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Is trading a zero sum game?

  • #41
  • May 26, 2010 1:49am May 26, 2010 1:49am
Quoting doblece
And money is "created" out of?
Fiat money is created out of debt. .

Doesn't matter a ton though because even if we had a gold standard, anything other than gold bars would still be abstraction. However, the Fed, the IMF and others wouldn't necessarily be involved in the process however.

Would that be for the better or worse? I would tend to lean slightly towards the opinion that it would be for the better...Slightly.
Thank you Lux!
  • #42
  • May 26, 2010 2:02am May 26, 2010 2:02am
Trading is a zero sum game cos the total sum of all transactions is 0.
There's not point of view in this, is a fact.

Lubo.

P.s. only stock, or others securities likes, where there are interests payments, dividends, and capital augmentation, could be considered a non zero sum game.
If I know how, I tell You!! Few but Good!!
  • #43
  • May 26, 2010 2:24am May 26, 2010 2:24am
After seeing several threads and lots of time spent on this topic, I have to ask: Why does it matter?

If everyone that believes it IS zero-sum is convinced it is NOT zero sum (or vice versa) by one of these threads, no one will suddenly stop trading. Believing one way or another will not make you a more profitable trader.

Heck, maybe all the time spent trying to convince others about stuff that really doesn't matter helps to bump that magic number up to 95%??.... Whoa... I think I just had an "a-HA" moment.....and I'm pretty sure I saw a thread about those.......gotta go!!....
  • #44
  • May 26, 2010 5:14am May 26, 2010 5:14am
Quoting moneymaker2
After seeing several threads and lots of time spent on this topic, I have to ask: Why does it matter?

If everyone that believes it IS zero-sum is convinced it is NOT zero sum (or vice versa) by one of these threads, no one will suddenly stop trading. Believing one way or another will not make you a more profitable trader.

Heck, maybe all the time spent trying to convince others about stuff that really doesn't matter helps to bump that magic number up to 95%??.... Whoa... I think...
it's actually a pretty important concept. Not understanding it and trading on blind faith that it's non-zerosum(wealth is created) is akin to a gambler playing roulette and saying the odds don't matter.

Both are going to think they'll win. Both won't.

Furthermore, the difference between zero and non zero sum has bigger repercussions for beginners to trading who seek to learn via forums such as these. Non zero sum games imply that trading systems and ideas offered up here have greater value. Zero sum game implies that few, if any ideas offered anywhere will have any value at all.

If everyone understood that the markets are zero sum, nobody would fall for silly scams selling systems that are "profitable"
  • #45
  • May 26, 2010 5:56am May 26, 2010 5:56am
Quoting Pollux
It is not a zero sum game. Trading currency does not involve only speculations. Banks often change currency for their clients' needs. If I buy 100.000 euros I may buy them from a French guy who wants to visit USA and needs dollars. I therefore might make a profit while the other one enjoys its holiday. Central banks often use their reserves for defending their own currency from sharp depreciation/ appreciation. You may see these examples as win/loss (the French could have waited for a better price, CB loses money while intervening into the market...

i would think it's still a zero sum because you benefit from the french guy's expense. Whether it's direct or indirect. Remember that when the french guy returns home he still wants to convert the excess dollars back into euros and he DOES make a loss while you won. Anyway, the fact is that actually both of you lose because of the spread that you pay to change the currencies at a bank, considering that the length of the vacation is a small one and no drastical events happen in the markets at that time.
  • #46
  • Edited 6:28am May 26, 2010 6:17am | Edited 6:28am
Quoting lumesh
i would think it's still a zero sum because you benefit from the french guy's expense. Whether it's direct or indirect. Remember that when the french guy returns home he still wants to convert the excess dollars back into euros and he DOES make a loss while you won. Anyway, the fact is that actually both of you lose because of the spread that you pay to change the currencies at a bank, considering that the length of the vacation is a small one and no drastical events happen in the markets at that time.

Well, why don't u try to think about it in a different way?
First of all this french guy gets not involved in trading but in currencies exchange, so I do not think this pass thru Spot market, but take the case it will do, this is always a transaction, he buys one currency and sells onther one, that must be bought from another guy, in this chase the bank or the money exchange services, but there's always the same thing one buy and one sell.........

Lubo.
If I know how, I tell You!! Few but Good!!
  • #47
  • May 26, 2010 6:33am May 26, 2010 6:33am
Let us assume that you are trading retail forex, and not the interbank market. If this is the case - as it is for nearly 99% of all of the traders here - then you are trading in a zero-sum game.

Why?

Because when you make money on a trade you are taking money from other traders.

How?

Because your retail forex broker takes the other side of your trade. Your broker makes money from losing traders, which make up about 95% of the accounts held. (This is also why brokers spend a large advertising budget, they need fresh blood to keep making money.) Brokers will hedge the (aggregate) positions of some traders in the interbank market, the "real" forex market. But these are traders who qualify as winning traders, only after consistently winning profits will an account be considered a winning account by your broker.

So, when you win profits you are literally taking your profits from other (losing) traders, and if you don't take that money your broker will...

I hope it is ok to post this, it is a great article about forex brokers:

http://www.tradingmarkets.com/forex/...ey-839961.html
  • #48
  • Edited 9:02am May 26, 2010 7:29am | Edited 9:02am
Quoting ScalpOrDie
Fiat money is created out of debt. .

Doesn't matter a ton though because even if we had a gold standard, anything other than gold bars would still be abstraction. However, the Fed, the IMF and others wouldn't necessarily be involved in the process however.

Would that be for the better or worse? I would tend to lean slightly towards the opinion that it would be for the better...Slightly.
That's right. As of 1971, when President Nixon took the U.S. (and World by proxy) off the Gold Standard the Dollar became a derivative of Debt, not Gold. It became a fiat currency. And fiat, aka paper money is a zero-sum game that can be proven by revealing the Fed's balance sheet or benchmark parameter, which is a tool it uses to expand/contract the nation's money supply.

Its balance sheet/benchmark parameter? Zero.

So what are the gross effects of that zero-sum reality to our trading? Oh, nothing. Nothing that "trading" can trade away! And of course, it's because our trades are based on the inherent value of the paper asset underlying every trade, which is zero.

Then, what real world, net effect will the Fed's zero-sum balance sheet have on my life? I'll payout a lot more for taxes, debt, inflation and retirement well into the future as the underlying asset loses value ... as the cumulative effects of mega-bailout after super-mega-bailout further ravage the world economy. Until there's nothing left? Zero? Think that I'll be able to trade profitably enough to keep up with it?

No matter. While my account may gain, the underlying value of currency in the balance, has been losing! This is actually happening. Now this should be grounds for pause...

What is it that I'm really doing as a trader?

"I'm trading the derivatives of (a) tax, debt, inflation and retirement account(s)."

Oh, so you don't actually create, sell or own those derivatives; you just trade them?

"Correct."

Sucks to be you... So why do you even care about posting in this thread, to the question, "Is trading a zero-sum game?"

"To culture shock myself from the belief that merely trading derivatives of currencies, stocks, bonds, futures or real estate is going to save me from the underlying dissolution of the asset itself. That I need not only consolidate my portfolio but consider the possibility that I'm in the wrong business to generate a passive income, which is the only way I'm going to make it if the underlying assets goes kaput."

You're saying that I'm wasting my time as a trader b/c the underlying asset of the derivatives I trade are essentially worthless?

"Nice oxymoron. But no, I'm saying that you're playing a game which leaves you vulnerable and renders you defenseless to an insidious confiscation of the wealth you accumulate, as a trader. That you're completely dependent on the asset both existing and moving in order for you to make profit or capital gains by trading it. So if it no longer exists or stops moving, you're screwed.

Now if I were you I wouldn't become too complacent on being a trader, as if it's going to prevent you from losing the asset traded. Trade all you want but how are you going to keep up with inflation, taxes, the baby-boomers retiring in droves for the next 5 years, the 100's of TRILLIONS in debt the world over? Do you think trading is going to be able to afford you a sufficient income?"

Well, it's something to think about, I'd say. What would you do?

"I would learn to become an investor, who creates/owns the asset traded, and who has the power sell it - with interest. That will hedge you more effectively against loss b/c owning the asset is more valuable than exchanging it in a trade for another investor to get rich at your expense."

Alright then, Soca. Thank you!

"You're welcome. This is a trading forum, which stinks w/a mentality of asset chasers not creators. As an investor first, trader second, I'm in the wrong place here. It's too small for me now. So thanks y'all for the support & resistance! Blessings, and all the best to you."
  • #49
  • May 26, 2010 11:53am May 26, 2010 11:53am
Quoting deathbait
Non zero sum games imply that trading systems and ideas offered up here have greater value. Zero sum game implies that few, if any ideas offered anywhere will have any value at all.
Huh? How's that? This is some odd logic...

Whether something is zero sum or not has little bearing on whether you should participate in the game... Lets take a look at some examples:

Consider a game where we're flipping coins. Heads, I win $1 from you, Tails, you win a dollar from me. Lets also assume that I don't tell you that the game is rigged in my favor: the coin comes up heads 60% of the time. This is a zero sum game that I should play all the time with you and you should never play with me. The fact that it's zero-sum has no bearing on whether it's a "good" game or not -- this game is most certainly not...

Poker is the perfect example of a zero-sum game. There are skilled poker players and bad poker players... Just because it's a zero sum game doesn't mean it's unwinable. There are ways of playing poker (systems & strategy) that give good poker players an edge over bad poker players. In the long run, these good poker players win more often than they lose and the bad ones lose more than they win, just like in currency markets.

Now lets play poker where every pot, the house *adds* $5 to the pot out of the kindness of their heart. Now we're not playing a zero sum game, the table stakes grow by $5 every round due to the benevolence of the casino (you could call this a "postive sum game"). Should you play this game? After all, there's free money being added in at the end of every pot... The answer is: It depends. It depends on whether you think your edge is better than the rest of the people playing the game. The $5 is a nice bonus every round, but if you only win (for arguments sake) 6% of the time, you might want to quit...Or even if you win 30% of the time, if your losses outweigh your gains, then no, you shouldn't play...

In other words, some systems work, many don't, but the fact that it's a zero sum game has little bearing on whether you should play the game or not.

Your analogy to roulette is actually quite apropos... With no (good) system, the game of speculation is very similar to a roulette while -- The 0 and 00 represent the commissions and spreads you pay to the house and the rest of the time you win some or you lose some...

As for the argument about the European going on vacation, it's kind of a silly argument.... If the European sells his Euros and buys dollars, comes to America and eats and drinks for the week and then heads home broke -- are we to judge the quality of his food or quantity of his drink versus the current price of the Euro? If the person he sold the Euros to holds onto them for another 2 weeks after his vacation and then eventually takes a loss on them, has the European vacationer "won"? What are we even talking about here?

At the end of the day I don't think this debate matters. In most cases markets are zero sum, sometimes they are not... movin' on....
  • #50
  • May 26, 2010 7:19pm May 26, 2010 7:19pm
Quoting InfinitySL
Huh?...
lol the explanation is simple

let's take your game for instance. Would you be willing to help another player in the game, or steer him with misinformation? Which benefits you more? Do you tell him how tough it is to beat the game? Or encourage him and tell him to stick to his guns?

That's the difference between zero sum and non zero sum games. When you're in a zero sum game where you yourself are one of the players, there is little value(mostly, negative value) gained by helping another player. Now if we know that is true, why are we seeking advice from our opponents?
  • #51
  • May 26, 2010 7:56pm May 26, 2010 7:56pm
Quoting deathbait
That's the difference between zero sum and non zero sum games. When you're in a zero sum game where you yourself are one of the players, there is little value(mostly, negative value) gained by helping another player. Now if we know that is true, why are we seeking advice from our opponents?
You're arguing against giving advice & using message boards, not the actual benefits of playing in a zero sum game.

To which I would say: Why are you bothering to respond to the message if there's no value to be gained on message forums such as this one?

(then again I suppose you didn't really address any of the merits of my argument anyway, so bravo).
  • #52
  • May 26, 2010 8:33pm May 26, 2010 8:33pm
Quoting InfinitySL
You're arguing against giving advice & using message boards, not the actual benefits of playing in a zero sum game.

To which I would say: Why are you bothering to respond to the message if there's no value to be gained on message forums such as this one?

(then again I suppose you didn't really address any of the merits of my argument anyway, so bravo).
i'm not arguing about giving advice. ok, a subset of my argument can be viewed as such. I'm saying knowledge of the fact that the game is zero sum changes perspective on forums such as these and advice from strangers.

it doesn't change the way the gambler at the roulette table plays, but it certainly should raise some alarm bells when the casino offers to give him some advice.


as for addressing your argument, if you'll kindly point out which part i missed out on addressing, i'll be glad to accomodate, or in turn point out the parts in my posts which have already addressed it.
  • #53
  • May 26, 2010 11:42pm May 26, 2010 11:42pm
Quoting deathbait
it's actually a pretty important concept. Not understanding it and trading on blind faith that it's non-zerosum(wealth is created) is akin to a gambler playing roulette and saying the odds don't matter. Both are going to think they'll win. Both won't.

If everyone understood that the markets are zero sum, nobody would fall for silly scams selling systems that are "profitable"
I am convinced! This IS a zero sum concept. How could I have been so blind to think that I had a profitable system just because I was making lots of money with it?!?!.....How can I trade the same system now that my paradigm has shifted?...now that I know it won't work anymore?

Naw, I'm just kidding with you .....I don't care if it is called zero sum or non-zero sum since it is totally irrelevent on my ability to make money. I just dropped by to see what the fuss was about, that's all.

Good trading.....
  • #54
  • May 27, 2010 2:59am May 27, 2010 2:59am
Quoting Soca
That's right. As of 1971, when President Nixon took the U.S. (and World by proxy) off the Gold Standard the Dollar became a derivative of Debt, not Gold. It became a fiat currency. And fiat, aka paper money is a zero-sum game that can be proven by revealing the Fed's balance sheet or benchmark parameter, which is a tool it uses to expand/contract the nation's money supply.

Its balance sheet/benchmark parameter? Zero.

So what are the gross effects of that zero-sum reality to our trading? Oh, nothing. [i]Nothing that "trading" can...
that was... epic!
Congratulations ScalaFX for coming out of the closet!
  • #55
  • May 27, 2010 12:20pm May 27, 2010 12:20pm
http://www-rcf.usc.edu/~lharris/ACROBAT/Zerosum.pdf
  • #56
  • May 27, 2010 1:04pm May 27, 2010 1:04pm
YES

absolutely. A zero sum game means, when someone wins.. someone has to lose. This is completely true with trading.

Even when someone uses the market to hedge. They still have to sell their position at a loss or gain. Whether external matters have impacted if their actions resulted in a net gain/loss they still have to lose or gain on their positions in the market.
  • #57
  • May 27, 2010 7:08pm May 27, 2010 7:08pm
Not quite zero sum, market makers and brokers skim their profit off each trade whatever way it goes.
  • #58
  • May 27, 2010 8:01pm May 27, 2010 8:01pm
LIFE itself is a zero sum game... though if you're smart enough, you can play around and do many interesting things for a while before the ultimate margin call...
  • #59
  • Last Post: May 27, 2010 8:43pm May 27, 2010 8:43pm
Quoting bevok
Not quite zero sum, market makers and brokers skim their profit off each trade whatever way it goes.
they are players too
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