Is Forex a ZERO Sum game? | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

zero-sum game question 6 replies

Zero Sum Game - Debt 50 replies

Is trading a zero sum game? 58 replies

Discussion on "Zero-sum Game" Article 7 replies

Forex: A Zero Sum Game? 18 replies

Is Forex a ZERO Sum game?

  • #1
  • First Post: Apr 10, 2006 9:21am Apr 10, 2006 9:21am
I ve a question regarding the win lose game in forex. Is forex a zero sum game? i.e. is the winning of some trader in one part of the world drives the presence of a losing trader some where else? in other words, hypothetically speaking, can all traders win at a single given time? or this is impossible?
  • #2
  • Apr 10, 2006 12:19pm Apr 10, 2006 12:19pm
Quoting abedewi
...hypothetically speaking, can all traders win at a single given time? or this is impossible?

Did you ever hear the story of the two guys being chased by a bear? One guys stops to put on his running shoes, the other guy yells out, "WHAT THE F#$% ARE YOU DOING? YOU WON'T OUT RUN THE BEAR!!" the other runner, unphased and calm, "I don't have to outrun the bear, I just have to outrun you."

Forex is not a zero sum gain, nothing in the universe is, but what is gain and what is loss?

as you know, in Forex, buying is selling and vise versa. If I trade $10,000 worth of GBP for USD, someone, or a bunch of people are trading the equivelant sum from USD to GBP. Now, if I trade back at a profit to me, some where, some amount of people are tradeing back at a loss to them - But some might be trading at a profit also.

There are 4 groups of traders, the Dealer, The Institutional, and the advanced retail. The last group are the novices - who end up having their money taken away by the advanced retail traders.

You are studying to be in the Advanced Retail Group. You will probably lose some money while in the novice group, but it's paying for well learned lessons hopefully.

Now, the deeper moral issue here is, how can you take from others and feel right about it? That depends on your personal relationship to money. What does money mean to you? what does wealth mean to you? What would you do with a lot of money? what would you do if you had no money?

Examples 1: I do 8 hours of work and make $1000. I pay rent and the money is gone. I exchanged 8 hours of my expertise for a month's stay at my place. For me, money is a measure of my value/hour. In turn my feeling of success and accomplishment comes from my ability to increase my value/hour.

Example 2: I have $1 million. I loan it to a business, I make 6% back in one year ($60,000). I did no work. so now, money to me and to the busness, means the value/dollar, which equals 6%/year. My feeling of success and accomplishment isn't tied to my own hourly worth.

Example 3: I do 40 hours of community service. I make enough to live for 1 month. The lives of people I directly impact gives me such an intense feeling of success and accomplishment, I don't need anything else. My value/hour is not measured by monitary sum, but to an unmeasurable entity - the positive improvements to peoples lives.

Example 4: I am an artist, I sleep in a warehouse and eat instant noodle with paint-stained hands. I make no money, but my sense of accomplishment when I am working on a masterpiece feeds my soul.

My point is, any one of the people mentioned above could be forex traders. Why they trade is up to them. Whether or not they win, or even if YOU win - that, can only be defined by you!!!

Cheers,
Thomas
  • #3
  • Apr 10, 2006 12:42pm Apr 10, 2006 12:42pm
Read the ZeroSum document from here.

I think part of the last comment was from one of Rob Booker's e-books ("Woodchuck & Possum")
  • #4
  • Apr 10, 2006 5:07pm Apr 10, 2006 5:07pm
Quoting abedewi
I ve a question regarding the win lose game in forex. Is forex a zero sum game? i.e. is the winning of some trader in one part of the world drives the presence of a losing trader some where else? in other words, hypothetically speaking, can all traders win at a single given time? or this is impossible?
the short answer is yes, forex is a zero sum game. but when you factor in the spread and commissions it is a negative sum game, as is all commodity trading. the only major non-zero sum game is the stock market. unless someone can think of another?
Relax and be happy.
  • #5
  • Apr 10, 2006 6:13pm Apr 10, 2006 6:13pm
Merlin, counterfeiting is not Zero sum... SMJ


Quoting merlin
the short answer is yes, forex is a zero sum game. but when you factor in the spread and commissions it is a negative sum game, as is all commodity trading. the only major non-zero sum game is the stock market. unless someone can think of another?
  • #6
  • Apr 10, 2006 6:49pm Apr 10, 2006 6:49pm
Quoting merlin
the short answer is yes, forex is a zero sum game. but when you factor in the spread and commissions it is a negative sum game, as is all commodity trading. the only major non-zero sum game is the stock market. unless someone can think of another?
Why stock market is zero sum game? U also need to pay commission,right?
  • #7
  • Apr 10, 2006 8:59pm Apr 10, 2006 8:59pm
Quoting phildunn
Why stock market is zero sum game? U also need to pay commission,right?

hmmm....


Trust me... in this world there is no such thing as FREE LUNCH.

Nothing is free...

No money No honey....

No money No Talk

So..... in orther words....

you have to pay at least the minimal before profits can come in.

there is a saying in chinese " no let go of small money, how can big money come in ".... direct translation.

i dont think is a zero sum game.... because we are just 'clinging onto the economics' to make more money. Technically you shldnt make any losses to the margin you pump in. as mention above, brokers put a minimal limit to you stop loss, hence broker earns some from here. (no economic factor included just purely brokerage services).

if economic point is YES. when there is a transaction. there bound to have "inners and lossers".
  • #8
  • Apr 11, 2006 12:02pm Apr 11, 2006 12:02pm
Okay guys, I had a different idea of what zero-sum meant, I had thought it was more like a "win-win".

here's a link to wikipedia's definition which help to clear it up for me.

http://en.wikipedia.org/wiki/Zero-sum
  • #9
  • Apr 11, 2006 1:54pm Apr 11, 2006 1:54pm
Great thread so far...!
  • #10
  • Apr 11, 2006 2:07pm Apr 11, 2006 2:07pm
Quoting buddhawarrior
Okay guys, I had a different idea of what zero-sum meant, I had thought it was more like a "win-win".

here's a link to wikipedia's definition which help to clear it up for me.

http://en.wikipedia.org/wiki/Zero-sum
I think I tend to agree with Merlin, no matter how you define what "zero-sum" means.

In a "zero-sum" game, the gains on one action = losses of another action. So unless you're not paying a spread or commission, this isn't possible (unless you want to be completely esoterical and include the spread as a "win" by a third-party).

However, think of it this way...no one trading entity will ever accumulate all the money invested in the forex market, it's impossible...the brokers and the banks will take a cut of every transaction, and thus, it's impossible for a 1-complete winner.

Incidentally, tournament poker without a rake is a zero-sum game...at some point, 1 person will have ALL the chips invested in a tournament.
  • #11
  • Apr 11, 2006 5:26pm Apr 11, 2006 5:26pm
I think we often forget the basic fractal nature of this market. It is what makes it all work. We all trade on different time horizons with different goals. Some of us just try to preserve capital while others are trying to gamble millions of dolars, yen etc. Some of scalp while others stay ina trade for weeks. One winner can offset another winner; not always but sometimes.
Nolite dormiens pungere ursum. -- Latan Proverb.
  • #12
  • Apr 12, 2006 2:48pm Apr 12, 2006 2:48pm
Just my opinion....Defining a certain market as a zero sum one means that at any point of time, there is always winners and losers...Winners who realize real profits and losers who realize real losses....The futures & the currency markets are like that...Regardless of the commissions and the spreads and everything else associated with the costs, eventually, some traders make net profits and others make net losses...This is a zero sum in my opinion, as usually, traders losses usually feed the commissions, spreads + other traders profits at any point of time...

In the stock market, it is a different case a little bit...I believe that the stock market is a zero sum market, over the very long term...But normally it is not in the short term...And when we say the short term, we are talking about 3-5 years...If people are long stocks, and stocks are being bid up, eventually everybody is winning and nobody is losing, excpet those who are short...However, shorts can hold their losing positions longer than they can hold positions in the forex and the futures markets because leverage is much lower....

Over the very long term, even the stock market is a zero sum game, in which the losers pay the commissions of the brokers + the profits of other traders and investors when they buy stocks from them just at the top of the hill...


Thanks,

Nader
  • #13
  • Apr 12, 2006 4:22pm Apr 12, 2006 4:22pm
Quoting narafa
Just my opinion....Defining a certain market as a zero sum one means that at any point of time, there is always winners and losers...Winners who realize real profits and losers who realize real losses....The futures & the currency markets are like that...Regardless of the commissions and the spreads and everything else associated with the costs, eventually, some traders make net profits and others make net losses...This is a zero sum in my opinion, as usually, traders losses usually feed the commissions, spreads + other traders profits at any point of time... In the stock market, it is a different case a little bit...I believe that the stock market is a zero sum market, over the very long term...But normally it is not in the short term...And when we say the short term, we are talking about 3-5 years...If people are long stocks, and stocks are being bid up, eventually everybody is winning and nobody is losing, excpet those who are short...However, shorts can hold their losing positions longer than they can hold positions in the forex and the futures markets because leverage is much lower.... Over the very long term, even the stock market is a zero sum game, in which the losers pay the commissions of the brokers + the profits of other traders and investors when they buy stocks from them just at the top of the hill... Thanks, Nader

I definitely respect your opinion on this, but I always thought that zero sum meant

net losses + net gains = 0

In any market with a commission or spread, I didn't think this was possible because the broker will take a cut of gains and losses.

In an absolutely zero-sum market, if I buy the EURUSD at 1.2000 my friend should be able to SHORT the EURUSD at 1.2000, and then as the market goes up and down my losses or gains = his gains or losses. However, we know that with a spread, this is impossible...If I want to BUY the EURUSD from a broker at 1.2000, a trader at that moment is SELLING (or shorting) to the broker at a lower price (let's say 1.1997)...that means that at this moment, I'm already in a 3 pip loss (same with the guy on the short end...he's at a 3 pip loss as well). As the market goes up 1 pip, my net loss is 2 pips while the shorter is at net loss of 4 pips. As the market goes up 10 pips, I have an unrealized gain of only 7 pips because the moment I try to sell, I'll have to give back 3 pips to the spread. But on the short side, the moment the shorter wants to buy back his loss, his realized loss is 13 pips.

7 + (-13) = -6 which shows that the forex is a NEGATIVE sum game.
  • #14
  • Apr 12, 2006 5:26pm Apr 12, 2006 5:26pm
zero sum, in the raw sense of the definition, means if i win $1, someone else lost $1.

the reason a zero sum game can become a negative sum game is because of commissions and the spread (the broker and market maker are making a living off of your trades). so unless you are one of them, you are playing a negative sum game by trading commodities (and currency is a commodity). the game is not negative by much, i feel its safe to call it a zero sum game.

the stock market is positive sum game because a stock can go up in value and all of us stockholders are making money. the underlying, ie the stock, is actually expanding.

so, if a bushel of hay could turn into two bussells of hay by storing it for two months, that would also be a positive sum game
Relax and be happy.
  • #15
  • Apr 12, 2006 6:12pm Apr 12, 2006 6:12pm
zero sum.


IF you win 10pips, then it means someone else lose 10 pips. In this case, because of the spread, you actually win 7 pips, on the other hand, someone out there lose 13 pips. Therefore, Loser are more than Winners.
Looking for pips!!!
  • #16
  • Apr 12, 2006 6:54pm Apr 12, 2006 6:54pm
Quoting bensonchan
zero sum.


IF you win 10pips, then it means someone else lose 10 pips. In this case, because of the spread, you actually win 7 pips, on the other hand, someone out there lose 13 pips. Therefore, Loser are more than Winners.
Case in point...that makes it negative sum game.

Merlin...stock market a positive sum game? Your example has merit...but don't be deceived...there are stocks that DEVALUE which make it more than a negative sum game. I suppose the stock could actually be worth money...but I was always in the camp that a stocks price was dictated mainly by what someone else was willing to pay for it. However, I do see your point.
  • #17
  • Apr 12, 2006 7:39pm Apr 12, 2006 7:39pm
Forex is not even a game because there is no contract between 2 players involved. Like for example in poker - if I win ( I have highest ranked hand) I'll take your $10, if you win ( you have highest ranked hand) you'll take my $10.

No such agreement exists in Forex.
  • #18
  • Apr 12, 2006 8:09pm Apr 12, 2006 8:09pm
Quoting baboon
Forex is not even a game because there is no contract between 2 players involved. Like for example in poker - if I win ( I have highest ranked hand) I'll take your $10, if you win ( you have highest ranked hand) you'll take my $10.

No such agreement exists in Forex.
Thats what i thought. Im sure im wrong but i was under the impression it worked kinda like this:

In stocks you have only a certain number of shares out, and basically in order to trade you you need to buy and/or sell shares from someone else. But in forex, i thought it was more of an exchange 'rate', and there there wasnt a 'float' for the currency circulating in each country.. and that the spread was the broker profiting, not actually 2 sides buying/selling... which would mean that there could be more winners than losers at some points and more losers than winners at others. It may be a zero-sum game, but over time?

Than again this is my first post and ive only been actively studying forex for a few weeks (this forum is great thanks guys ).
  • #19
  • Apr 12, 2006 9:30pm Apr 12, 2006 9:30pm
Quoting Paus2
Thats what i thought. Im sure im wrong but i was under the impression it worked kinda like this:

In stocks you have only a certain number of shares out, and basically in order to trade you you need to buy and/or sell shares from someone else. But in forex, i thought it was more of an exchange 'rate', and there there wasnt a 'float' for the currency circulating in each country.. and that the spread was the broker profiting, not actually 2 sides buying/selling... which would mean that there could be more winners than losers at some points and more losers than winners at others. It may be a zero-sum game, but over time?

Than again this is my first post and ive only been actively studying forex for a few weeks (this forum is great thanks guys ).
Wow...great point...but I do have to wonder...technically, I AM purchasing 100,000 Euros at a given rate...however, you're right about the float part...there is no real exchange of product. Then again, the rate is a reflection of the desire for someone to sell 100,000 Euros at that rate. If no one wanted to sell the Euro, the rate would go to positive infiniti. So, maybe there is some sort of implicit contract...with the overall market, I suppose.

Great point, though...
  • #20
  • Apr 21, 2006 1:42am Apr 21, 2006 1:42am
Well, you seem to count out the spreads and commissions from the formula, but I believe this should not be done...The fact is the amount of money inside the market is constant, spreads and commissions are paid from this amount of money, so you can't count them out and say that the whole game is a negative sum...


Thanks,

Nader
0 traders viewing now