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Is Forex a ZERO Sum game? 62 replies

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Forex: A Zero Sum Game? 18 replies

Zero Sum Game - Debt

  • #21
  • Apr 16, 2012 4:50pm Apr 16, 2012 4:50pm
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,

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'.

Cheers
Abi
It's the simplest of logic to say that when you add up the profits and the losses. you get zero. To say that is over-simplification in the forex market is an understatement.

A simple example; George trades the monthly chart only, for a few thousand pips. Ralph trades the hourly chart for 50 to 100 pips. George wins a trade for 1500 pips after 3 months. In between, Ralph has won 2000 pips from the shorter term trades, even though at times, he bet against George.

In the meantime, brokers have made money off both their trades (not the definition of zero-sum) and jobs were created.

Various Countries gained or lost a trade advantage because their currency appreciated/depreciated in value. And so it goes....

So actually, someone DOES NOT have to lose just because I win a trade. If I take 100 pips out of George's trade he still wins and so have I. The brokers have made money from both our trades and given a large enough swing, a Country has gained/lost a little trading edge.
When the Joker is in the deck.. fear not and play it well
  • #22
  • Apr 16, 2012 4:51pm Apr 16, 2012 4:51pm
Quoting Tact1cal
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.
Sorry, it AIN'T that simple
When the Joker is in the deck.. fear not and play it well
  • #23
  • Apr 16, 2012 5:03pm Apr 16, 2012 5:03pm
Quoting Slim Buffett
It's the simplest of logic to say that when you add up the profits and the losses. you get zero. To say that is over-simplification in the forex market is an understatement.

A simple example; George trades the monthly chart only, for a few thousand pips. Ralph trades the hourly chart for 50 to 100 pips. George wins a trade for 1500 pips after 3 months. In between, Ralph has won 2000 pips from the shorter term trades, even though at times, he bet against George.

In the meantime, brokers have made money off both their trades (not the definition...
Slim I fail to see your logic, you have now brought macro-economic effects of trading into the zero-sum debate further complicating the simple idea.

You have given examples of 2 people from the normal market, and tried to justify your arguement on that basis, you can't take two people out of the whole forex market and say that. If we do use your example then we have to assume that George and Ralph are the ONLY two people in the market, and then you will see that there is no way George can make any money without Ralph losing some and vice-versa.

As for your broker's spread concept, assume that the brokers are kind and do not charge any spread (not realistic I know but bear with me) then Ralph will win more (as the spread will not eat into his profit) and he will go to his local mall and buy an extra TV hence creating jobs.

In the trading arena, money is neither created nor destroyed, it is merely being transferred from one person to another, and that is what the essence of zero-sum is

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #24
  • Apr 16, 2012 5:06pm Apr 16, 2012 5:06pm
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?
You all can argue about the technicalities, but FOREX is more or less a zero sum game. x dollars in, x dollars out.

As for the question of 95% losers, consider the math. For every successful trader who makes $100,000 a year, there are a hundred traders with blown accounts of $1,000 each. To make big money, you either gotta take it from one big loser (not likely), or a whole bunch of little losers!
"A is A"
  • #25
  • Apr 16, 2012 5:07pm Apr 16, 2012 5:07pm
Quoting Slim Buffett
Sorry, it AIN'T that simple
Judging by your previous post you've clearly over complicated the matter.
Cautiously optimistic. . .
  • #26
  • Apr 16, 2012 5:10pm Apr 16, 2012 5:10pm
Quoting abi2712

In the trading arena, money is neither created nor destroyed, it is merely being transferred from one person to another, and that is what the essence of zero-sum is

Cheers
Abi
The problem is that you try to over-simplify that which is complicated. In the trading arena, Central Banks create and destroy money all the time.

I'm sure that next, you will tell me that Central Bank's matter not.
When the Joker is in the deck.. fear not and play it well
  • #27
  • Apr 16, 2012 5:16pm Apr 16, 2012 5:16pm
Quoting Slim Buffett
The problem is that you try to over-simplify that which is complicated. In the trading arena, Central Banks create and destroy money all the time.

I'm sure that next, you will tell me that Central Bank's matter not.
You see slim, you are confusing a number of economic concepts and hence over-complicating it, and yes, I am over-simplifying it at times so that it makes sense and is easy to explain, but the simplification that I do can be easily extrapolated to include the market. I totally agree with you when you say that it is complicated and that the chances are that you might not get 0, but that is because of the sheer volume of the market.

I am not going to deny that Central banks print money, but the money they print will not be deposited into speculator's accounts, it is used for other purposes. But when a country prints money, its currencies value will go down, so the people who are long on it will lose money while those who are short on it will make money (the amount the longs lose will be equal to the amount the shorts win) hence zero-sum.
An investment in knowledge pays the best interest - Ben Franklin
  • #28
  • Apr 16, 2012 5:34pm Apr 16, 2012 5:34pm
Quoting abi2712
You see slim, you are confusing a number of economic concepts and hence over-complicating it, .
OK.... let's back up for a minute. The simple argument is: when one trader makes money, another trader has to lose money.

That is simply NOT true and you know it. You can bend it, shape it, state it anyway you want to. It's still fallacy.

If I "tossed a coin" in a trade I might win or lose. In the meantime there might be any number of winners or losers. Chances are pretty good that the broker will always win in some fashion. Otherwise the broker wouldn't be in business anymore.

You've failed to prove your point.

I discredit your voucher as; "not worthy, politically motivated".

And WHY am I arguing about this? I dunno !!


?
When the Joker is in the deck.. fear not and play it well
  • #29
  • Apr 16, 2012 5:57pm Apr 16, 2012 5:57pm
Quoting Slim Buffett
OK.... let's back up for a minute. The simple argument is: when one trader makes money, another trader has to lose money.

That is simply NOT true and you know it. You can bend it, shape it, state it anyway you want to. It's still fallacy.

If I "tossed a coin" in a trade I might win or lose. In the meantime there might be any number of winners or losers. Chances are pretty good that the broker will always win in some fashion. Otherwise the broker wouldn't be in business anymore.

You've failed to prove your point.

I discredit...
A number of issues here Slim,

- This is an intellectual discussion where we are expressing our ideas so as to learn from each other, I do not see the need to make it into an argument, and I, for the life in me, cannot see the political motivation, I'm not trying to sell you something. My voucher was given to me by somebody who has been given the privilege by FF to vouch for people. It his privilege and if he thinks I am unworthy of it he can take it back, the voucher does not concern you in any way whatsoever.

You have been bringing different concepts into this discussion, central banks, macroeconomics and now brokers. The brokers I use are not market makers, they transfer my order to a market maker, and in doing so charge me a spread, that I believe is fair. Brokers provide a platform for us to trade on, it is a business, and yes the brokers who do make markets trade against you to hedge their positions, but as long as they give you a fair market price without distorting it in any way then we have no reason to blame them, they are running a business not a charity so yes they have to show a profit at the end of the year and as long as they do it legitimately it is not a problem.

As for the zero-game principle, if one makes money then somebody has to lose, it can be a trader, a business, a government, a bank, a hedge fund etc.

If you make money in the market it has to come from somewhere, can't just come from thin air, and the person from whom it comes from has lost money, simple.

As for the case of coin tossing, when you toss heads and make the trade choice accordingly, if your order gets executed, in effect somebody has taken the opposite of your position, because (you cannot buy without someone selling it to you and cannot sell without someone buying it) and if you win that person loses, its that simple.

And yes, this may seem to be a pointless argument no doubt about that as this is not a trade-able idea, but it is a fundamental principle of a market. I am expressing my ideas in as cohesive a manner as possible so as to receive input and I am very open to criticism as well, I'm here to learn, and nothing more

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #30
  • Apr 16, 2012 6:24pm Apr 16, 2012 6:24pm
Quoting abi2712
A number of issues here Slim,

- This is an intellectual discussion where we are expressing our ideas so as to learn from each other, I do not see the need to make it into an argument, and I, for the life in me, cannot see the political motivation, I'm not trying to sell you something. My voucher was given to me by somebody who has been given the privilege by FF to vouch for people. It his privilege and if he thinks I am unworthy of it he can take it back, the voucher does not concern you in any way whatsoever.
That's very gentlemen-like. I hope you can appreciate a bit of sarcasm and my preparedness for the usual "dog-eat-dog" mud-slinging.

Quoting abi2712
You have been bringing different concepts into this discussion, central banks, macroeconomics and now brokers. The brokers I use are not market makers, they transfer my order to a market maker, and in doing so charge me a spread, that I believe is fair. Brokers provide a platform for us to trade on, it is a business, and yes the brokers who do make markets trade against you to hedge their positions, but as long as they give you a fair market price without distorting it in any way then we have no reason to blame them, they are running a business...
You're simply admitting that your assumption is false. For example; someone can run a business no matter who wins or loses. Therefore, someone can always win.

Quoting abi2712
As for the zero-game principle, if one makes money then somebody has to lose, it can be a trader, a business, a government, a bank, a hedge fund etc.
Let's look at this sentence carefully. : A zero-sum game is also called a strictly competitive game while non-zero-sum games can be either competitive or non-competitive."

Being the intelligent person that you are, can you see the difference? Given the total sum of all the players, including traders, brokers, governments, central banks and so forth, don't you think it's just a little absurd to call trading a zero-sum game.
When the Joker is in the deck.. fear not and play it well
  • #31
  • Apr 16, 2012 6:40pm Apr 16, 2012 6:40pm
Quoting Slim Buffett
That's very gentlemen-like. I hope you can appreciate a bit of sarcasm and my preparedness for the usual "dog-eat-dog" mud-slinging.



You're simply admitting that your assumption is false. For example; someone can run a business no matter who wins or loses. Therefore, someone can always win.



Let's look at this sentence carefully. : A zero-sum game is also called a strictly competitive game while non-zero-sum games can be either competitive or non-competitive."

Being the intelligent person that you are, can you see...
I appreciate the sentiment.

First of all you cannot say that the broker 'wins', winning implies a competition and a possibility of losing. Brokers who make money using spreads ONLY and not trading against their clients are not really participating in trading. They are just transferring your order to a market maker and charging a fee for that, the market maker is the one who will either lose or win. I appreciate the fact that there are some brokers who actually make the market and thus they either win or lose based on the outcome of your trade and I have arguments against that, and in this case if you win the broker loses and vice versa.

As for your second point, once you look at all the market participants then trading may not be a zero-sum game because every participants a different objective. For eg a govt may devalue its currency purposely thus losing money, but they may do it to boost exports and reduce imports so they may not count the loss as losing, if you take that into account then yes its not a zero-sum game. But in the process of devaluing the currency the amount the govt and other people holding the currency will lose will be equal the winnings of the people holding the inverse currency.

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #32
  • Apr 16, 2012 6:53pm Apr 16, 2012 6:53pm
Quoting abi2712
I appreciate the sentiment.

First of all you cannot say that the broker 'wins', winning implies a competition and a possibility of losing. Brokers who make money using spreads ONLY and not trading against their clients are not really participating in trading. They are just transferring your order to a market maker and charging a fee for that, the market maker is the one who will either lose or win. I appreciate the fact that there are some brokers who actually make the market and thus they either win or lose based on the outcome of your trade...
And you (yourself) are now stating EXACTLY why trading is not a zero sum game !
And maybe you don't even know it. That's OK though. We can over-complicate anything we want to. The answer will remain the same.

In summation and with all due respect, you have still proven nothing but the fact that your assumption is erroneous.
When the Joker is in the deck.. fear not and play it well
  • #33
  • Apr 16, 2012 6:55pm Apr 16, 2012 6:55pm
Quoting Slim Buffett
And you (yourself) are now stating EXACTLY why trading is not a zero sum game !
And maybe you don't even know it. That's OK though. We can over-complicate anything we want to. The answer will remain the same.

In summation and with all due respect, you have still proven nothing but the fact that your assumption is erroneous.
Please, do explain how that implies that trading is not a zero-sum game
An investment in knowledge pays the best interest - Ben Franklin
  • #34
  • Apr 16, 2012 7:12pm Apr 16, 2012 7:12pm
Slim is right, the fact that the exchange is used for utility purposes makes the exchange non zero-sum by definition. When a company exchanges for the purpose of paying employees the fact that they are not competing to "win" negates the zero-sum argument because ALL participants would need to be competing to "win" for it to be zero sum by definition.

Wasn't expecting to change my opinion on that one today, much less in a thread where I disagreed a page ago. Well, that's enough semantics for me today.
Cautiously optimistic. . .
  • #35
  • Apr 16, 2012 7:17pm Apr 16, 2012 7:17pm
slim...

You are bringing in a lot of complex ideas into a simple discussion to bulldoze your way into getting people to accept your claims.

If you entered into a coin toss bet with a friend, one of you has to take heads and another has to take tails. When the coin lands, one of you will win and one of you will lose.

If both of you bet on heads, there would be no bet. Because nobody wants to take the tails position. Hence, the bet would be called off. Otherwise, there would be nobody to pay the winner (or nobody to take the winnings of the bet) All you need to do is apply this concept to millions of dollars.

EG: X amount of people has bet a total of 5mil dollars that eurusd will go up today. For that bet to have happened, Y amount of people has bet a total of 5 mil dollars that eurusd will go down today.

Notice that we don't make a distinction where X and Y come from. They can be the gov, a trader, a huge company, a traveller - anyone. What we do make a fuss out of is that 5mil worth of longs were offset by 5 mil worth of shorts.

This is what we are discussing in zero sum.

To demonstrate how you are describing this discussion:
We have a bet between 2 people in a coin toss. One guy bets heads the other bets tails. But there is a middleman - the guy who tosses the coins for these 2 players.

This middleman charges both the 2 players a small fee for the coin tossing service. This has in turn created income for the middleman. He can then use this income to buy things from his local grocer.

So now the local grocer has the money of these 2 betting players. The 2 players have now contributed to the economy and money circulates. This is causing inflation. So the gov decides to increase interest rates. Now everybody is affected. There is no zero sum. Money is created everywhere.

Can you see how you are complicating a simple concept?
  • #36
  • Apr 16, 2012 7:19pm Apr 16, 2012 7:19pm
Quoting abi2712
Please, do explain how that implies that trading is not a zero-sum game
OK, do you understand the meaning of competitive as opposed to non-competitive?

Read this carefully: "non-zero-sum games can be either competitive or non-competitive"

Trading forex is not always competitive. That isn't so difficult to comprehend. But you have to realize all the "players" that are involved.

If you don't realize the multitude of individuals, corporations, on and on, not all of them simply trading for profit but corporations and countries trying to protect a trade advantage or hedging on overseas payroll.

Well, you're really not as educated as you would like people to believe. Now don't get bent out of shape, that's just one gentlemen speaking to another.
When the Joker is in the deck.. fear not and play it well
  • #37
  • Apr 16, 2012 7:23pm Apr 16, 2012 7:23pm
Quoting Tact1cal
Slim is right, the fact that the exchange is used for utility purposes makes the exchange non zero-sum by definition. When a company exchanges for the purpose of paying employees the fact that they are not competing to "win" negates the zero-sum argument because ALL participants would need to be competing to win for it to be zero sum by definition.

Wasn't expecting to change my opinion on that one today, much less in a thread where I disagreed a page ago. Well, that's enough semantics for me today.
If you bring in external factors like macroeconomics and whatnot, nothing in this world is zero sum. Just like my coin toss example, you can expand it endlessly to define trading as non zero sum. In fact you can say that anything you do will never be zero sum because whatever you do contributes in some way to the circulation of money around the world.

But the very essence of a trade is zero sum.

You can't buy something that nobody wants to sell.
  • #38
  • Apr 16, 2012 7:32pm Apr 16, 2012 7:32pm
Quoting thelws
If you bring in external factors like macroeconomics and whatnot, nothing in this world is zero sum. Just like my coin toss example, you can expand it endlessly to define trading as non zero sum. In fact you can say that anything you do will never be zero sum because whatever you do contributes in some way to the circulation of money around the world.

But the very essence of a trade is zero sum.

You can't buy something that nobody wants to sell.
Strictly speaking, slim is right. I'm not bringing macro economics into this. People are using the exchange without the intention of profiting. That's a fact. Zero sum by definition requires ALL participants to compete to win. This is not true for Forex. That's a fact. So by definition the foreign exchange is a non zero sum game.

Don't get me wrong though. I only trade with the intention of taking money from other people. It's not like this changes the way we should approach trading. You're still my competition.
Cautiously optimistic. . .
  • #39
  • Apr 16, 2012 7:41pm Apr 16, 2012 7:41pm
Quoting thelws
I

But the very essence of a trade is zero sum.

You can't buy something that nobody wants to sell.
This is simply not true. The very essence of a zero-sum game is like that of a coin toss. If only two players toss a coin; one will win, one will lose. ZERO-SUM.
Nothing has really changed except between THOSE two players. That can NEVER be said of forex trading.

And maybe I can't buy something that nobody wants to sell. Not really sure what that has to do with anything but I haven't seen anything yet that was once for sale that couldn't be bought at some price.
When the Joker is in the deck.. fear not and play it well
  • #40
  • Apr 16, 2012 7:52pm Apr 16, 2012 7:52pm
Quoting Tact1cal
Strictly speaking, slim is right. I'm not bringing macro economics into this. People are using the exchange without the intention of profiting. That's a fact. Zero sum by definition requires ALL participants to compete to win. This is not true for Forex. That's a fact. So by definition the foreign exchange is a non zero sum game.

Don't get me wrong though. I only trade with the intention of taking money from other people. It's not like this changes the way we should approach trading. You're still my competition.
I realize now what I'm getting worked up about. Slim does a very poor job (at least in my eyes) at explaining zero sum. The examples he uses are rather dodgy and does not explain it simply enough.

I however accept this explanation of yours. And I believe this is what slim wants to convey all along.

Some participants in the market enter into a trade without any regards to whether they win or lose. So this creates a non zero sum game.

And you are right, this doesn't change the fact that I still want to take your money We are still competitors. But if there are enough participants in the market who enter with no intention of winning, then there will be enough money for us both.

And to end it all, the concept that you can't buy something nobody wants to sell is still true in the markets. If I have the only gold bar in the world and I don't want to sell it, none of you can buy the gold bar. The only salvation we have is that there are people out there who would willingly sell you something with disregard to profits (because it serves them a greater good)
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