Could this Destroy the Forex Business?

Hi Lance,

My Previous Question:
What would actually happen to the Forex Market if every individual trader profiting million of dollars just by using some reliable technical analysis from home.

Your Answer:
It's never going to happen. Never has and never will. The majority will always lose over the long-term. The professionals will always take the money from the amateurs.

My Current Question:
You said it's not going to happen but why? I saw many website providing profitable forex signal services to the public and their performance were ALL POSITIVE Trades by average with 7 years of statistic. What IF all the trader from the rest of the world is following their signal and make millions. Is this going to happen? Will the forex business collapse?

Please advice. Thanks,
G

Response:

Hi G,

Let's start by making an assumption that everyone in the whole world could be following the same signals, and so all trying to enter in the same direction and at the same price. It can't happen, but let's assume it could and see where that will lead us.

First up, for a transaction to occur, someone has to take the other side of your trade. If you're going long the EUR/USD for example, then someone's going short EUR/USD. Now, if everyone was trading the same system, who would be left to go short? No-one.

For most of us in the retail world, we'll be trading through a Market Maker style broker who will take the opposite side of our trade. However, they're not in the business of assuming much risk. They will be looking to offset any risk against other trades. If everyone in the world was trying to enter long only, with no-one wanting to sell, they'd have no way to offset this risk and would quickly cease to operate. There would be no market.

Markets require transactions, which require both a buyer and a seller. When you have no more sellers, the market would cease to exist until such time as the buyers bid higher prices and attract sellers into the market.

In addition, think about how prices rise. A transaction occurs when there's both a buyer and a seller at a particular price. How then can it rise? To rise, someone must be willing to buy (with a corresponding sell) at a higher price. To rise further, someone else must be willing to buy even higher again (with a matching sell). Price rises only while other market participants are willing to buy at a higher price. When we run out of demand (buyers), price will fall. It then continues to fall until we run out of sellers willing to sell at a lower price.

If everyone is following the same system, no-one will be willing to buy at a higher price. So, there's no demand above the current level. Prices will fall and the system will fail.

The above is a gross simplification. I'd suggest doing some research into market profile, and in particular the dual auction theory, if you want more detail on this.

The reality is though that we're not all going to be subscribing to the same signals service. I can pretty much guarantee you that I won't be. The market is made up of many different participants, with different timeframes, objectives, analysis and decision making methods. Not everyone is in it for speculation. Not everyone is making a trading decision based on technical analysis. A lot of forex transactions occur simply due to capital flowing into and out of a country due to either trade or in seeking better interest rates. There will always be buyers and sellers.

Some other factors that come to mind...

With a mechanical system, history shows that not all traders will execute it with the same degree of accuracy. In fact, many traders could be given a proven positive expectancy system and still lose money. We all have a different tolerance for risk, the inability to watch the markets 24/7, and a natural human tendency to second-guess the signals. And with the inability for these systems to adapt to changing markets, I can pretty much guarantee that you will be second guessing the signals.

For a signals service, delays in getting the signal will also lead to different entry times or possibly even missed entries.

Mechanical systems entered via robots - well, I haven't seen one yet that really worked.

With discretionary systems, it's even worse. All human information processing and decision making is subject to error. Our ability to perceive the market, understand what it means and project that into the future to determine probable future action, is flawed. It's subject to influence from our beliefs, values, attitude, heuristics & biases, and our limited attentional resources. We are not robots, but imperfect human beings. Your decisions and actions will not be the same as everyone else's, and will be more emotion based than based on logic.

Basically, we all make different decisions and would not all be interested in following the same signals service. Even if we for some reason did try to execute the same system, it just wouldn't work. Our execution would differ.

Regarding the websites that you've seen offering signals with 7 years of backtested success, I don't know which sites you're referring to so can't comment on their offer. I have no doubt there are signals services operating with a strategy that does provide a positive expectancy. However as we discussed above, the results you achieve will differ from the vendors results. If a signals service interests you, be sure to trial it first on a demo platform to confirm that the strategy suits your personality and lifestyle.

Be careful too as there's a lot of rubbish systems and signals services for sale. It's quite easy to produce 7 years of backtested success when the results are curve-fitted to the 7 years of data. In this case, the results in future are very unlikely to match the past results.

I've seen a few forex robots advertised recently that offer 7+ years of history, which includes NO losses at all. What absolute rubbish. Typically these have a ridiculous risk:reward ratio, such as taking profits at maybe 5-10 pips and setting stop losses at -200. Here's how to make a few thousand selling a crap system - find any system, work out the maximum favorable excursion (MFE) and adverse excursion (MAE) for every trade, and set the target within the minimum MFE and the stop outside the maximum MAE. There's your seven years backtested 100% profitable system. Now just create an EA to run it, put up a website and sell it. While it's sure to provide a short-term boost to your bank account, watch out for the karma payback!!! I don't know how those people sleep at night.

Anyway, I've probably taken enough of your time. A lot of the above explanation involves simplification of the concepts. I encourage you to research the dual auction process, and human performance limitations / heuristics and biases.

Hopefully you can see that this concern is just not representative of reality. It won't happen.

Cheers,

Lance Beggs

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