Is Forex a ZERO Sum game?

Trillions of dollars are traded every day on the Forex market. Commissions are nothing. Dont get hung up on commissions. Commissions are a rounding error.

Your win will always be someone elses' loss. If you buy EURUSD at 1.23 and it goes to 1.24 (where you sell), someone just lost 100 pips. Who? Whoever sold to you at 1.23. They are now holding dollars worth 100 pips less.

The laws of thermodynamics say that matter (ie energy) cannot be created or destroyed. Neither can money, no matter what central banks tell you.

Speaking from a purely mathematical point of view forex is a zero sum game. What I win someone else loses and vice-versa. However, in the real world, with new money comng in and old money leaving all the time the zero sum affect is mitigated or diluted. Imagine a poker game with 5 players , each one sitting down at the beginning of the game with $1000 to play with and no additional money allowed to be added by any player. (known in some circles as a freeze-out) Obviously if any one player, at the end of the game has accumulated more than $1000 it must have come from the other players bankroll. The total money held by all players is still the same ($5000) only the distribution has changed. Ergo zero sum.Taking this example one step further,if a new player now joins the game with a new $1000 the dynamic has now changed , from the standpoint of the original 5 players and the zero sum affect is lost. This equates to the open interest in forex positions changing, which it always does, hence the zero sum affect is similarly lost. ---

And with the person with the least money or most money leaving the game, puts a new spin on the volume.

The original 5 of $5000 has lost the zero sum game as you state, and there is 6 with $6000 total now, with that said, if the loser leaves with his $500, the other 5 are playing with $5500. Or the opposite, if the Winner left with his $2500, then the 5 would only have $3500 to play with. I guess a new zero sum game would start over every time with players coming and going.

Last > as a trend took place and a larger country or Bank started adding shares making price rise and we smaller investors got it during various points, the final outcome would be 1 of 2 scenarios >
1. If we smaller investor pulled out with our profit as the larger investor was still adding, they would take a slight loss.
2. If the larger investor pulled out as the smaller ones were entering, the larger investor would gain.

It would be at the tops or bottoms that would make or break you, those who ride the in the middle (like wave 3) would be the safest..................

Forex is a negative-sum game. Whether the trader wins or loses, he/she must pay a commision to play the game. Yes, the broker's bid/ask spread is a commision, even if the broker doesn't call it that. The sooner one understands that, the better.

"Trillions of dollars are traded every day on the Forex market. Commissions are nothing. Dont get hung up on commissions. Commissions are a rounding error."

VERY, VERY dangerous thinking! Again, commissions ARE a big deal to an individual retail trader . Retail traders aren't the ones trading "trillions of dollars" and the banks who do trade such vast amounts are the creators of the forex market and don't pay commissions. We as retail traders aren't banks, nor are we hedge funds. As retail traders we DO have to worry about commissions because forex is a negative-sum game.

So by your logic and (lack of) understanding of game/decision theory, everyone in Forex loses? First off, and I repeat myself here, commissions, and spreads, etc, are a COST OF DOING BUSINESS, and nothing to do with the sum of the game. There is always a cost of doing business in any game, regardless of negative sum, zero sum, or non zero sum, and it doesn't determine the nature of the game. A negative sum game is one in which the cumulative outcome of the game is negative, i.e you are in a game where you are restricted to minimizing your loss, there is no positive payoff achievable for yourself or any other player. These situations arise often in life, and in a negative sum game, you would use game theory to establish the optimum outcome between you and all the other players to achieve the best possible 'negative outcome' based on the decisions you anticipate the other players making, aka making the best of a bad situation.. For example, if you knew player A would chose to do X and thus would achieve a payoff of -15, and by doing so you could mathematically calculate that if you did Y you would receive a payoff of -20, but if you did Z then you would receive a payoff of -10, you would achieve an optimum outcome by doing Z, assuming the other player actually played X. You would still be losing, but at a lesser rate. This is a (very simplified) example of a negative sum game, but still nothing like Forex, as when someone loses in Forex, someone else wins, by the exact difference, once again, very simply calculated to ZERO, making Forex a zero sum game. There are too many people here making statements who have no underlying knowledge of game theory.

DrDax,

First off, I DO indeed have an understanding of probability and statistics ( part of my training as a physicist ). I wonder, how many such courses have you taken?
Simply calling commission part of the game and then dismissing its effects on trader outcome doesn't give anyone the impression you're well-versed in probability theory, now does it? Instead of talking about things you clearly don't comprehend, why don't you take an actual course in probability and statistics at a real university and not just the university of google .

BTW - unlike you, the "Dr." I place in front of my name has actually been earned and is not merely a nom de plume used on internet forums.

life as a whole is a sum of zero the thing that we just feel that we are making more but it is a sum of zero and yes forex is a sum of zero

You guys are in a semantic quibble--you both are essentially in agreement but expressing differently.

Dear Dr Gravitist,

First off, the 'Dr' in my screen name, coupled with my profile pic, I believe is a demonstration of not taking myself too seriously. A screen name I have used for over a decade, and one I will not be changing anytime soon. It is a shame that for someone with such alleged status and qualification that you have to resort to such mediocre slander instead of focusing on the subject matter.

Secondly, I may not be a physicist, or a real Dr, but I do however possess a 'real' MBA in Business Finance and Capital Markets from a 'real' UK university, as pointed out earlier on in the thread as a way of justifying my stance/opinion over the debate. Studying business and finance I would suggest a little more specific to the nature of this debate than say, being a physicist. It is specifically my field of expertise, and not a side effect of something I studied that has no relevance to business. I don't care to have a contest with anyone over status or qualification, and certainly wouldn't go to a physics forum and start throwing my weight around because I happen to have studied game theory in the business environment as it would have little to no relevance.

Thirdly, I learned the way to apply statistics and probability in business alone, and have merely been trying to let others who are interested in understanding, know that the commissions and spreads in Forex do not establish the sum of the game with regards to being zero, non, or negative. I never once said that they don't effect the way a player behaves, or what their individual outcome may be, just that it does not dictate the sum of the game, as the sum of the game is concerned with the whole, not the individual. It is a fact, that for a negative sum game, all payoffs would need to be 'negative' or the total of all gains and losses be less than zero, and anyone who has won a trade in Forex will agree that this is not the case. The need for allocentric behavior in game theory makes use of the commissions, spreads, dealers, etc, in determining how you play the game, but not in dictating the sum of it. Perhaps if the max payoff available in any game/trade was the sum of the total spreads and commissions paid by the players in that game/trade, then it would be negative sum, but payoffs are not limited to this value, and therefore the sum of payoffs is not less than zero, and therefore cannot be negative sum.

I aim not to insult anyone and there is much I do not know, I just wish to correct any statements I believe to be false to prevent others from walking away with the wrong information.

Some arguments for forex being positive sum, negative sum and zero sum in the different links here. Make of it all whatever you will.

"Retail traders aren't the ones trading "trillions of dollars" and the banks who do trade such vast amounts are the creators of the forex market and don't pay commissions"

Banks pay commissions or brokerage depending on the platform they use.
They also pay for Quants IT software traders . etc.

Retails traders are the ones trading more and more and the banks are less and less because of compliance restraints .

The Forex space will soon be dominated by the non banks

To begin with, the New York Stock Exchange is not a zero-sum game as mentioned in post #4. Back when there were pits, the specialist in the pit can issue all the stock people want to buy, regardless of what people are overall. (ie, the market is moving down) There is NEVER a corresponding trader on the opposite side of your stock purchase. How do I know it? I was a pit trader for 25 years.

More to the point, futures trading is a zero-sum game as commissions and spreads have nothing to do with the structure of futures trading. Quite simply, for every winner there is a corresponding and equal loser. In this day and age, the CME doesn't match traders on each side of the contract but use algorithms to maintain the exact balance for sellers and buyers in the market.

It is not a negative sum game, as some have suggested nor it a positive sum game. You are confusing the results of your trading (profit or loss) with incidental costs that arise along the way. How do I know? I also traded on the CME floor for 4 years.

Best of luck in your trading and my wish is that everyone will be consistently profitable.

If the banks lose control over the market, there will be no market anymore. In order for this market to survive, the smaller of the two balances must be the loser in most of the cases, like 8 out of 10 times. If the bigger balance of both (long/short) happens to win more frequently, the banks will go out of business and this market will be all over... Do not worry. That is probably never gonna happen, surely not any time soon.

L, if you mean that the banks will apply other methods of control, where they are not officially engaged so, like they already own the politicians in the real life, where they just follow orders of those who lend the money to the society (out of thin air), you are maybe right. We will have more funny actors pretending to be some important, real "market movers"...

yes

in the busines

when someone is loss, someone will gain in profit

in trading, u lose to the informed trader

Not everyone who exchanges currency is a trader. Don't forget business, foreign investors and holiday makers.

Then there's the central banks your gain could be their quantitative easing.

This is why it isn't a zero sum game.

Yes. It could be zero-sum but (link) basically, most of the volume is made not by speculators but rather by large transactions of companies (and their banks) who are just doing their daily business. Say, you have to pay an invoice of USD 10.000 from your EUR account in the next 3 days. You get a daily currency exchange offer from your bank. Are you going to care about whether it's up or down 100 pips? Probably not. At most, you'll whine about the bad rates and spread.


Let me just quote from the above link:
...some people trade for more than just expected profits. People trade to hedge risk, to move funds from one point in time to another, to exchange assets, to earn an unconditional expected return, to learn whether they can expect to profit from trading and to take pleasure from gambling. These external benefits make trading a positive-sum game. If the external benefits to trading are great enough, traders will trade even though they expect to lose. Skilled traders will profit to the extent that unskilled traders are willing to trade for external reasons.
Market prices efficiently incorporate information about value fundamentals when skilled traders obtain this information and trade upon it in search of profits. The activity is profitable if the trading profits exceed the costs of obtaining and acting upon the information. If no one traded for external benefits, skilled traders could not profit from trading. They would quit doing their research, they would not trade, and prices would not be efficient. This problem is known as the Grossman-Stiglitz paradox. Price efficiency depends both on skilled traders and on traders who are willing or irrational losers. The skilled traders make prices efficient and the losers pay for their research efforts.

This was by far the best post I've read, but one of the first.. I'm new here and this really explained quite a bit. Thanks!!

While forex is technically a zero sum game it is possible for everyone to make a profit over time. If you buy and i sold and you close profit 20 pips later. Say a day later im in profit 20 pips as well and close.

I think you are misrepresenting what a zero sum game actually is. In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which each participant's gain or loss of utility is exactly balanced by the losses or gains of the utility of the other participants. So somebody should loose of them ? Or you do not mean traders.