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Truth of the Forex Market: Part II

Discussion in 'Forex Discussions' started by painofhell, Nov 24, 2015.

  1. painofhell

    painofhell Content Contributor

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    The Sad Truth of Trading

    At best, most markets are a zero-sum game. A zero-sum game means that when two parties are engaged in a contract, one side wins and the other side loses. However, because most trades in the FX Market are done over-the-counter or OTC a broker is involved, who takes a spread off the trade making trading not a zero-sum game but a negative sum-game.


    What's more, leverage will likely be reduced by the end of the year either by regulators or by brokers. Naturally, you have to abide by the regulations and learn to adapt to the new game while learning to improve your trading after understanding where others have fallen short.

    Why Traders Come to FX From Other Markets

    The FX Market shouldn't be seen as a casino but that's often how it's treated. Traders can access much larger trades than there balance with their broker, known as leveraged trades allowed due to low margin requirements. In some cases, the margin requirements are less than 1% of the total contract size, which allows 100X leverage. As you can imagine, if you're using too much leverage, a small move, or large move, against you will result in a large loss of capital.

    That is why stop losses are always encouraged however they don't guarantee that the level you suggest will be the level you get filled at.

    Aside from leverage and low margin to enter a trade, others come to the market because there is a strong potential to trade the FX market profitably without a clear trend because markets can either trade in a range with well defined support and resistance.

    Because pairs are traded in pairs, traders can buy or sell allowing them to profit in up and down markets and the 24-hour nature of the market allows around-the-clock entry.

    Another benefit that traders find in trading these market is the plethora of themes. A theme is any fundamental story that has a multi-month affect on the Foreign Exchange market. Late 2014 and early 2015 has a theme of central banks fighting a deflationary environment which is caused by too little demand that Economics 101 tells us is a problem when demand drops.

    Seek and You Shall Find?

    As this series points out, while the potential of the FX market is huge, the downside should never be forgotten. According to the NFA, Individual Broker filings for Q2 2013 showed how profitable clients were over one quarter from multiple brokers. Most retail FX brokers like FXCM, Oanda, Gain, & Alpari were sitting around 30% profitability. The other brokers with higher average profitability albeit only around 40% as opposed to 30% have a clear pattern. They have a higher minimum balance of around $10,000 while the smaller desks with smaller average profitability do not.

    Summary

    Traders that try to get something for very little often end up very disappointed. You've heard the low average profitability that only moved up from 30% to 40% when the minimum deposit is raised and also how markets are a zero sum game due to the fees from brokers in an environment. Next, we'll discuss how to benefit from the seemingly dour situation
     
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