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So, suddenly you think you are a currency expert

Discussion in 'General Investing Discussion' started by Tropo, 25th Oct, 2010.

  1. Tropo

    Tropo Well-Known Member

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    October 23, 2010

    SO the Australian dollar hits parity and suddenly every Tom, Dick and frigging Harry is a currency expert.
    It's as if the Aussie dollar hitting the big figure miraculously released a previously absent forex-predicting hormone into the community, a compound that has empowered everyone from the completely unqualified dill to the completely unqualified dill with a financial services licence and some product to sell.
    All of a sudden, a horde of previously indifferent clients want to know how to trade forex.

    Financial planners are sagely listing for their clients ways to buy currency exposure through fee-carrying US dollar-based products priced in Australia, products that were seemingly unnecessary when the Aussie was at US99.99¢ but at $US1 are suddenly of grave importance.
    And the futures market, for the first time in years, has become popular again with the green and innocent and the interest in ASX-listed US dollar-based exchange traded funds, which only ever gain a seasonal popularity in a bull market, is blossoming.

    And it's the perfect storm for the CFD providers. Their "marche de choice" has always been forex anyway.
    It allows ''clients'' to trade 24 hours a day, is perfect for amateur charting and has proven itself the single best market for blowing up clients who can dispense of their funds, often with a bottle of red wine on board, while the rest of us sleep.
    It's a drug, and the parity headlines are the ideal opportunity to market, when everyone has a view, but not everyone the ability to profit from it.
    It's miraculous. And it's pathetic. Come on everybody, who do you think you are?

    The idea that you can suddenly speculate in foreign exchange and make money, just because it has hit parity with the US dollar, is ridiculous.
    What could you possibly know about the future direction of the forex markets?
    What edge could you or your product-wielding adviser possibly have on the currency trading world? Where could you have got this wisdom from?
    I'll tell you.
    You ripped it out of your a@#e, because that's the only place your complete guesswork, seat-of-the-pants, mean reversion, media-fed instinct could have come from.
    You are making it up, guessing at best, and while everyone is entitled to their opinion, you will experience a random outcome if you allow your new-found wisdom to dictate where you ''gamble'', sorry, ''invest'' your money.

    I suppose all the professional currency traders that are doing their nuts in the forex markets every day are idiots and you're the guru? Yeah, right.
    Sorry, but knowing about two moving averages, doji and harami candles, support and resistance and any other titbit you picked up in a one-hour seminar doesn't count.

    The currency markets are for business, hedging and the professional systems trader. They are a graveyard for the part-time speculator.
    There is no edge for the mortal man, no matter how many home-study courses and DVDs you buy.
    It is a market for companies to exchange currency, for businesses to hedge their business, for producers to lock in future outcomes and for the big banks, endowed with their privileged knowledge of currency market action, to punt.
    That leaves amateur speculation and rogue trading.
    And unless you are under 17, have attitude, a juiced-up resume (big forex desks expect it), a mole in the back office, an ability to operate beyond your limits, a foolproof method of trading illiquid derivatives and work for a big bank board that wouldn't know a Pip from a Kiwi and a Cable, you'll never make a rogue trader.
    In which case you're speculating and the only people to make money out of that are the lucky and Nick Leeson's publisher.

    Marcus Padley.
     
  2. Chris C

    Chris C Well-Known Member

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    HAHAHA - Marcus Padley... what a dude! Tells it like it is.
     
  3. The Falcon

    The Falcon New Member

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    Top article...we need more of this :)
     
  4. Chris C

    Chris C Well-Known Member

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    What the world really needs is mandatory reading of this article before anyone wastes any money buying a FOREX trading program, ebook, seminar, course, etc...
     
  5. Alex Barton

    Alex Barton Member

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    Currency trading is a real gamble. Very easy to get burnt if you don't know what you're doing (or even if you do!).
     
  6. Tropo

    Tropo Well-Known Member

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    Trading currency is not a gambling as long as you know what you are doing.
    Trading is a business...and like any other businesses carry a risk.
    Individuals without knowledge, experience, discipline and not knowing how to manage a risk are gamblers.:cool:
     
  7. Chris C

    Chris C Well-Known Member

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    Trading is a zero sum game.

    So I don't know if I would go as far as to call it a "business". You could call it a way to make a living, but you can make a living being a professional gambler as well.

    Professional poker players are individuals WITH knowledge, experience, discipline and know how to manage risk, but we still call them gamblers, but the good ones DO win a hell of a lot more money than they lose, but at the end of the day for the good ones to win someone needs to lose.

    :rolleyes:
     
  8. Tropo

    Tropo Well-Known Member

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    Zero-sum game theory is often misunderstood (there is also minus-sum game).
    Future and options contracts are examples of zero-sum game (for every person who gains, there is a person who loses).
    Zero-sum game does not apply to stock market, because there is a lot of participants, who put different amount of money on the line, so amount of money distributed to the winners is not equal.
    Also not every seller is a loser. Participants may have a lot of reasons to sell, including taking a good profit.
    People who consistently benefit from a trading (even part time traders), consider trading as a business, but there are some who threat trading as a ... hobby :confused:
    Do not confuse season poker players (gamblers) with pro poker players (I call them players), who are making a good living out of that game.
     
  9. Chris C

    Chris C Well-Known Member

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    In aggregate and from a macro perspective "trading" is a zero sum game (at best). However you are probably right that in practice it creates a misallocation of human capital and unrequired infrastructure, which creates a negative externalities for society - making it a minus sum game.

    "Investing" on the other hand is more about attempting to allocate capital to businesses that can use them most efficiently. So for example Warren Buffett buys an undervalued business, adds value, increases production and future profits. When he allocates capital his philosophy is that he has the aim of holding his investment forever. He often also doesn't distribute dividends precisely because he can "better allocate that capital" to productive expansion of businesses than his stockholders could.

    So "investing" is good, because it's about getting the right resources to the right people/companies so they can innovate and grow into the future which have positive flow on effects for society in the form of better and cheaper products and services.

    "Trading" is bad because nothing is gained from a social perspective and often just creates negative externalities for society.

    It doesn't matter whether you are full time or part time trader. Trading doesn't add value for society making it a zero sum game (at best).

    I'm not making those that trade wrong or anything for doing what they do (even I do it). If anything, it makes a lot of sense to get involved in it if you are good at it, there is great money to be made, just like there is in becoming a pro poker player.

    My point is we as a society should be looking to reduce these inefficiencies, but that doesn't mean it's the only inefficiencies in society that need to be reduced.
     
  10. Tropo

    Tropo Well-Known Member

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    Hmmm...It seems to me that you are quite confused person.
    There is not much difference between trading and investing.
    It seems to me that you think like most people do, that every trader is selling and buying every 5 mins (some do just that).
    The issue for traders are commissions and slippage so they sometimes receive less than what losers lose, and that what minus-sum game is all about.
    Trader must be more than "better than average" to win a minus-sum game.
    Now...as you see this has nothing to do with infrastructure and/or externalities of society.
    The only people who are affected by a zero/minus-sum game are traders/investors, gamblers and the like.
    Also, there is no proof that investing provides cheaper products and services.

    What is good or bad for society is a different story.
    A lot of young people are dead drunk every weekend and this is bad for the society, government's investments which go "wrong" are bad for the society etc...
    If you are so society orientated why don't you start reducing these inefficiencies by taking politicians under the microscope instead of traders.

    Ah yes...Nobody knows how many investments W. Buffett is selling and buying and there are not many people who can successfully play W.B game.
     
  11. Chris C

    Chris C Well-Known Member

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    Maybe - but I also might not be as confused as you think.

    :)

    It doesn't matter if you are trading over 5 seconds, 5 minutes, 5 weeks, or even 5 months. If your strategy is buy low sell high (often using leverage) irrespective of the underlying business's future profits then you are trading.

    With just those variables that isn't a minus sum game from a social perspective, that is just a minus sum game from a traders perspective.

    Those commissions that go from the trader to a brokerage firm or interest payments that go to a finance company don't fall out of the economy, they eventually get inject back into economy the same way the winning traders eventually inject their proceeds back into the economy.

    The minus comes about, as I said, from the resources that are wasted in building and facilitating the trading industry as well as the oppurtunity costs of the resources (both capital and human capital) that are wasted in this industry (from a social perspective).

    By this I mean if there were no traders then many brokerage firms and trading financiers would have less work and would therefore be smaller and as a result require less capital and human capital and things like specialised trading platforms that traders use wouldn't have been developed which would have saved money.

    These things are all resources that were spent on business building and infrastructure developments that aren't value adding for society. Worst of all is the human capital loss. People working in the industries that facilitate trading or are in trading themselves are often some of the best and brightest of society and they are engaged in industry that doesn't add value when they could be spending there time curing cancer or doing something of value for both themselves and society.


    This is the same reason why 80% of fund mangers don't outperform the index all costs considered.


    Read above.


    Not if you include the opportunity cost of resources and human capital being better allocated.


    Investment alone doesn't, but it's a necessary component for technological innovation and efficiency gains within society.

    I 100% agree.

    It's why many governments have flirted with prohibition of alcohol (and drugs), which is a completely rational law to enforce if you assume that people are also rational - but we are not and seem to derive a great amount of utility (aka happiness) from getting hammered on the weekend. Same thing goes from gambling, it creates a net loss for society from a economic perspective, but people still love engaging in it because the derive utility from it even if the odds are against them.

    :rolleyes:

    Because I'm too busy engaging in zero sum activities that line my pocket to worry about politics and society.

    So don't get me wrong, I'm not preaching because I practice. I'm just someone who practices but isn't deluded by what value I add to society doing what I'm doing (very little). I'm not someone who engages in zero sum games and expects them to last, as in I wouldn't cry if government took the right away, I'd actually support them doing it.

    :rolleyes:

    No there are not, but it's better for society if people try and be Warren Buffett than to accept that you're not and just engage in the minus sum game of trading.
     
  12. Tropo

    Tropo Well-Known Member

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    Everyone who is selling asset at one point of time can be classified as a trader incl. W. Buffett who is also selling from time to time, and there is nothing wrong with it.
    There is nothing wasted from social perspective...Money somehow always is spent by winners.
    There is a lot of serious waste in different industries, but not many people even talk about it.
    Every trader must support his broker and the business of exchange before he/she collects some money. Exchanges, regulators, brokers, and advisors live off the markets.
    Unfortunately without a traders/investors, market will cease to exist.
    There is not a point of buying if there is no sellers. And the only time you are making money is when you sell at the right time.
    Sad story is that there is far more losers in the market than winners, but that is another story.
    Markets need a fresh supply of money (buyers) in order to keeps trading industry going.
    Cost of computers, data, etc. all come out of trading funds. A lot of traders donate money to the charity...so I do not know how all of this may fit your social frame.
    There is a lot of reasons why fund managers perform poorly. Minus/zero sum game is only one of the reasons.
    Markets are also one of the few resources to allocate capital. The only problem is that a lot of allocated capital is wasted for whatever reason.
    What is value for one person is a waste for another...but if majority may agree that spending time and money to cure cancer may be very positive for humanity, do not expect that say...G.Soros suddenly becomes a very competitive cancer researcher.
    As I said not many traders/investors can play W.B game, who has resources not available to the majority of players.
    There is a lot of stories about W. Buffett...Not many know that W.B started in his early days as an insider trader. W.B still may fascinate many people until some of them discover that what is good for W.B is not necessarily good for them.
    If zero sum game is your hobby let me quote what I read long time ago..."if your hobby is not giving you extra income....simply change your hobby".;)
     
  13. Chris C

    Chris C Well-Known Member

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    There is a big difference between those that are parking their savings in a diversified portfolio so that their surplus production (savings) in their working years can retain its purchasing power in their later years of retirement when it's required and those that engage in a minus sum game of trading that encourages and facilitates the misallocation of resources.

    As I have said previously, opportunity for social advancement is wasted as well as time. These are both forms of waste it's just that they're not effectively measured in any economic form presently.

    The point is not that there are not wastes in other in industries, there is actually waste and inefficiency in every industry. The point is not every industry in aggregate is a negative rather than a positive like the proprietary trading and speculation industries are.

    I'm not saying that markets, exchanges, regulators, brokers and advisers aren't required - they serve an important function within a productive society. What I'm saying is those that engage in trading as a means of producing their livelihood without being an adviser, broker, regulator or exchange manager are not producing any social benefits for society.

    An example might be a firm like Goldman Sachs which both engages in providing productive products and services for the economy on the investment banking side of its business yet it is heavily engaged in proprietary trading which doesn't add value to the economy yet is highly lucrative.

    The tragedy is that smart people and investments often follow the money and in this case the money is found in an area of finance that doesn't help the economy, in a real sense, which as a result undermines the innovation and development of more productive parts of finance industry for society in addition to an over allocation of capital being in the finance industry.

    There are a multitude of reasons for people to buy and sell assets. To argue that markets would not exist without proprietary trading is a bit of a stretch of the imagination. It's like arguing housing prices wouldn't find a clearing rate if investors were removed from the real estate market. I'd concede that the market wouldn't be as liquid, but the benefits of improving the liquidity of a market by allowing proprietary trading and speculation are unlikely to offset the negative externalities of the misallocation of resources, not to mention creating incentive to manipulate markets.

    More important than all of this it's important to remember the fact that houses are built for consumption not to speculation and that where there are buyers and sellers the market will find a clearing rate.

    That's why people should be encouraged not to engage in market speculation.

    And the market will always find fresh money because everyone around the world are at different points on their life cycle. The young are accruing savings and investments in their working years and the elderly are drawing down on their savings and investments in their retirement.

    The less waste we have in society the more resources there are too allocate to welfare, not to mention that as society becomes more productive it has more resources to allocate to social welfare.

    Plus there are many wealthy people that accrued their wealth through socially positive means who donate heavily to charity.

    George Soros, at 20 years old, would have been an intelligent person, relative to his peers, when he had to choose a life path. If he was a rational individual you can assume that he made a rational decision to the utility of his labour, i.e. follow the money. It's just unfortunate for society that this rational decision to follow the money meant that his talents and intelligence was dedicated to being the best hedge fund manager he could be.

    So I agree that George Soros today will not find the cure for cancer, but it is important that we encourage and financially incentivise the intelligent and talented 20-year-olds of today to pursue life paths that are not only personally beneficial, but socially beneficial.
    I agree.

    It's an unfortunate reality that many successful and productive people within society have checkered pasts. For most the notion of being truly altruistic is unrealistic if you don't have your own ass covered. We humans, as with all animals, have a strong bias to ensuring our own survival. We also, like most animals, are opportunistic. So when you combine the uncertainty of survival with the opportunity to significantly gain relative to one's current circumstances - it's understandable that one might engage in shady dealings.

    on the flip side of this, as one's survival, from a financial perspective, becomes ensured and the relative gain from engaging in shady dealings is less – it's equally understandable that an individual might take the higher road later in life.

    I wholeheartedly agree.

    Though it might be worth pointing out at this point that I'm already someone who has turned their hobby of making popular websites in their teenage years into a business. So you might be preaching to the converted in this regard.

    :D
     
  14. Tropo

    Tropo Well-Known Member

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    There is a big difference between theory and practise. And you are drawing utopian model of modern society. Nothing wrong with it as long as you are aware of it.
    In case of productivity, creativity or welfare allocation etc. there is a lot of different opinions (ask five economists and you'll get five different answers - six if one went to Harvard).
    Nobody would work for free, so there is nothing wrong with making/creating money.
    There is no guarantee that Soros trained as a brain surgeon in his young age, would be as good and competitive as he is as a trader.
    At least Soros is doing what he is good at, comparing to majority of others.
    Brokers, advisers etc. produce nothing.
    A lot of them are real danger to people who are looking for financial advice, and wrong advises are not uncommon. If this happen advisers/brokers blame the market or wrong weather forecast.
    Traders trade own money and if they lost some of it, they blame only themselves.
    Not every player involved in trading/investing is struggling with a minus/zero sum game, otherwise all those participants would not play this game.
    Basically you are talking about a perfect society, perfect approaches and perfect world in general, but living in "paradise" would be very boring indeed.
     
  15. Alex Barton

    Alex Barton Member

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    But how can anyone know what they're doing? Too many variables - who could have predicted the RBA wouldn't move last month, and the impact that had on the AUD. These things are too hard to call, IMO.
     
  16. Chris C

    Chris C Well-Known Member

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    I agree that there is definitely a difference between theory and practice. Yet the field of behavioural economics is a fairly new one so not even a lot of academic theory has been formed on the matter as yet, but it is blatantly obvious there are serious negative externalities involved with speculative trading.

    Also I'm not actually arguing for a Utopian model at all, I'm actually suggesting that it is our flawed human nature that actually needs to be regulated. It's the opportunist in us and the desire to make money for nothing that draws many into the seductive idea of trading, but the reality is the most that engage in it they will lose both their time and their capital. Therefore if maximising social utility is the objective, it stands to reason that we should prevent our human nature from undermining ourselves.

    Well it would seem that capitalism has done wonders for increasing productivity, creativity and welfare. So I don't see a need to break a working system, rather just fine tune it a little bit.

    I completely agree. And like with capitalism incentives seem to work well for motivating individuals. That said, it's important to make sure that individual incentives also align with social incentives.

    Once again I agree. That said, there would no doubt have been many potentially great teachers who became merchant bankers because the pay was much better, when from a social perspective one great teacher who changed thousands of students lives for the better would add far more greater value to society in aggregate.

    I agree that people should do what they are good at and what they are passionate about because that's how they will get the most out of themselves. Though one caveat I would add to this is that whatever business they engage in it needs to ADD value to society.

    Brokers and advisers from my perspective fall into a similar category as lawyers, accountants, police, etc in that they provide a service that facilitates production rather than actively engages in production. These services are required to allow an economy to operate productively. However these industries overstretch their mark when they become self-serving rather than facilitating production.

    Some good examples of these sorts of firms extending themselves be on the realm of facilitating production can be seen with brokerage firms (investment banks) who now happily engage in proprietary trading or with advisory firms like that of Storm Financial whose revenues were derived from exorbitant commissions whilst giving sub optimal advice to their clients displaying an obvious principal agent problem.

    I completely agree, and this is why good regulation is required in capitalism to make sure misaligned incentives don't create principal agent problems.

    I'm not saying that traders don't live by the sword and die by the sword, but gamblers operate the same way.

    The point is that if in aggregate nothing productive for society is produced then it should be regulated such that there is reduced incentive for people to engage in it. I'm not even arguing that people should not be allowed to engage in speculative trading, I'm just saying that regulators should look to reduce people's incentive to engage in it (it could be in the form of higher taxes like those that are placed on alcohol and cigarettes).

    Yes but we are not talking about individuals, we are talking about of trading. Anecdotal evidence isn't good for forming policy.

    I'm not talking about "paradise", our world is a long way from it, I'm talking about making "progress".
     
  17. Tropo

    Tropo Well-Known Member

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    If you look around very carefully you may find that negative externalities exist in almost every aspect of modern life.
    Forget behavioural economy when academics still do not agree on many aspects of classical economy.
    Many suggest that John Maynard Keynes was a crappy economist, but on the other hand J.M.K was a very good trader, who made a lot of money for himself and his friends.
    If you feel a need to "fix" this world, why don't you write few books. Who knows, you may find solution to negative externalities and all sort of speculation/gambling/betting...
    It seems to me that you are almost obsessed with social behaviour and associated problems. But that is your problem.
    Frankly, being your age I would rather chase good looking girls instead of ramble about flawed human nature.

    Enjoy Melbourne Cup :p
     
  18. Tropo

    Tropo Well-Known Member

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    Do not try to predict anything in currency or any markets.
    Predictions, guessing, TV "gurus" suggestions etc... are the main reason why so many treaders/investors are decimated.
    You must be trained and relatively experienced to know what you are doing...
    All you need is a good tested trading/investing system, good understanding of risk/money management, and simply follow the market.
     
  19. InvestmentAnalyst

    InvestmentAnalyst New Member

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    I agree with the comments that at a mathematical level, currency trading is a zero sum game, but the argument for active currency managers existing is that exchange rates can deviate from equilibrium (however you determine it) due to occasional demand-supply imbalances.

    Companies trade overseas, foreign companies need to consummate takeover transactions, banks need to repay overseas debt at points in time; the majority of currency transactions need to happen without any consideration for the underlying currency value. Of course the trick is to be able to fundamentally assess a "true" currency value (interest rate parity/purchasing power parity/world trade movements/whatever model you dream up or nick from your finance professor) and adjust this accordingly for new information on an ongoing basis.

    On the other hand, if you're Joe (or Josephine) Bloggs sitting at home thinking you can guess which way various currency pairs will move, without any fundamental understanding of currency valuation (and I have none), good luck with that.