fundamental question on how trading operates

[levincoolpal]

i have been using the trial version of AVA fx for a while now. (its a commodity/forex, trading platform).

suppose i want to buy 100 barrels of crude oil, ill click on the buy button. I assume that somewhere a broker will sell me 100 barrels of crude (which he buys off a seller). If i go long, and the price of the crude goes up, then i will make a profit when i click the sell button (i assume that the crude is being sold to a broker who gets his profits back by selling to a seller with a markup).

This is how i believe the model works.

How come everytime i click buy or sell, there is always stock available? what if the broker cannot find a buyer or seller?

It is possible to go short and still make money. Am i making money that is lost by someone else (the ones who go long where i go short).

Are big corporations with traders who know what they are doing taking advantage of people who dont know what they are doing?

Thx

Levincoolpal

 

[Xeno]

i have been using the trial version of AVA fx for a while now. (its a commodity/forex, trading platform).

suppose i want to buy 100 barrels of crude oil, ill click on the buy button. I assume that somewhere a broker will sell me 100 barrels of crude (which he buys off a seller). If i go long, and the price of the crude goes up, then i will make a profit when i click the sell button (i assume that the crude is being sold to a broker who gets his profits back by selling to a seller with a markup).

This is how i believe the model works.

How come everytime i click buy or sell, there is always stock available? what if the broker cannot find a buyer or seller?

It is possible to go short and still make money. Am i making money that is lost by someone else (the ones who go long where i go short).

Are big corporations with traders who know what they are doing taking advantage of people who dont know what they are doing?

Thx

Levincoolpal

You're not buying or selling oil, you're probably just an entry on an electronic exchange record. You're probably buying the right to receive or deliver oil to someone before a future date, but since most of the trading is done before that date, no oil changes hands.

You need to grab some books, but in the meantime, look up 'futures' and how they work.

You're last question is a big yes.

 

[timsk]

Hi levincoolpal,
Welcome to T2W.

How come everytime i click buy or sell, there is always stock available? what if the broker cannot find a buyer or seller?

The simple answer is supply and demand. After the market has risen, there will come a point where demand will drop off (because all the buyers have bought) and supply will start to outstrip demand (because those that bought want to realise their profits). Then the pendulum swings the other way. The problem is - buyers are scarce at this point as the stock is way too expensive and any buyers that remain don't want to pay the price being asked by the sellers. There's only one way for the sellers to offload their stock and attract more buyers into the market. And that's to lower the price. If price is falling, it's easy to buy as sellers are keen to sell before the price falls even further. If it's rising, sellers are less keen to sell and you're liable to get a poor fill (if using market orders). When the market is at its peak and you are the only trader on the globe that still wants to buy, you'll be hit by an avalanche of sellers who will bite your hand off at the ankle in order to get out at the top with a (huge) profit and leave you holding stock that can only fall in price. So, you can see - I hope - that there's always someone willing to sell you stock, just as there's always someone willing to buy when you want to sell. But each party may not get the price they ideally wanted, or make the profit thay hoped for. If there aren't many traders around, then the price moves can be large which is why short term traders tend to steer clear of illiquid markets.

It is possible to go short and still make money. Am i making money that is lost by someone else (the ones who go long where i go short).

Yes to the first part of your question and maybe to the second. Do a search on how shorting works. The second part of your question is more complicated in as much as it begs the (oft' asked) question: is trading a zero sum game? The broad answer to this is 'no', although some will argue that it is - especially for futures markets. The reason for this is that let's say you sold stock to a position trader - while you're a scalper looking to make quick profits. Your stop loss is tight, while the other trader's is much wider. You're out for a profit at a point where the other trader would lose if they closed ther position. However, their time frame and objectives are different to yours, enabling them to stay in the trade without their stop loss being hit. The market then reverses up, moves to break even and eventually into profit. Like you, the position trader closes their trade for a profit even though s/he entered long at the exact same price you entered short.

Are big corporations with traders who know what they are doing taking advantage of people who dont know what they are doing?

Yes, but the institutions are screwing each other as well. You and I are just beer money to them!
HTH.
Tim.

 

[levincoolpal]

so these online transactions i make- do brokers have anything to do with it? from what Xeno said, the computer acts like a broker.

I am still not quiet sure where the money comes from if i successfully short on a position. Fine, i agree that trading is a 0 sum game. From this statement, i understand that market is driven by supply and demand and therefore prices fluctuate. Then this means that if i succesfuly make money during a short sell, then someone does not necessarily have to lose money for me to profit. - Strange, it sounds like money comes from nothing.

All i know is that big corporations can move the graph a lot more because they gamble with more money. How can once corporation screw another?