FX trader in investment bank/hedge fund, what do they do?

[myownstrategy]

Hello I am an absolute newbie here. Pardon me for my lack of knowledge.
I have been reading up on FX trading recently. And I am wondering why most retail trader lose money.
Logically speaking, if the claim that 90% of retail traders lose money is true, then there must be a way to consistently make money from the FX market----doing the opposite of the retail trader does

Here, I hope some professionals can clear some of my doubts:
1. From many places people say that automated trading strategy outperforms discretionary traders? Is that really true...like DB is using trading robot to make a lot of money?
2. Does Technical analysis really work on FX? How does hedge fund trade FX?

Thanks a lot if someone can shed some lights on my doubts

 

[DominiConnor]

1: If retail FX traders are losing money, it follows that someone else is making it, question is can it be you ?
Some FX algo traders are making real money but the nature of this activity is that any given strategy either fades or gets mined out.

Some FX traders are executing trades either directly for clients or as part of a service provided to them. The impression I get is that more money is made from this than prop FX trading of both manual and algo kind.
Also there is now a blurring between and robots and humans, a human may decide on the strategy based upon macro factors or some other model and a machine will execute it to get the best prices.

2. Depends upon what you call TA. Some techniques such as mean reversion can produce positive returns but I'm in general skeptical of it. At my last firm the TA stuff was most eagerly read by the people who sold stuff to clients because it can make a good sales pitch. The most senior guy who sold to clients ( who had an MSc from the LSE) read the TA books avidly and still regarded it as nonsense. Also I've seen studies based upon how TA traders trade and it seems often the case that they genuinely believe they are TA trading, but their actually trades tell a different story.

 

[Barny]

TA is rubbish, but in some markets the participants believe in it so much that it actually effects prices. In FX and commodities, for instance.

 

[myownstrategy]

1: If retail FX traders are losing money, it follows that someone else is making it, question is can it be you ?
Some FX algo traders are making real money but the nature of this activity is that any given strategy either fades or gets mined out.

Some FX traders are executing trades either directly for clients or as part of a service provided to them. The impression I get is that more money is made from this than prop FX trading of both manual and algo kind.
Also there is now a blurring between and robots and humans, a human may decide on the strategy based upon macro factors or some other model and a machine will execute it to get the best prices.

2. Depends upon what you call TA. Some techniques such as mean reversion can produce positive returns but I'm in general skeptical of it. At my last firm the TA stuff was most eagerly read by the people who sold stuff to clients because it can make a good sales pitch. The most senior guy who sold to clients ( who had an MSc from the LSE) read the TA books avidly and still regarded it as nonsense. Also I've seen studies based upon how TA traders trade and it seems often the case that they genuinely believe they are TA trading, but their actually trades tell a different story.

Hi, DominiConnor, thanks a lot for your reply. But if trading is not generating so much money, what is the source of income for those properiatary trading firms such as Jane street (firms trades using their own money)? Do they rely a lot on inside information like what Goldman is doing?

 

[myownstrategy]

TA is rubbish, but in some markets the participants believe in it so much that it actually effects prices. In FX and commodities, for instance.

My opinion on T.A is very skepitcal as well. I think it only works because sometimes a lot of traders believe in this. So do you think whether alog trading is rubbish as well? (except for those algothrims really good at looking for arbitrarge opportunities)

 

[Joy Pathak]

FX trader in investment bank/hedge fund, what do they do?
---
At investment banks they make markets with their clients. They will buy what their client is selling and visa versa. The money they make is mostly of fees. It is purely market making business with a very quick inventory turnover rate. Sometimes they will hold positions longer if they know or think a client might be thinking of doing a trade in a little while. Almost all positions are hedged.

At hedge funds it's purely prop trading. They take outright positions without hedging all legs or some legs and aim to make a money based on direction or whatever factor they are using.

Almost all traders at banks and hedge funds use TA. FYI... Paul Tudor uses technical analysis. The thing people don''t understand is what kind of TA are they using. They don't use a moving average to trade. It's more involved then that but almost all trading is based on TA.

 

[financeguy]

Hello I am an absolute newbie here. Pardon me for my lack of knowledge.
I have been reading up on FX trading recently. And I am wondering why most retail trader lose money.
Logically speaking, if the claim that 90% of retail traders lose money is true, then there must be a way to consistently make money from the FX market----doing the opposite of the retail trader does

Here, I hope some professionals can clear some of my doubts:
1. From many places people say that automated trading strategy outperforms discretionary traders? Is that really true...like DB is using trading robot to make a lot of money?
2. Does Technical analysis really work on FX? How does hedge fund trade FX?

Thanks a lot if someone can shed some lights on my doubts

If you buy a bunch of EURUSD at 1.3500, exactly mid market, perhaps you have a 50% chance of making money. If you are a retail client who deals in not embarrassingly small size, you get quoted 1.3496/1.3504. If you then buy it at 1.3504 from the market maker or algo or whatever while the mid market is 1.3500, your chances of making money are now less than 50%. When you exit the trade, you'll have to hit a bid that's .0004 below mid market as well. So whenever you trade, you're .0008 behind from the get go. That makes the odds stack up against the retail investor. It also means there's probably not a great opportunity for you to exploit this statistic.

Note I totally made up the spread on this. But no matter who you are, you'll pay some bid/offer spread. If you're a big hedge fund you might only have to pay 1 pip away. If you're a small retail client, you might be paying 10 pips or more away each time.

 

[myownstrategy]

FX trader in investment bank/hedge fund, what do they do?
---
At investment banks they make markets with their clients. They will buy what their client is selling and visa versa. The money they make is mostly of fees. It is purely market making business with a very quick inventory turnover rate. Sometimes they will hold positions longer if they know or think a client might be thinking of doing a trade in a little while. Almost all positions are hedged.

At hedge funds it's purely prop trading. They take outright positions without hedging all legs or some legs and aim to make a money based on direction or whatever factor they are using.

Almost all traders at banks and hedge funds use TA. FYI... Paul Tudor uses technical analysis. The thing people don''t understand is what kind of TA are they using. They don't use a moving average to trade. It's more involved then that but almost all trading is based on TA.

Hello Joy
Thanks a lot for your sharing. Building up on your reply, Can I ask you another question?
I think it's correct to say that investment banks are on the sell side. But if their ultimate goal is to make money as well, and equipped with loads of quants and traders, why not investment banks take on any position/speculating in the FX market? what makes hedge funds having the confidence betting on the market?

 

[myownstrategy]

If you buy a bunch of EURUSD at 1.3500, exactly mid market, perhaps you have a 50% chance of making money. If you are a retail client who deals in not embarrassingly small size, you get quoted 1.3496/1.3504. If you then buy it at 1.3504 from the market maker or algo or whatever while the mid market is 1.3500, your chances of making money are now less than 50%. When you exit the trade, you'll have to hit a bid that's .0004 below mid market as well. So whenever you trade, you're .0008 behind from the get go. That makes the odds stack up against the retail investor. It also means there's probably not a great opportunity for you to exploit this statistic.

Note I totally made up the spread on this. But no matter who you are, you'll pay some bid/offer spread. If you're a big hedge fund you might only have to pay 1 pip away. If you're a small retail client, you might be paying 10 pips or more away each time.

Hello Finance guy.
From what I know is that a lot retail traders offer 1-3 pip spread on FX market. I think you are right that hedge fund pays a lot less spread than that due to large transcation volume. Let's assume they pay 0.1 pip. Our profit probability is a little lower 50% (49% maybe) and theirs is 49.99%, do you think this is the ultimate reason why funds makes a lot of money but we don't.?

 

[lobomattu]

Trading randomly as a retail trader , your chances of a profitable trade will be slightly less than 50% because of the bid-ask spread and commissions. In my opinion, technical analysis is just a tool that, when used with expertise and discipline, can tilt those odds in your favor. Of course, it's not gonna work all the time. Maybe it will increase your chance of winning to 55% or 60% or even higher, depending on how good you are with the TA tool you're using. That's enough to make money in the market. You just have to find what's right for you. Everyone in my office uses TA to trade (profitably).

 

[mfegrad]

Hello Joy
Thanks a lot for your sharing. Building up on your reply, Can I ask you another question?
I think it's correct to say that investment banks are on the sell side. But if their ultimate goal is to make money as well, and equipped with loads of quants and traders, why not investment banks take on any position/speculating in the FX market? what makes hedge funds having the confidence betting on the market?

let me introduce you to mr. volcker

 

[financeguy]

Hello Finance guy.
From what I know is that a lot retail traders offer 1-3 pip spread on FX market. I think you are right that hedge fund pays a lot less spread than that due to large transcation volume. Let's assume they pay 0.1 pip. Our profit probability is a little lower 50% (49% maybe) and theirs is 49.99%, do you think this is the ultimate reason why funds makes a lot of money but we don't.?

1-3 pip spread I think is quite optimistic for a retail trader to be honest. I suppose it depends on the currency pair you're trading. As far as why funds tend to make more money trading spot than retail traders, I do think the spread is certainly partially to blame, but also hedge fund traders are generally more sophisticated and experienced in trading in the market. They'll have a better idea as to when to stop out, take profit, and when to put on positions and in the first place. They'll also have much more information about market positioning. For example, a big hedge fund can call up a sales desk and ask what orders have been left with major market makers orderbooks - which means they could potentially know at what levels a large amount of a currency could be bought or sold. I don't think it's because they're any better at technical analysis.

 

[myownstrategy]

let me introduce you to mr. volcker

Great point.

 

[ConMan]

Some FX algo traders are making real money but the nature of this activity is that any given strategy either fades or gets mined out.

Hi, I'm also a newbie to the forums here. One thing that I've learned and has always bothered me is why strategies eventually fail once they become wider-known. For example, the Dogs of the Dow used to be a profitable strategy in the 70's-90's. Now, not so much so. I apologize in advance if this is off-topic.

 

[alain]

Couple of articles that proved discretionary FX trading is dead when competing with automated agents.