff, good and bad, available on the internet now. When are you meeting
her? Make the appointment for 5 years from now...
A final note: I don't want to come off sounding like no one makes money in
the forex market or else I'm going to get spammed to death. Some people do.
Those with a good trading plan and very good discipline can make money in
the forex market. Then again, these kinds of people can make money in any
market....
Another pearl of wisdom: The "Absolutely Very Best and Never been Wrong"
forecasting tool that I have seen in over 25 years is to watch the 'client'
positions at banks and trading houses (read bucket shops) build up. The
client positions start to build up and grow whenever there is a 'trend'
developing and these clients are usually 100% on the wrong side of the
trend... I've seen it first hand... Why do you think banks are in this
business for?
Good luck and good trading,
LP
p.s. By the way, is the 'gal' young and pretty? If not, move the appointment
out by another 15 years...
---- Original Message -----
From: "Paul Altman" <paulha@xxxxxxxxxxxxx>
To: <omega-list@xxxxxxxxxx>
Sent: Sunday, February 24, 2002 12:40 PM
Subject: Foreign exchange newbie
> I just met a gal tonight who, took a course or two, read a few books, and
> spent a few years trading foreign exchange (which I know zilch about), and
> claims to make well in excess of 1000% a year, with >70% winning
> trades. This sounds like the typical vendor scam, I know, but she seems
> like a straightforward person and doesn't appear to have anything at all
> she's interested in selling me. Just a local gal who can't seem to
believe
> her own good fortune. This kind of unjaded "cheeriness" does not match
the
> demeanor of the other successful traders I've known. Fortunately, she
> invited me to come over and watch her trade, so I guess I'll find out what
> the real scoop is soon enough.
>
> But I've got a couple of questions right from the beginning:
>
> 1) Where does the huge leverage (100 to 1) come from? What are the
> mechanics of the foreign exchange game, that allow for this?
> 2) One of the broker sites bragged about the thin spreads and the nearly
> infinite liquidity. My acquaintance said that this is true, and that it's
> a far less manipulated market than stocks, for that reason. I'm always
> interested in a fairer deal. Comments from you futures traders?
> 3) She claims that the foreign exchange markets are trendier and more
> predictable than other markets. Hard for me to believe that anyone's
> giving anything away for free! You'd think that "infinite" liquidity
would
> mean that you've got a ton of huge, highly sophisticated, trading
> operations looking to squeeze a dollar out of every penny. I'd expect a
> less fair slippage deal, but a better trendiness deal, from smaller
> markets. Comments?
> 4) What should I read to acquaint myself with the realities of this
market,
> good and bad, before going over to hang out with her? Books, industry
> propaganda, websites?
>
> Thanks for any insights.
>
> Paul
>
>
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