Hi, I've never traded forex but i'm really puzzled as to where does the money come from. I read somewhere that 25% of all trades are done for currency hedging . So 75% is trading for profit and speculation. We could basically divide traders into institutional and retail traders. I think that institutional traders are not really into losing money and let say that they are playing it safe and can make consistent 20% interest a year on their investment.
It looks like retail investors are using some kind automatic, back testing software, that helps them make consistent profit .
There are many softwares here reviewed where u can have 7% or more in monthly returns, and some of them have been consistently making money for many years. I think that many new traders lose their money at the beginning, and then they do extensive research and end up using a software that find the trades for them . So once you find the successful software u should be making long term monthly profits and compounding the interest on every trade. Let say you lose $10,000 your first year, you either never come back or you start using a software and start over once you save $10,000. But with a software u are able to make let say 7% a month on average for many many years. So where does the money for opposite trades come from ?
Your account is compounding exponentially , it means that new money must be coming in with exponential rate as well. Lets assume that everybody who comes back to Forex after losing their first investment is are able to grow their account let say 7% a month . If we pool money from all the traders who are using successful software method for trading we will have pretty large number . If we give it enough time ,let say 20-30 years, these traders will own all the money in the world. Why aren't they influencing liquidity in trading to such extent that it takes really long time to execute the trades ,as there are no more buyers and sellers.
Let say 7% a month minus 35% income tax a year , we have 80% interest a year. In 30 years that's 45517159 times the initial investment. So starting with $10,000,000 you would probably owe all the money in the world. It almost looks like, that in order for forex to work there must be equal amount of people who have loses that grow exponentially. So sooner or later, all the winners must give money back to forex losers in order for forex to continue to work. So even if you have a successful trading software or system , it should start to lose money sooner or later because you would own all the money in the world . And loses should appear with such a speed that no stop loss should help you .
I apologize in advanced for my limiting knowledge of forex, and question asked may just be common knowledge between the experienced traders. I hope someone can clear this out and tell me, how can someone produce consistent long term profit in forex and where all the new money is coming from ?