Zero Sum-Total FX Myth

Hi there. I've been a retail FX trader now for the better part of 3 years - sad to say though, I've been in and out of losing several FX trading accounts the whole time.

Nevertheless my general approach to getting successful at FX trading is to gain the deepest of perspectives of how trading works in its true dynamics.

An illustration of this is the point of discussion on this thread: that having examined the facts closely, I have a contrary belief to the popular FX maxim that FX trading has a zero sum-total in net profits/losses outcomes.

IT IS A FALACY THAT FOREX TRADING ADDS UP TO ZERO IN SUM-TOTAL OF NET PROFITS OF ALL TRADERS

Here are my clear arguments:

1) Lets for argument's sake, assume the total population of FX traders (institutional traders and retail traders combined) to be the arbitrary figure of 1000.

2) Next, let us assume that at the same moment in time each and every one of the 1000 enter their respective trades.

3) Granted, the very next second all the trades are in, will reflect a zero sum-total in terms of net profits and losses, BUT ONLY INSOFAR AS THE TRADES ARE STILL ALL OPEN TRADES AND THIS REMAINS SO WHEN NO SINGLE TRADER AMONGST THE 1000 HAS YET CLOSED HIS OPEN TRADE.

4) Next, consider for the sake of illustrating my point, that the 1000 total traders are composed of 950 retail traders and 50 institutional traders, and that the 950 retail traders all close-out their trades at the same moment in time with all being with profit.

5) This would mean that at least some of the 50 institutional traders were with open, losing trades at the moment the 950 retail traders closed-out with profit.

6) However, markets may change direction later such that the erstwhile losing trades of those institutional traders become winning trades that can close-out with profit too.

7) For point 6) to occur would of course mean that some amongst the assumed net 1000 population of all traders went for a second round entry of new trades, and thus continues the cycle.

8) Therefore theoretically, all trades can close-out profitably. In reality though, what we see at the end of each trading day is a net PROFIT or a net LOSS of closed trades.

9) To be clear, a zero sum-total of profits/losses does occur insofar as the net OPEN and CLOSED trades combined are considered.

10) Point 9) above however underscores the messiness of the zero sum-total maxim: whoever amongst we traders ever considers any trade a WIN or a LOSS from the moment the trade is open before the very end.

It is a minus sum game; the spread ensures it. A zero sum game would be much easier!

Trading indeed is NOT a zero-sum game . It's a negative-sum game. Commissions eat away at profits and add to losses, slowly causing one's account balance to drift to zero. Of course, there's also the occasional "black swan" event like last year's SNB decision to not fix the CHF to the EUR - traders lost billions, accounts were wiped out and brokers demanded payment for negative balances to cover their losses.

So, yes, trading is definitely not a zero-sum game.

as long as price keeps going up, there will be only winners........

Yes, it only prices only went up... but of course that's not how the market works, now is it?

price can go up for a long time: you only have to look at the indices like Nasdaq100 where you have trends lasting 5-9 years and go bust in 1-2 years and start all over again. just be prepared for the bust when you`re long.

why bother whether is it zero sum or not? can know about it make us more skilful more profit?

It is NOT a zero sum game. For that to be true ALL participants would have to be speculators and derive their profits and losses ONLY through their trading activity.

There are also hedgers that are involved in the market. They use the market to offload risk and for purely converting one currency into another. When they offload risk, they do not necessarily care which way the currency pair moves once they have initiated their trade. Their gains will be offset by losses in the underlying assets or their losses in the currency trade will be made up in the underlying assets.

So Corporation A needs to bring USD from USA home to Japan in the form of JPY in one week. They sell USD/JPY pair and lock in their conversion rate. A speculator buys the USD/JPY pair from them. The price of the USD/JPY pair appreciates at the end of one week. Corporation A losses $10,000 on the trade. The speculator gains $10,000 on the trade. Corporation A gains $10,000 on their cash position from the time they initiated the trade until they closed the trade and converted their USD check into JPY at their local bank. So -$10,000 +$10,000 + $10,000 <> ZERO.

Yes their are brokerage fees, bank fees, and spread all skimmed off the top, BUT their is still no ZERO or NEGATIVE left at the end of the day.

GREEN pips to one and all.

Here are some arguments for positive and negative sum, and Boris Schlossberg's argument for zero sum.

My understanding is that FX is NOT zero sum for the following reasons (and possibly others):

 Markets are not independent and there is constant regulation/intervention by central banks who also issue that currency. The central banks are players in the market as well, but don't really pocket losses.

 Businesses that trade goods or services across borders, and so need forex to settle the deal, will sometimes accept a small loss on the forex transaction if they can make a bigger profit on the thing they're trading. In other words, in non-speculative transactions, if we include the 'external' P/L being made on the goods being sold, the whole transaction is not strictly zero sum.

 While the values of different currencies move against each other, purchasing power of these currencies are constantly eroded by inflation. Forex traders can continue to gain units of currencies through trading as monetary bases are expanded through debt created throughout economies. The units of currencies gained by traders represent value taken from the global economy, which is continuously generated by other economic activities such as manufacturing.

 Interest payments on currency transactions.


The assertion that all trades can be profitable if held long enough is not only irrelevant to the zero sum argument, but also illusory IMO (unless the trader has infinite time and capital). Open trades are 'real' for the reasons in myth #7 here. Whatever one's view, it doesn't change the truism that being profitable amounts to being net long while price is rising, and net short while it's falling, frequently/heavily enough to overcome costs.

Just my 2c FWIW.

Not necessarily the only condition for ALL trades by ALL traders to still be profitable. This is why I say that there is a need for clear perspectives on the true dynamics of FX trading because as a matter of fact the repeated cycle mentioned in point 7) at the start, is such that ALL trades by ALL traders can keep closing-out with profit more especially in a ranging, up-and-down market - and not just in a continuous, same direction as you suggest.Think about it: the very fact that a trade closes is because new trades opened that same moment IN THE OPPOSITE DIRECTION.

Direct answer: No. Knowing about it may not directly translate to profits. However indirectly it may translate to profits and yes, make us more skillful, for the reason that resolving the issue correctly would be an exercise in deeper, clearer insights as to the true working dynamics of the market and the mind-set of &quot;smart money&quot; traders.

I went and read the myth #7 that you hyperlinked to. While I quite agree that there's a difference in importance between floating P/L and actual ones, I do not understand how you would feel that holding on to floating P/L to wait for a market turn for a more favourable outcome, is not relevant to the discussion here.Do you truly believe that there are no institutional traders currently willing to take advantage of say, sudden liquidity in the AUDUSD upon sudden bad Aussy economic data - to nevertheless strongly go long - in the relentless search by such deep pocketed traders for more in terms of liquidity, to horde against years to come when they can short at a then much high price? Such that they are willing to tolerate the short to mid-term floating losses their accounts in the interim will indicate?

Interesting opinions from all of you, always trying to keep an open mind. Thanks.

I think we are at a significant misunderstanding. If I try to restate my view:

1. IMHO any equation relating to 'zero sum' should include floating P/L. That being so, then the market as a whole would be zero sum, except for items along the lines of the bullet points in my previous post.

2. My argument in myth #7 is that floating losses SHOULD be treated as real losses (reasons given in the link). It is a general precept, i.e. is not limited to specific strategies or scenarios like your AUDUSD example.

When you say "relevant to the discussion", I'm not exactly sure what the discussion topic is, i.e. whether you're looking to debate 'zero sum' (thread title); or to present a case for 'everybody can potentially be profitable if they wait until their trades return to profit before exiting them' (point (8) in your post #1); or possibly something else?

I see "true market dynamics" as being a process that is the outcome of several colliding elements, predominantly macroeconomics (e.g. central bank monetary policies); intermarket factors (risk on/off); geopolitical events; sentiment (e.g. moves driven by news outcomes); orderflow (e.g. supply/demand, heavyweight agendas); triangular equilibrium across pairs; TA-based self-fulfilling prophecy; etc etc. Hence I believe that a deep understanding of topics like these is beneficial to profitable trading.

The title of this thread alone is a blatantly flawed premise, and any posts that follow it are an exercise in battling naivety.

ATM's are positive-sum because I never have to put any of my money back into them, therefore, all I have to do is just keep taking money out of ATM's. Oh, shit, I've let my million dollar secret out.

BTW, is there any benefit to talk whether is this zero sum game or not? positive or negative? It doesn't matter. trading is trading, like other business has positive and negative side. as long as you are profiting, its ok. Not profit yet, train again.
Thanks,

Championing ignorance isn't a great attitude to have. Walking blindly through the world is a great way to get steamrolled. Cut the shit. Your sentiment is expressed all of the time across this forum as though remaining stupid is something to strive for.

From my point of view, it is probably not a zero-sum game, due to regulations and interventions it might be slightly positive (central banks play usually a losing game).
But the mechanism of opening and closing trades in profit in the first post is rather naive, nobody can close a trade, when there is no counterpart willing to take the other side of the trade.

nubcake,

were you schooling? I don't think so by reading your comment.

Go to school, please. In order to have politeness.

fuck politeness, being polite wont get you anywhere good in this world. The world and especially world of trading FX or any market is cold crude and blunt. Its eat or be eaten.

Nubcake actually makes very good posts, you should read them.