Not so easy.

Discussion in 'Forex' started by OfmY, Oct 19, 2005.

  1. OfmY


    Hello to everyone who is interested in what stuff I'm about to write here:

    Let's suppose that the eurusd now is 1.2 and after the FED release of hiking the rates it's pulling down strong to 1.19.
    I think everyone in such situation would buy usd and sell euro, i.e. going short. Net total positions of forex brokers need to be covered in the real forex market. The questions is by whom...of course by the banks...those who provide the liquidity by the spread we all pay to them. In such situations when everyone going short, banks need to buy euro and by that time make losses.

    First of all, I want to know if I'm right. If yes, I'm sure they cover their losses...the question is how...may be by doing market maker things opposite to what many traders/analytics think and eager to show what they think.

    Your comments please.
  2. well, my best guess is that it may be that the extemely deep liquidity in the forex market ($2t a day volume) has something to do with it.

    so it may not be an either/or type situation.
  3. Neodude


    The FX markets main purpose is not really to speculate on currency, it arose because of the need to trade real products between nations. So when a bank takes the other side of your trade or the broker's it knows that there is a pretty good chance that there are businesses which need to expatriate their profits and therefore can be used to offset their positions on and collect a spread fee from. This makes it possible for banks to make profits even when they are taking an initially losing position.


    PS. I should also add that banks have time on their side just like the casinos, they know that Fed generated moves can be smoothed out over time. So they might be in a losing position today, but they might be able to unwind their position tomorrow with a hefty spread fee onto some counterparty like GM or Boeing.
  4. OfmY


    >so it may not be an either/or type situation.

    yes, not so easy to understand. I wonder if traders ever think about when they go short, who must go long?

    concerning that extremely liguidity, I think much of them belongs not to the ordinary traders but to the banks by which they can move the currency, often in absence of big news, sometimes opposite to what many analitycs advise. tough game, though.

    just remember the situation with new orlean which pull up euro to 1.26...not easy to offset.

    Of course, banks were born not yeasterday and there are very tuned procceses or systems whatever you wish which offset such moves...the question is how concerning ordinary traders which probably partly explains why so many lossers and few winners...maybe.
  5. I'm not quite sure of what you theorize as market maker activity, but large banks work on a system that would entail correlation to the currency pairs themselves. So say for instance speculators want to sell EUR/USD a bank will offset a loss of that nature by in turn buying EUR/USD and selling a strongly correlated currency such as the CHF/USD at the same time. Being that they own both sides of the playing field they can profit quite easily from the spreads. Mind you also that although the CHF/USD is strongly correlated to EUR/USD the CHF is the stronger mover historically. So they will profit not only from all the spreads they have pulled in but also from the trade. All the trades that they wouldn't wish to take gets fired off to Interbank where money is not an object because they would be using the same correlated practices as standard institutions but unleveraged. Combined with some of the strategies that Neodude is explaining the banking systems are always at a win win. But also note that these correlated strategies are put together for months if not years at a time when it comes to banking institutions....
  6. I see you have the right idea...My post was just a bit late to your table...Banks are what make all this possible... They are the insiders to this game and nothing will ever stop them from knowing every trick in the book.
  7. OfmY


    IMHO In ordinary times banks and other big players through many things create the demand for certain currency just in reason to sell it.

    We just need to accept that we play by rules not on the book, but by the rules of market makers which eventually win, and we ... vast majority loss ... sometimes few win.

    the question of liquidity is to play against majority...especially short time...IMHO

    forex - very complicated business though...

  8. Not even to sound sarcastic... but of course....Haven't you heard of George Soros...

    Believe me when I say the FOREX as a whole is the next move to rape the pockets of the "sucker born every minute"... Just read the first couple chapters of Larry Livermore's famous book...
  9. Agreed that retail FX on huge margin is definately akin to bucket shops of yore, and that quotes can be 'funny' if the dealer is using that method to make his profit.

    However, you DON'T need to trade at maximum leverage. That's your decision, and if you do so to "maximize your returns" and "control $100,000 with only $2000 of up front money", you get what you deserve. FX done correctly is a primo asset class. But if you want to trade $100,000 - you should really have $100,000 to trade unless you really know what you are doing.
  10. Neodude


    In short, a large part of the banking business is the art of being a good middle man (aka market maker).

    #10     Oct 19, 2005