Why people are loosing in retail Forex trading?

> The main reason people are loosing in retail Forex is certainly due to the believe that one can guess where the market will go next. Even an educated guess cannot draw the line between correlation and causality - i.e. one cannot infer causality from correlation which by definition is what a guess is. So people loose in Forex mainly because by witnessing a strong correlation impacting price fluctuation they deduce imprudently that the same correlation will be applicable for the next occurrence of a similar event. Another phenomenon at play is the temporary positive feedback from the guesses that strengthen the erroneous believes that have motivated the guesses in the first place - similarly to the phenomenon at play with a game of luck in which no consistent method of winning has been identified.

 

Does Captain Algorithm make guesses?

> No, Captain Algorithm does not make guesses in the sense of devising its trading strategy based on the ongoing trends, news breaks, chart indicators or any other triggering signals. The core assumption of Captain Algorithm's trading strategy - according to which the longer the period of time considered, the larger the amplitude of fluctuation of the market will be - is justified by the nature of the Forex market itself i.e. a market with a gargantuan volume of daily trades and a highly scattered market structure involving numerous financial actors - whose financial behaviours are subjected to economical cycles and political contingencies. As the Captain would have said it would be fairly similar to assuming that there would be waves and winds at the Cap Horn.

 

How professional Forex traders make money in real life?

> Traditionally, a trader is just someone who executes financial services - for instance striking a deal between a buyer and a seller - and earns a commission for the provided services. The higher volume they trade, the higher the commissions they received. This type of trading - trading as executing financial services - is carried out by traders working as employees of large international banks and financial institutions offering financial services - for instance brokering. In theory the money made by this type of traders does not depend directly on price fluctuations - to the extent to which they are still able to execute their financial services.

 

Another type of trader is the trader who buys and sells in order to carry out the currency reserve strategy of large international banks and financial institutions. Large international banks and institutions make profits through a discerning currency reserve strategy of cross borrowing and lending integrated to their financial structuring operations. Basically by conducting an appropriate strategy for their currency reserve, large international banks and financial institutions make profits. This type of trading - trading as part of a currency reserve strategy - is carried out by traders working as employees of large international banks and financial institutions. The risks are intrinsic to the large international banks and financial institutions strategies and operations. In theory the money made by this type of traders depends on price fluctuations in the long run and the currency reserve strategy carried out by the large international banks and financial institutions they are working for.

 

Another type of trader is the speculative trader who apply the usual profit making model of buying at lower price and selling at higher price. In principle speculative traders have always existed ever since the inception of any trading market - simply because the profit making model is in itself quite intuitive and simple. Speculation in itself is not a bad thing; on the contrary the existence of a high number of speculators improve the liquidity of a given asset - making it easier to find a buyer or a seller - thus reducing the risks of holding a given asset. Furthermore the risks reduction scheme through the calling on of speculators justifies the creation of derivatives markets where basically the risks of a given asset are passed on to speculators expecting to make profits on the forecasted evolution of the said asset. A simplified example for this can be the stock market where speculators buy stocks at lower prices and sell at higher prices - one way speculation - as opposed to the derivative market of such stock where speculators take a position (for instance "Buy" or "Sell") and expect to make a profit depending on the price variation of that stock relatively to the type of the position taken - two ways speculation. Hence the derivative notion i.e. the profits or losses of the derivative products based on that stock do not follow literally the price trend of that stock but depend on the type of position taken relatively to the price change. Most large international banks and financial institutions will engage in operations involving derivatives as an emitter of such derivatives or as speculators themselves. This type of trading - speculative trading - is carried out by traders working as employees of large international banks, financial institutions and all kind of money management firms. In theory the money made by this type of traders depends on whether the speculative traders have taken the correct position with regard to future price changes.

 

The last type of trader is the retail trader - in a sense a retail trader cannot be considered as a proper trader for he is not a trader by trade so to speak. Retail trading is actually an offshoot of derivatives markets. What you trade as a retail Forex trader is a derivative i.e. the profit you can make depends on the position you have taken relatively to the price change. So the retail Forex trader can be categorized as a small scale speculative trader of derivative products. The profit you can make depends on whether you have taken the correct position or not with regard to future price changes.

 

What can I expect as a retail trader?

> As the Captain would have said as a retail trader you are a shrimp swimming among whales that are crossing the open seas. In terms of volume retail Forex trading is very modest and furthermore retail Forex has no incidence whatsoever vis-à-vis the global Forex market. Compared to a professional speculative trader a retail trader will appear at best an enlightened amateur and at worst a foolhardy hobbyist for the gaps in terms of knowledge, experiences, equipment, time and manpower are simply unfathomable. In any proper trading room you will find state-of-the-art equipment and at least several dozens of PhD in finance, mathematics and statistics from the most prestigious universities in the world trying to guess what the next best move will be while calculating the risks and how to hedge those risks for the traders - their traders. There are roughly only two ways to make profit in speculative trading : the first of which being to anticipate market fluctuation - by definition - and the second of which by influencing directly the market - also by definition. To achieve the former one needs proper access and understanding of the arcane of Forex markets that are far away from all the Forex indicators with ever fancier names used by amateur retail traders while to achieve the latter one needs a quasi demiurgeous capability of bending price curves to one's will. Compared to professional traders retail traders are left with paltry means for achieving a somewhat phantasmatic return on equity - when not risking that equity altogether. Well at least until now for Captain Algorithm intends to become the weapon of choice of retail traders. With Captain Algorithm do not expect to become "uberwealthy" in several months but you can realistically expect to earn from 1% to 5% monthly ROE depending on your trading account score, the symbols you are trading with and the market amplitudes over the period - which is is very substantial; all the more so if you take into consideration the low to very low risk level for trading accounts that have received a very good rating.

 

Why does Forex rate fluctuate?

> The price curve one can see in the trading terminal - namely MT4 - represents the spot rate for that pair i.e. the current rate. The current rate is given by the agglomeration and weighting of rates at which foreign exchange contracts have been struck over a certain time frame. Basically the current exchange rate is a compounded rate of the rates of previous foreign exchange deals. So the Forex rate does not "move" per se but reflects a certain rate at which most of the ongoing offers and demands for the currencies are met. So the spot rate is indicative of the rate at which financial actors are willing to trade - with physical transfer of one currency into another. It is precisely because the forthcoming Forex deals will have different rates that the price curve of that pair will "move" as the compounding of the rates of Forex contracts is continuously re-actualized. So it is because the financial actors exchanging currencies are willing to do so at certain rates that the Forex rate in your trading terminal appear to "fluctuate".

 

> There are 5 main forces at play that cause the Forex rates to change :

1/ Monetary policies (ex: the FED changes its rates...)

2/ Debts (ex: a given country needs to pay back debt in JPY - Japan being an important regional lender - ...)

3/ International payments (ex: buying oil in large amount in USD or EUR...)

4/ Investments (ex: buying of a fleet of airplanes in USD or EUR and/or a compound of JPY and AUD...)

5/ Currencies reserves management and speculations (ex: knowing the 4 variables cited above devise a strategy to gain money...)

 

> That being said the difficulties in forecasting Forex rates are related to the difficulties in retrieving relevant data - ideally allowing the "reverse engineering" of rates fluctuations - due to the kaleidoscopic nature of the Forex market on informational, strategical and temporal levels : for instance, a company will not disclose how much oil it will buy, an international bank will not reveal its currency reserve strategy, a country will not disclose all the structure of its national debts, etc. Adding to that there are the breaking news of a downturn of a major economy, political contingencies, tariffs disputes, etc. All of which is taking place in 24h and will eventually make up the quandary that the Forex markets are. In the light of that, it does not come as a surprise that major international banks themselves have been caught red-handed in Forex rates manipulation schemes.

 

Is Forex sustainable?

> First of all you must bear in mind that there are quite many types of financial activities around the notion of Forex - Foreign Exchange - of which retail Forex trading is just a new offshoot that targets a new segment of costumers. Depending on the Forex financial activity you carry out the risks and profits models can be very different.

 

For instance physical Forex investment as buying, selling and holding major currencies with the objective of making profits through the difference of exchange rate over time is actually considered to be one of the safest form of financial investment because the Forex market is characterized as highly liquid, low volatility and highly safe. For instance shall you as an European invest in USD by exchanging an amount of EUR into an amount of USD and holding that amount of USD until the USD appreciates against the EUR in order to convert back that amount of USD into a larger amount of EUR, then this form of investment is very safe because the amount of money you hold in either USD or EUR will always remain convertible and for which the spendable value is guaranteed by their respective legislation. Obviously you could have lost some money in the process because the exchange rate could have been reversed by the time of the reverse conversion, however money is still money either in EUR or USD - by legislation. Hence the high safety of physical Forex investment - for money will remain money when applied on major currencies although it is still speculative in nature - compared to for instance investment in stock market where the possibility of loosing your entire investment exists - should the company in which you have invested go bankrupt. This is the case for physical Forex investment where you actually hold different currencies - being a case of currency reserve profit making strategy.

 

Physical Forex investment is not to be confounded with retail Forex trading - much the contrary. As explained earlier, retail Forex trading is the trading of derivative products based on foreign currencies (i.e. a type of CFD). In retail Forex trading you do not literally exchange currencies but you buy a certain position giving you certain rights and certain liabilities vis-à-vis other actors partaking in that derivative market - such as other traders, your broker, etc. Basically with retail Forex trading you enter the world of two ways betting and speculation : you earn profit should you have taken the correct position and you loose your money should you have taken the wrong position. Thus this form of investment, namely retail Forex trading - contrary to physical Forex investment - is highly risky and reputably difficult for the method to achieve consistent profits in the long run is difficult to devised - well unless of course if you use Captain Algorithm. The difficulty level of retail Forex trading and the loosing rate of retail traders thereof - mostly individuals - is the main reason many financial authorities worldwide are looking at the retail Forex trading industry with a dubious eye. 

 

Added to the high loosing rate of individual traders, there is the issue of shabby retail Forex brokers which business model consists simply in draining their costumers' equity slowly but surely by either refuelling the ignorance of their costumers on the trading terms offered through abundant and well-marketed information or offering trading conditions that are difficult to cope with (high spread and low leverage on a standard account for instance). This of course raises the issue of the sustainability of the retail Forex trading industry in general.

 

Obviously the Forex market as a whole will not fade out of existence anytime soon - neither the derivative market, both the Forex market and the derivative market being the cornerstone of the world economy - however the retail Forex trading - which is just a niche - can be endangered by an increasing number of would be traders sacrificing themselves on the altar of retail Forex trading and an inflating number of unregulated brokers with exploitative and risky business models.

 

So the sustainability of retail Forex trading will eventually boil down to whether the competent financial authorities will be able to impose a best practice framework to regulate brokers while having a better scrutiny of the way brokers carry out their businesses - which has been partially done in main European countries, Australia and New-Zealand - and whether the retail traders - particularly individuals - get access to the proper information in order to make their investment decisions.

 

Do trade signals work?

> Seemingly trade signals could have been a good idea since trade signals trigger the buying or the selling of a position imitating a winning trading account. However with some thinking one will quickly realise that trading signals just do not work and are mostly a marketing argument to lure beginners into trading - and possibly to appeal to a certain untold ambition to become signals provider themselves. Trading signals do not work for two main reasons : firstly asynchronicity and secondly heterogeneity of trading conditions between accounts.

 

The asynchronicity does not refer to the inherent time latency of data transfer but the likely offsetting of the trading strategy between the signals sender and the signals receiver. For instance, consider the case where the signals provider has been trading for some time before providing signals and you decide to subscribe to his signals. The signals provider take a position to hedge some ongoing positions. The position you then immediately imitate will just be a brand new position detached from any purpose for your position will be a "hedge" without the counter positions i.e. initial positions. So by subscribing to trading signals you will have to expect either the signals provider to "one shot" every trade or to be asynchronous with the signals provider now and then.

 

Heterogeneity of trading parameters between signals provider account and signals receiver account is a severe cause of unpleasant surprises. For those who subscribe to trading signals or have the intention to, it cannot be repeated enough that a safe and profitable trading does rely as much - if not more - on the trading parameters of their trading accounts than the positions taken. For instance consider the example in which the leverage of the signals provider is different than the leverage of the signals receiver. It will entail that the number of positions the signal providers can take will be different than that of the signals receiver, thus the trading strategy used by the signals provider will not be comprehensively replicable by the signals receiver. Another striking example is the difference in spread that may exist between the signals provider and the signals receiver; in which case shall the signals provider apply a scalping approach than the signals receiver would have to expect some bad surprises should the spread of his trading account be larger - because indeed, the spread of the same given pair of currencies changes differently and sometimes greatly from one broker to another.

 

Globally trading signals in idea is as good as asking a dinghy sailor mimic a blue water sailor or vice-versa. Although the idea is superficially tempting, in practice it may reserve some unpleasant outcomes for the conditions of trade can be very different between the signals provider and the signals receiver - in which case the correct trade strategies must also be very different. As opposed to a mimetic strategy, Captain Algorithm computes continuously relevant and actual trading parameters in order to adapt its trading strategy according to the trading conditions of the trading account.

 

Last but not least - perhaps the main breaking point regarding trade signals - is the question whether the signals provider is up to the task and how one can actually know that he is indeed. In the absence of a clearly defined trading strategy and methodology for which one can have a safety assessment, a leap of faith is needed in choosing the signals provider.

 

Does social trading work?

> The so called social trading in idea is very similar to trade signals. Trade signals provide signals on individual basis whereas social trading provide a pool of signals or even a compounding of signals. Well unless the majority of the individuals partaking in the social trading pool have suddenly become Forex seers or market finance stars there is a dim chance that a general inciting of mimetism between chickens and hedgehogs could produce a few winners - for the heterogeneity among trading accounts is high and there is no clearly defined method for choosing the signals...The so called social trading is more or less a marketing spin with a leftist accent to it, to lure in new traders who somehow - against all odds and thinking - see the connection between the social wisdom that is mostly hype, and global Forex market fluctuations. It boils down to a web based street poll on currencies for what it is worth.