Forex trading is a zero-sum game as a profit in a currency trade always equals a loss somewhere on the other side of the equation. The balance may not equal zero immediately, but will be somewhere down the line and history of transaction. For example, if you only look at traders A and B’s transactions, it may not ap See more 26/11/ · The Zero Sum Game It's important to understand that forex traders do not buy assets. They don't even buy currencies. What they do is take bets against each other on the 02/05/ · The Forex zero-sum game is a way of trading and earning a second income with a lower risk than equities. Because you own two currencies, your investment cannot go to zero. Yes, Forex is a zero-sum game. Because the profit of one trader is equal to the loss of another one. Money transferred from losers to winners. This, in turn, never changes the SUM of the 23/08/ · Is Forex a Zero Sum Game? The Short Answer The short answer is: it depends on the circumstances involved and who you ask. Some traders will always consider it to be a zero ... read more
Now for the important part, the poker example described above is almost exactly how the forex market essentially works. Contrary to popular brief no money actually gets made in the forex markets, instead what happens is it gets transferred from one set of people to the other, the same as in poker.
In trading the set of people who are characteristically said to always make money are the bank and hedge fund traders. The money these traders make comes from the people who typically tend to lose money in the market, which are retail traders with no professional trading background.
For the most part this is incorrect, although they do have advantage when it comes to information flow for example they may have a heads up on what impact a news event might have in the market before its released they generally have access to the same tools as us, the only difference is they use them in a different way.
Whereas retail traders will look at a chart of currency in terms of technical analysis i. e support and resistance , swing highs and lows etc the bank traders are looking at these tools to but from a different perspective.
Bank traders are attempting to predict the market by understanding what the retail trader is going to do. Each day in the forex market how much money can be made is entirely dependent on how many people decide to put money at risk.
If , people place a trade tomorrow and they have all risked £10 each that means the maximum amount of money that can be made for that day is £1, Now if we woke up tomorrow and no one decided to place a trade then two things would happen:. This is why understanding the implication of what it means to be trading in a zero sum market can have a dramatic effect on your trading. Whenever you make money on a trade how much you make is determined by how many people have lost, conversely when you lose money on a trade that money has been taken by another trader or traders who have anticipated the market direction better than you.
If your analysis focuses on anything other than identifying where people are gonna lose money then your potential profits will be much smaller than those who do. They know they only way for them to make profits is to identify a situation where a lot of people are likely to lose money by taking some course of action lets say placing a buy trade for example then taking the opposite action, selling against the people who have brought.
This is why you commonly see people make gigantic profits during financial crashes. When the markets crashed in he made 4 billion dollars in a single year betting on the mortgage crisis that would eventually bring about the major rescission which bought the financial integrity of the world to a standstill. Because he knew a situation was setting up that was going to cause a lot of people heavy financial loss.
This is what you need to be doing when looking at your charts for trading opportunities. In my supply and demand article I talk about how the strength of the move away is not a determining factor in whether the zone is considered strong or not. I want you to look at this image and think about the psychology of the people who are short when the market moves up creating this demand zone.
The banks have brought down here because they know if the market moves up all the traders who are short in the market will probably close their trades, resulting in the banks making significant profits.
Bank traders know trading forex is a zero sum game therefore their behavior in the market will always be based on making as many people as possible lose money. This is a common example of how bank traders take money from the retail traders.
Now they have loads and loads of buy orders available to place the remaining sell orders from the banks. When this is completed the market begins moving lower and eventually the process described above will repeat itself in the other direction.
It happens everyday on every currency on every time frame. These types of hypothetical scenarios throw on horse blinders and only focus on a small slice of the whole story to support their viewpoint. There are various factors Forex traders should consider when considering if Forex is a zero-sum game. Another factor to consider is commission and transaction fees made by brokers. If you are exchanging currencies, you almost always have to use a broker.
A broker converts your currency to another and facilitates the transaction between you and another trader. The broker has employees and infrastructure that all cost money to maintain. As such, they have to charge a fee to keep the lights on, pay their employees, and make a profit. With this consideration, Forex trading is more akin to a negative sum-game as both buyers and sellers have transaction costs they have to pay. However, they usually pay the same transaction fees making what the buyer and seller lose equal.
This is another example that is not considering the whole story. This perspective falsely assumes that Trader A and Trader B are the only traders in the market. Forex trading is a zero-sum game as a profit in a currency trade always equals a loss somewhere on the other side of the equation. The balance may not equal zero immediately, but will be somewhere down the line and history of transaction. But if you look at the whole picture, all the transactions between traders A, B, C, D, etc.
With that said, if you take into account transaction fees and broker commissions, you might call Forex a negative-sum game. About us Contact Us Advertise With Us Press Room Terms of Services Report an Error Sitemap.
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Is Forex a zero-sum game? Published by Jonathon Jachura. Reviewed by Bowen Khong, ACCA. Fact Checked. Last updated: September 12, Why it Matters Many people have likened the forex market to a zero-sum game, and rightly so.
What is a Zero-Sum Game? When Forex is a Zero-Sum Game Many traders view Forex trading as a zero-sum game when currencies are spot traded. Other Examples Against Forex Being a Zero-Sum Game Some traders often use false assumptions and allegories to demonstrate that Forex is not a zero-sum game. Other Factors to Consider There are various factors Forex traders should consider when considering if Forex is a zero-sum game. Here are some top considerations. Broker Fees Another factor to consider is commission and transaction fees made by brokers.
Long Positions vs. Conclusion Forex trading is a zero-sum game as a profit in a currency trade always equals a loss somewhere on the other side of the equation. Jonathon Jachura. You may also be interested in reading. Have you been waiting to. Darwinex Review Founded in , Darwinex has grown to be trusted by thousands,.
By Louis H-P on May 2, Just ask those who were caught up in the stock market crash of Yet there are securities which can be traded where the risk is reduced versus equities: Forex. The Forex zero-sum game has less chance of blowing up in your face because when you are buying one currency you are selling another. For anyone following finance events recently cannot have missed the bankruptcy of Carillion and Debenhams entering administration. In both cases shareholders were wiped out, loosing everything.
Forex is not as explosive as stocks and less risky. Forex is simpler than equities where you have hundreds to chose from. There are only a handful of major currencies to chose from, making the choice easier. Also you are able to take advantage of intraday volatility. It is reassuring to know that the Forex market is the largest and most liquid in the world. The Forex zero-sum game also allows many to benefit from Forex trading.
Another advantage of Forex zero-sum game is that currencies are less volatile than stocks. Although some volatility is good for trading, too much is a headache!
Forex trading gives you the right balance of volatility with some sense of trend, allowing you to profit from opportunities. Central banks monetary policies are the one area to watch closely. A move in the interest rate can have a big influence in the value of that currency, especially if it is unexpected.
Although the reduction in risk that a Forex zero-sum trading can give you is an advantage, it should not be traded away. This is where risk reduction techniques come to play. The first rule of trading is not to lose money.
Risk management should be seen as a chance to make money. A risk adjusted approach, where you only trade a portion of your portfolio and make a return consummate to the risk you took allows to put this into effect.
Expanding on this, one of the best approaches is to use, is the risk reward ratio. This ratio teaches you to risk less money than you intent on making. For the Forex zero-sum game to work for you, you have to ensure that you are in the game! This is where we talk about the perils of leverage. Just because a broker offers you leverage does not mean you should take it. Especially for new retail Forex traders, leverage can blow up your account. We have all been there: you have a few successful trades and then before you know it you have gone big using leverage.
The Forex zero-sum game no longer applies to you because you have lost all your capital. The Forex zero-sum game is a way of trading and earning a second income with a lower risk than equities. Because you own two currencies, your investment cannot go to zero. Currencies are also less volatile , especially the major currencies such as USD, EUR and GBP. Learning to watch central bank announcements will have to become second nature.
Doing so will ensure you trade successfully! FEATURED ON About author. Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team. Learn to Trade. The Forex Zero-Sum Game. The following two tabs change content below. Bio Latest Posts. Latest posts by Louis H-P see all. You May Also Like What Actually is Volatility Trading? Ask anyone about financial markets and one of their first thoughts is volatility.
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Is forex trading always a zero-sum game? Yes it is always a zero sum game. No that does not prove it's not a zero sum game. In order for it not to be a zero sum game you would have to Forex trading is a zero-sum game as a profit in a currency trade always equals a loss somewhere on the other side of the equation. The balance may not equal zero immediately, but will be somewhere down the line and history of transaction. For example, if you only look at traders A and B’s transactions, it may not ap See more Yes, Forex is a zero-sum game. Because the profit of one trader is equal to the loss of another one. Money transferred from losers to winners. This, in turn, never changes the SUM of the 25/05/ · Regardless of intentions, if the above premise holds true, it's zero sum. Quote In game theory and economic theory, zero-sum describes a situation in which a participant's 02/05/ · The Forex zero-sum game is a way of trading and earning a second income with a lower risk than equities. Because you own two currencies, your investment cannot go to zero. 23/08/ · Is Forex a Zero Sum Game? The Short Answer The short answer is: it depends on the circumstances involved and who you ask. Some traders will always consider it to be a zero ... read more
Published by Jonathon Jachura. The other players! If your prediction happens to be correct, you will make a profit. What Is Margin In Forex? We are aware that our editorial process is not perfect, and we are constantly improving our editorial quality through readers feedback and internal review. Where does this money come from?There are various factors Forex traders should consider when considering if Forex is a zero-sum game. What Actually is Volatility Trading? Forex trading zero sum game so will ensure you trade successfully! Bank traders know trading forex is a zero sum game therefore their behavior in the market will always be based on making as many people as possible lose money. But the fees, commissions, and spreads they have to pay, make it a negative-sum game.