Zero Sum-Total FX Myth

Come on man you ruin the hypothesis of TS which probably took him a good deal of time to write.

Of course Forex trading is NOT a zero sum game cuz its not a poker pot which is restricted by..pot itself
Forex has deep connection with world financial system which constantly increase along with generating of material benefits, creating "extra cost" etc.

the other one was not schooling. This person can not differentiate trading with personal attitude. the world/trading is neutral. the person makes it good or bad. be grown, be adult.

leebsurag,

yes, you are right, absolutely right. i think you understand about international finance well.

thanks,

Cheers bro

Here's another myth for you all...

You will get rich quick trading forex.

Thank you
But from the standpoint of individual rookie forex is negative sum game cuz he likely plays a game with bucketshop which creates "pot" with two players, moreover charges spread etc.

But considering it as a whole I mean saying that your gains are somebody's loss is not quite correct..
Middle age mercantilists thought that world economy is a zero sum game and was suggesting that positive trade balance is imperative factor for economic growth etc.. but time proved they was not absolutely right.
As forex is a part of world economy we can narrow down this explanation to fx itself.
Cheers

I'm sorry, i still don't understand.

I would like you to answer the following questions:
Please explain this in simple terms, I am curious to know.
1) If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?
1.1) Will it be the broker or another retail trader?
1.2) If it is another retail trader, will the broker match us together?
1.3) If there is no retail trader that wants to SELL EURUSD at the same time with me that wants to BUY EURUSD? What will happen?
2) If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
2.1) If the other retail trader or broker waits and EURUSD price falls and their order gets into profit and closes their trade with a profit, who has suffers the loss?
3) We both can profit in the above situation but who is on the losing side?

---

Ive emailed both my forex account managers from different brokers for their anwers, will paste them once they've replied.

Exness:


Our company representative will be with you in a moment.

11:04 Cao Dong Phuong has joined the chat.

Cao Dong Phuong | 11:04
Hello, my name is Cao Dong Phuong. Thank you for contacting Exness. How may I assist you?

Mr. Fan | 11:04
1) If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?

Mr. Fan | 11:05
Will it be the broker or another retail trader?

Cao Dong Phuong | 11:06
It is the other clients in the market whom has a demand to sell this pair, sir.

Mr. Fan | 11:06
1.2) If it is another retail trader, will the broker match us together?
exness will pair us together?

Cao Dong Phuong | 11:07
Yes sir, it is correct that Exness will match 2 demands from buy and sell.

Mr. Fan | 11:07
If there is no retail trader that wants to SELL EURUSD at the same time with me that wants to BUY EURUSD? What will happen?

Cao Dong Phuong | 11:08
In this case, the price may not move but in our company, it rarely happens and always maintain in good conditions for clients.

Mr. Fan | 11:09
If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
the retail trader who you match us have not closed the trade


Mr. Fan | 11:10
If the other retail trader waits and EURUSD price falls and their order gets into profit and closes their trade with a profit, who has suffers the loss?

Cao Dong Phuong | 11:10
If you close the trade with the profit mean you can buy it with good price and same for other who can sell it with the good price.

Mr. Fan | 11:12
the person you match me with will have a drawdown if I close my trade in profit but his order is still open.
if I close my trade in profit, must he close his trade in loss?

Cao Dong Phuong | 11:14
We provide all the good price for both clients to complete their trade with the good result.

Mr. Fan | 11:15
so if both of us retail trader you match have profit, exness will have a loss, is this correct?

Cao Dong Phuong | 11:17
I am so sorry for this information, we could not provide it to you, sir.
I am sure that for the client's side, we always provide good trading conditions to.

Mr. Fan | 11:18
ok thank you.


--- end -



Had time so jump in chat with exness rep:

We are a full ECN/STP broker, this means all your positions go on the market throught our big pool of liquidity providers (Banks). In the event of wins or losses, most of the risks are carried by the Liquidity Providers. We only charge you a flat commission which is one of the lowest on the market.

- Tickmill

FXCM's liquidity providers particularly like the order flow they receive from our clients, because retail traders (generally speaking) tend to trade against the trend (buying lows and selling highs). By contrast, many of the hedge funds that offset trades with these same liquidity providers tend to trade with trend (selling lows and buying highs).

This difference in the tendencies between retail and institutional traders means banks like to have variety in order flow to have more opportunities to offset their own risk.

-FXCM

Traders opinions:

It is a zero sum game: 1

1) Broker, unless your a large profitable account
1.1 No, if your good it'll go to inter banks

2) Broker, but they control their own price feed, so it might not hit your price or they'll requote you, or you trade will just disappear , or the inter bank
2.1) you, went long

3) the customer 99% losers, because of their own ignorance or broker magic

Its NOT a zero sum game: 1

If you buy EURUSD at the current market price you're accepting an offer price that's been sitting at the top of the order book waiting for someone to match it. So imagine someone out there is saying "Who wants EURUSD at 1.14132?!" When you click, the BUY button you're essentially saying "Yup, I'll pay that!"

The person at the other end of the market that's offering to sell at 1.14132 could be anyone, a bank, retail trader or hedge fund. The price is fed to the broker by a range of liquidity providers who then combine all this into a single feed which displays the best price that you see on your chart or the "top of book price".

So you're seeing the best offer price from a bunch of liquidity providers, who are feeding the offers from tens of thousands of normal market participants (like you).

So who loses? Nobody specifically, because you're just taking the price of someone that wants to sell on the other end of the market, be it for a gain or a loss. But over the course of time you're competing against the broader market, because you're right in thinking that across the entire market of a given period of time that there'll be some winners and some losers.

However it's not a true zero sum game because the spread acts like a "house advantage". You need to have a strategy that gives you an edge over the house AND the other market participants if you want to be profitable. That's why trading for yourself is so damn hard... not only do you have to beat the spread, you also need to beat the broader market which includes banks and hedge funds.

For the sake of this example I've ignored the B-book model that simulates the example above, but instead of a normal market participant taking your order, the broker fills it in the expectation that you'll lose on the trade and they can pocket the loss.

Clint from babypips, very good answer in my opinion:

---start---

1) If I BUY EURUSD 1.00 lot, who is the one that SELL EURUSD 1.00 lot?

Ans:
*Your retail forex broker sells to you.*

Your retail forex broker takes the other side of your trade. Your retail broker becomes the counterparty to your trade, and remains the counterparty to your trade, for the duration of your trade.

What your retail broker does to protect himself from exposure to your trade is another matter, and does not have anything to do with your trade.

2) If EURUSD price goes up and I close the trade in profit, who has suffered the loss?
---End Quote---
*Your retail forex broker has suffered the loss.*

Your broker has likely offset (or hedged) his exposure to your trade, so that the loss he takes on your trade is exactly balanced by a profit he makes trading upstream with his liquidity provider.

If you trade with FXCM (for example) and FXCM deals with CitiGroup as their liquidity provider (for example), then in the case of your winning trade, FXCM suffers a loss on their side of your trade, but earns a profit in the form of the spread.

And FXCM earns a profit (equal to the loss you inflicted on them) on their upstream trade with CitiGroup, but they pay a spread on their transaction with CitiGroup, which is a cost to FXCM.

However, the spread that FXCM collects from you is larger than the spread which they pay to CitiGroup, the difference being FXCM's net profit on your trade.

It may appear that CitiGroup ultimately takes the loss in this scenario. But, banks are not in the business of losing money, so it's safe to assume that CitiGroup passes their loss on to someone else.

You will never know who that ultimate loser is.

--- end ---

TURBOnero from babypips:

---start---

For forex its like this:

(here example)
who earns money:______$_____$$_____$
(Winner)retail trader <- fxcm <- city <- fxcm <- retail trader (loser)

so through fxcm and city one retailtrader wins against another retail trader who was on the other side.
that is on the big picture through pools created. in real no retail trader is given the chance to take the direct opposite position of another trader. the transaction risk is at citygroup but that is offsetted by balance of loosing and winning traders. as we know most retail traders are loosing and only few win it creates balance again as: for every sucessfull trader you need in average 10 loosing traders every year.

example:

1 winning trader making 100.000 a year
equivalent: 10 loosing traders who deposit 10.000 each and get broke and stop trading forever

next year you need 10 more loosers

bucket broker are a different story again.

everyone can argue about that banks and big companies take losses but in fact they dont as forthem it is another game. securing itself from currency fluctuations of a country they are doing business with.

for example: city buys 2000 flats in europe on a KGV of 12 years (yearly profit of each flat= 8,33%), for them the rent is important and not the specualtion that a year later (due to euro getting worth more) they can sell those buildings for 5% more. so in the same amount they go long against $. if dollar looses value it will be offset by the euro rent (they now can convert into 5% more dollars) they are receiving from those 2000 flats. if dollar goes up 5% they will recieve a smaller dollar equivalent of their rents paid in euroe, but that will be offset by the profit of the long position on dollar.

so in this game only retailtrader are going against retail trader and bucket broker.

in the end both is a game of person versus person, winer against looser. just with the difference that in stocks you have a big bonus which is underlaying security that usually pays divident (creates value) of 3-4% every year, from this surplus most of the winning parts are beeing payed out and you dont necesarrily have to have a 1 looser for each winner.

In forex you have no underlaying security that creates any value, so for every winner you must find a looser.
So... the job of forex brokers is not the trading, their job is to constantly get new "loosers" into the game-field in order to keep the game running, the commissions and spreads paid (or in other words: bring 10 sheeps to 1 wolf every year)

it simply is a zero sum game

---end---

If you are that bothered by someone else losing when you win perhaps you should stop trading.

because different traders make different decisions when taking a trade... trading cannot be a zero sum game... never ever...

A matched order can be profitable for both traders...

i've updated the post above to add further answers.

take for example trader A = He went long on euro at 1.05 1 lot in 2015


trader B had gone short on euro at 1.30 2014 1 lot too.

current market price in 2016 for euro is 1.12

both traders want to exit their positions.. so they are matched.

trader A = wins 70pips profit

trader B = wins 180 profits

so you see trading is not a zero sum game...where someone has to lose for someone else to win

To add to the other 2 broker's answer above...

We are not a market maker. We execute the order directly into the market. (Market execution)

Market execution is when an order is executed at the best price available directly to the markets, where global banks and financial institutions act as liquidity providers. Orders are executed without any dealing desk manipulation or intervention. Market orders do not experience re-quotes and are executed on a “fill or fill” basis.



We do not do anything of the below because we are not a market maker. We are an STP/ECN broker.



Please let me know if you need further clarification.

- Orbex

FX actually is a zero sum total game afterall.

As hanover says, banks are constantly printing money so it cannot be a zero sum. But who cares anyway

In reality where banks/FED prints more money, might not be a zero sum game, that would be in the case of international currencies. We are not part of that. I think governments are.

So with regards, purely forex as in trading... It could be a zero sum game:

1) Broker bucketshop (could be exness) : I trade BUY EURUSD 1.00 lot, broker would be against me and sell EURUSD 1.00, once I close my trade in profit, broker loses. But since 75% to 95% of traders fail, they'll eventually get alot more.

2) ECN/STP, and NDD (no-dealing-desk) broker, they'll match you with liquidity providers (banks), up front, they get commission and spreads once you close your trades in profit or loss. The banks will also trust that 75 to 95% of traders fail so in the end they'll make money.

Am i missing anything here?