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Forex: A Zero Sum Game? 18 replies

Zero Sum Game - Debt

  • #1
  • First Post: Apr 14, 2012 5:44pm Apr 14, 2012 5:44pm
Hello,

Quick question, just been bugging me.... the old saying, 95% people lose money... so 5% must be getting richer and richer and richer? In order for this to be a zero sum game... who therefore holds/sits on all the debt?
  • #2
  • Apr 14, 2012 6:46pm Apr 14, 2012 6:46pm
Quoting guess121
Hello,

Quick question, just been bugging me.... the old saying, 95% people lose money... so 5% must be getting richer and richer and richer? In order for this to be a zero sum game... who therefore holds/sits on all the debt?
Sorry, I fail to grasp the substance of your post. But if you're referring to trading, it is not a zero sum game.

As far as debt, what kind of debt and how does it relate to "95% people lose money" . Do you mean that if someone makes money another must go into debt? Pardon my lack of knowledge.

I find that my lack of knowledge leads me to new discoveries.
When the Joker is in the deck.. fear not and play it well
  • #3
  • Apr 14, 2012 8:08pm Apr 14, 2012 8:08pm
You have raised an interesting point,

First of all, you are correct in saying that trading is a zero sum game, if you win somebody else has to lose, however there are a number of things you are missing:

- We as retail traders in the forex market are essentially betting whether the price of a currency will go up or down, that is we are in the business of pure speculation. The currency market however was not created for this purpose, infact the currency market's primary objective is to facilitate trade between countries (imports, exports) so not all the buying and selling that is going on is speculation. For eg, not all people who buy the EURUSD pair are doing so to make money through speculation, they could be doing so because say, they own a business that exports products or are just looking to go on a holiday. These people will not use brokers like us, obviously they will go to a bank, which in turn buys and sells from the currency market. So yes, it is a zero sum game, but since there are people who are not only speculating it will be difficult to say that if you win somebody else has to have lost money.

- Your second point, saying that 95% of forex traders fail, well, there has been no conclusive proof that this is the case, but yes it is widely known that a majority of retail forex traders fail (the reasons for this are beyond the scope of this post) But again, the currency market is not made up of retail traders only, there major entities involved in this business, governments, banks, hedge-funds, private companies etc etc, all these people buy and sell currency for various reasons so even if the statistic that says 95% of traders lose money it does not mean that all the money they lost was made by the 5% who actually made money, it simply means that for every 5 traders who have made money, there are 95 traders who have lost money.

- As for debt, well very few brokers out there allow you to borrow money to trade with, infact, I have not come across any broker who is willing to lend money to you to trade with, I feel that what you may be referring to is leverage which is an entirely different concept.

Hope this helps
Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #4
  • Edited 12:42am Apr 15, 2012 12:25am | Edited 12:42am
Quoting abi2712
You have raised an interesting point,

First of all, you are correct in saying that trading is a zero sum game, if you win somebody else has to lose, however there are a number of things you are missing:

- We as retail traders in the forex market are essentially betting whether the price of a currency will go up or down, that is we are in the business of pure speculation. The currency market however was not created for this purpose, infact the currency market's primary objective is to facilitate trade between countries (imports, exports) so not...
The Zero Sum debate summed up brilliantly... Fk it have a vouch
Time hides Nothing
  • #5
  • Apr 15, 2012 1:51am Apr 15, 2012 1:51am
Quoting abi2712

As for debt, well very few brokers out there allow you to borrow money to trade with, infact, I have not come across any broker who is willing to lend money to you to trade with
Nice summary of zero sum in forex, you might have opened a can of worms tho!

Brøkers do offer lines of credit and bank guarantee trading here in UK, not sure about the rest of the world.....
  • #6
  • Apr 15, 2012 6:10am Apr 15, 2012 6:10am
Quoting CindyXXXX
The Zero Sum debate summed up brilliantly... Fk it have a vouch
Thanks Cindy
An investment in knowledge pays the best interest - Ben Franklin
  • #7
  • Apr 15, 2012 6:12am Apr 15, 2012 6:12am
Quoting pipmutt
Nice summary of zero sum in forex, you might have opened a can of worms tho!

Brøkers do offer lines of credit and bank guarantee trading here in UK, not sure about the rest of the world.....
Thanks for the clarification pipmutt, I'll definitely look into that, sounds like a lucrative albeit risky option. ]

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #8
  • Apr 16, 2012 4:24pm Apr 16, 2012 4:24pm
Very nicely put!

Though if we take out people and businesses like me and you, who want to exchange monies for holidays or making paymenys... how many people are sitting on debt?

Quoting abi2712
You have raised an interesting point,

First of all, you are correct in saying that trading is a zero sum game, if you win somebody else has to lose, however there are a number of things you are missing:

- We as retail traders in the forex market are essentially betting whether the price of a currency will go up or down, that is we are in the business of pure speculation. The currency market however was not created for this purpose, infact the currency market's primary objective is to facilitate trade between countries (imports, exports) so...
  • #9
  • Apr 16, 2012 4:31pm Apr 16, 2012 4:31pm
Quoting guess121
Very nicely put!

Though if we take out people and businesses like me and you, who want to exchange monies for holidays or making paymenys... how many people are sitting on debt?
Could you kindly clarify what you mean exactly by 'debt' in this context. Although if you are asking about how many people engage in speculation in the currency markets, well then that number could go into the millions, and this may seem large but if you take into account the fact that the currency market averages 4 trillion dollars a day the amount that retail speculators like ourselves control is relatively small.
An investment in knowledge pays the best interest - Ben Franklin
  • #10
  • Apr 16, 2012 4:54pm Apr 16, 2012 4:54pm
Quoting abi2712
You have raised an interesting point,

First of all, you are correct in saying that trading is a zero sum game,
Abi
You're very wrong in saying that trading is a zero sum game.
When the Joker is in the deck.. fear not and play it well
  • #11
  • Apr 16, 2012 4:56pm Apr 16, 2012 4:56pm
Quoting CindyXXXX
The Zero Sum debate summed up brilliantly... Fk it have a vouch
There is never only on e winner and one loser in forex. It is not a zero sum game.
When the Joker is in the deck.. fear not and play it well
  • #12
  • Apr 16, 2012 4:57pm Apr 16, 2012 4:57pm
Quoting pipmutt
Nice summary of zero sum in forex, you might have opened a can of worms tho!
I thought you would have known better.
When the Joker is in the deck.. fear not and play it well
  • #13
  • Apr 16, 2012 4:59pm Apr 16, 2012 4:59pm
Quoting abi2712
Thanks Cindy
Ohhhh !!! Politically motivated. I get it now.
When the Joker is in the deck.. fear not and play it well
  • #14
  • Edited 5:15pm Apr 16, 2012 5:02pm | Edited 5:15pm
Quoting Slim Buffett
There is never only on e winner and one loser in forex. It is not a zero sum game.
o dear here it comes...

Don't just sit there insinuating you have a brain.... Prove it
Time hides Nothing
  • #15
  • Apr 16, 2012 5:17pm Apr 16, 2012 5:17pm
Quoting CindyXXXX
o dear here it comes.
"a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s)."

Perhaps you can actually study the meaning of a zero sum game. There is no zero sum in forex.

If you can profoundly, astutely and intelligently prove to me otherwise, I'm listening.

http://en.wikipedia.org/wiki/Zero%E2%80%93sum_game
When the Joker is in the deck.. fear not and play it well
  • #16
  • Apr 16, 2012 5:36pm Apr 16, 2012 5:36pm
Sorry.. debt=loss.

What I am trying to get is... there has to be debt/losses, does there not? I exchange something for price that is less than I intended, therefore this would be a loss?

Quoting abi2712
Could you kindly clarify what you mean exactly by 'debt' in this context. Although if you are asking about how many people engage in speculation in the currency markets, well then that number could go into the millions, and this may seem large but if you take into account the fact that the currency market averages 4 trillion dollars a day the amount that retail speculators like ourselves control is relatively small.
  • #17
  • Apr 16, 2012 5:41pm Apr 16, 2012 5:41pm
Quoting Slim Buffett
"a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s)."

Perhaps you can actually study the meaning of a zero sum game. There is no zero sum in forex.

If you can profoundly, astutely and intelligently prove to me otherwise, I'm listening.

http://en.wikipedia.org/wiki/Zero%E2%80%93sum_game
Point taken but did you even read the thread? I never suggested there was zero sum in Forex... All I said was it was a good summary of the zero sum debate... Meaning Albi outlined why there is such misunderstanding around this. He successfully separated the concepts of trading (which in theory is centered around the logic's of zero sum (maybe not in practice but lets not get too technical in the rookie section)) and the concept of the market itself, which I thought was well written and well explained that's all. Nothing more

As for the technicalities of the debate itself... I really couldn't care less. It goes no where anyway.
Time hides Nothing
  • #18
  • Apr 16, 2012 5:42pm Apr 16, 2012 5:42pm
This may not apply to the retail market... as the products that we trade a synthetic, no? They are not traded on an exchange on some form or another? We are trading against the house. Though if I want to exchange with a man from the USA my British pounds to Dollars... we agree a price an exchange, then if he is not able to exchange my quantity, then what do I do, do I wait for someone who is willing, exchange completed? Then someone else comes along and repeats, until people realise there is money to be from this and more and more ppl come and long and think the same and then someone say I can do quantity X at this price... but if you want more... I can do it at this price... we create a market?

Quoting Slim Buffett
You're very wrong in saying that trading is a zero sum game.
  • #19
  • Apr 16, 2012 5:44pm Apr 16, 2012 5:44pm
Buffet, the zero sum principle is debated, and that is a fact, but it is only debated because of the varied participants in the markets, I'm not a millionaire trader yet but I have a sound knowledge of the market and the way it works and I will explain myself to you and maybe then you can tell us why you don't think it is a zero sum game.

The definition of zero-sum, means that when you add up the losses and the profits you get 0, ie the negative fgure of the losses cancels out the positive figure, allow me to demonstrate,

Say you decide that the EURUSD pair is undervalued and the will go up, hence you naturally go long, ie buy into the EURUSD pair. Now if you are buying into this pair there has to be somebody who has to sell it to you (common sense says that it is impossible to buy something without somebody selling it to you) so say you buy this pair from a person in the market (obviously when using brokers you cant know who is selling it to you but let us assume you do) we call this person 'x'(note at this point that mr 'x' is a speculator like you and thinks you are wrong and the EURUSD will go down). Now once this transaction is complete, one of three things can happen:

1) The pair's value remains the same - hence none of you make any profit or loss
2) You were correct in your assumption and the EURUSD goes up and you make a profit - The profit you make will be exactly equal to the loss made by mr 'x'
3) You were wrong and the the pair goes down in value, you make a loss - The loss you make will be exactly equal to the profit made by mr 'x'

So as you can see the zero-sum principle holds (this excludes things like transaction costs and commissions but since these facilitate trading and are not actually part of the trade itself they can be excluded)

So you see, as above in principle somebody has to make a loss if you make a profit.

So yes mathematically it is a zero-sum game, the answer will always be 0, but the notion that if somebody makes a profit the other person has to make a loss is debated only because of the varied use of the word 'loss'.

To demonstrate allow me to use the above example of mr 'x'. Say you still believe the EURUSD will go up, so you buy Euros and Sell dollars, but say mr 'x' (the person whos selling the Euros to you and buying your dollars) is not a speculator but a tourist visiting USA for a conference.

Now, let us assume you are right and after a month the value of the Euro goes up and you make a profit, hence mr 'x' has made a loss (if he would have bought dollars a month later he'd have avoided the loss) but in his books he would not count this as a loss, because he needed those dollars for that particular conference, so he would not mind incurring that loss.

I know the above example is a little generic and I'm sure others may be able to think of better examples, but in principle, when using pure numbers and nothing else, (also stripping away transaction costs) the FX market is a zero sum game.

I'm happy to receive any new opinions on this

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #20
  • Apr 16, 2012 6:42pm Apr 16, 2012 6:42pm
Quoting abi2712

The definition of zero-sum, means that when you add up the losses and the profits you get 0, ie the negative fgure of the losses cancels out the positive figure, allow me to demonstrate,
If people would just pay attention to this part there would be no arguments about zero-sum. Volume in - volume out, it's that simple.
Cautiously optimistic. . .
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