is Forex the Zero Sum Game

[forexenator]

Originally Posted by Sympatico

In over 7 months trading @O, I have been making more than most people's paycheck on interest alone. That's real money.

Now I am quite astonished at your comment win/rob/lose comment. How do you think you make money in the 1st place in forex. Someone's got to lose. Are you angry because that's often your case? ...

I don't think someone had to lose for your to make money on Forex, I think it is a different situation than in stock trading where someone has to lose in order that you get money.
Because simply in the forex you are buying or selling, and on the other side someone may be selling or buying on a profit, so you wont lose unless you closed the position on a negative pip value.

{some posts of this thread were part of another thread. split for different topics}

[ERA]

Originally Posted by forexenator

I don't think someone had to lose for your to make money on Forex, I think it is a different situation than in stock trading where someone has to lose in order that you get money.
Because simply in the forex you are buying or selling, and on the other side someone may be selling or buying on a profit, so you wont lose unless you closed the position on a negative pip value.

Sorry forexenator this observation is complete wrong, you have it the wrong way around. As an example, If a stock goes to new all time highs there are no losers amoung the buyers, because everyone either bought at a lower price or is at break even. The only losers will be a small minority who shorted the stock and the opportunity profit some stockholders have missed out on by selling their stock to someone else earlier ( but this is not a monetary loss showing up in their account it's purely the ' cost of selling early and missing out'). It possible in stocks for wealth to be created as they move higher.

Forex market no wealth is created , losers pay the winners, it is less than a zero sum game due to spreads constantly grinding down the pot and the only way the pot to increase is from a net inflow of players and funds.

[rwilliams]

Originally Posted by ERA

Sorry forexenator [etc]
Forex market no wealth is created , losers pay the winners, it is less than a zero sum game due to spreads constantly grinding down the pot and the only way the pot to increase is from a net inflow of players and funds.

Yes, that's so, but we have to consider that some of the participants don't actually _care_ if they 'make money' out of their trades or not - they are willing to pay us speculators for supplying liquidity. I'm talking about buisnesses who wish to gain a definite price for their goods at some future time in another country so that they can plan their cash flows.

As well, there are players such as banks who simply may have more Yen (e.g.) in their inventory than they want (company policy concerning risk management, for example) and simply dump Yen and buy dollars and/or Euro irrespective of whether the Yen is appreciating vs one or both of the other two, or not.

Not all (by a long shot) of FX transations are pure speculation. If they were, then you'd be right - it would be zero sum minus transaction costs. It just isn't _for us_, for the reasons outline above.

[ERA]

Originally Posted by rwilliams

Yes, that's so, but we have to consider that some of the participants don't actually _care_ if they 'make money' out of their trades or not - they are willing to pay us speculators for supplying liquidity. I'm talking about buisnesses who wish to gain a definite price for their goods at some future time in another country so that they can plan their cash flows.

As well, there are players such as banks who simply may have more Yen (e.g.) in their inventory than they want (company policy concerning risk management, for example) and simply dump Yen and buy dollars and/or Euro irrespective of whether the Yen is appreciating vs one or both of the other two, or not.

rw, I can't disagree with what you are saying with regard to position intent in the market, some use the market for spec and some to hedge risk, where it is a tool to manage risk and ultimately aid make a profit in their main business. To some a loss in their fx forward hedge is the cost of doing business. But that loss is ulimately someones gains, whoever took the other side of that hedge. A cost to some one is an income to another.

[fxscalper90]

So... this thread has turned into discussing 'zero sum game' eh?

OK, I'll bite.

The issue of 'zero sum game' hasn't been finalized as far as I know in the world of trading. Some think it exists, others do not.

Zero sum game essentially meaning that there must be a loser of every dollar for every dollar gained by a winning trader. In forex or in stocks.

I think Soros holds that indeed it is a zero sum game. I have not made a determination, but, on the surface I would say that money has to come from somewhere it doesn't just materialize out of thin air.

And, after all, there ARE many more losers than winners so it would make sense that winners take their money through superior trading systems while not getting dinged themselves.

The subject of liquidity plays a part too in that in my understanding you can have a position in drawdown basically putting your UP/L into the negative but you only really LOSE that money if you close the trade while in the negative.

Where does your 'lost' money go then? Does it mean that someone out there is actually sitting (for example) 100s of points in the black? Must they close that trade at the same time you close your (losing) position in order to gain your money?

Doesn't make sense.

fxs

[forexenator]

Originally Posted by ERA

Sorry forexenator this observation is complete wrong, you have it the wrong way around. As an example, If a stock goes to new all time highs there are no losers amoung the buyers, because everyone either bought at a lower price or is at break even. The only losers will be a small minority who shorted the stock and the opportunity profit some stockholders have missed out on by selling their stock to someone else earlier ( but this is not a monetary loss showing up in their account it's purely the ' cost of selling early and missing out'). It possible in stocks for wealth to be created as they move higher.

Forex market no wealth is created , losers pay the winners, it is less than a zero sum game due to spreads constantly grinding down the pot and the only way the pot to increase is from a net inflow of players and funds.

If we take the EUR/USD as 1.0000 , now I will start my day by selling EUR/USD and themarket goes my way and I found the EUR/USD became 0.9000 , Now I will close the position, on the other hand someone may start at that level by buying and then the market will increase and he closes the position. so both of us won in that day. Now I don't have to get someone money to make profit in this FX.

[fxscalper90]

Originally Posted by forexenator

If we take the EUR/USD as 1.0000 , now I will start my day by selling EUR/USD and themarket goes my way and I found the EUR/USD became 0.9000 , Now I will close the position, on the other hand someone may start at that level by buying and then the market will increase and he closes the position. so both of us won in that day. Now I don't have to get someone money to make profit in this FX.

Conceivably you and the other trader mentoned will not be the only players in the market though, right?

I guess maybe so many ppl are losing that it doesn't really matter who wins... because there is always an ample amount of money floating around (to win).

fxs

[Nonpiker]

Originally Posted by fxscalper90

Conceivably you and the other trader mentoned will not be the only players in the market though, right?

I guess maybe so many ppl are losing that it doesn't really matter who wins... because there is always an ample amount of money floating around (to win).

fxs

In your example, if this was strictly one person market then you would both be flat, and you would realize a gain and the contra party a loss. To clarify your example, if you sold EUR's to begin the day you would need to cover by purchasing them, which would leave contra party short or less long. Now if EUR goes lower, you are technically the loser in the zero sum game, since you would have stood to profit on an additional leg down (opportunity cost). If it were to go higher then the contra party is the loser.

The same example can be applied to equity shareholders. The losers in an upward move in a specific stock is not only the short sellers, but those who sold at lower levels. Again, there is an opportunity loss.

Trading in my humble opinion is always a zero sum game, especially when you think of it in these terms. While some markets obviously have both hedgers and speculators there are still actual or potential gains created when any positions are closed or opened.