I recently read this short article entitled, “Forex is NOT a Zero-sum Game” on this blog called “nobull forex”. It said,
Technically Forex is a zero-sum game, so I apologize for the misleading title, but hear me out. Forex is a zero-sum game, but that means nothing for us retail traders trying to make a profit. You see the biggest players on the Forex market, such as corporations, are making ridiculously large transactions all the time. The thing is, these transactions are generally NOT for profit, but rather just necessary currency exchanges required for regular international business dealings. What this means is, these large corporations knowingly take a loss in the Forex market in exchange for a larger gain in other markets. As a result of these massive transactions and massive losses, there is plenty of room for every single retail trader to profit. So the next time you hear someone say, “Forex is a zero-sum game”, just say, “Yes, but remember, not everyone is playing for profit”.
Is this true? This seem to make good sense to me, but I would like the opinions of some more experienced traders.
Technically Forex isn’t even a zero-sum game, it’s actually a negative-sum game due to the cost of trading, aka spread, commissions.
The statement in the quote seems correct to me - most forex transactions are not made for speculation. Just remember that you’ll be fighting the institutional traders for that slice of profit.
Most retail traders will always be losers anyway, so the whole thing is a bit theoretical.
It doesn’t matter what the profit motivation is for any participant. A market will be zero sum (negative sum with transaction costs, etc.) if there are matching longs and shorts. To that end, spot forex trading is zero sum.
That said, however, forex overall is not zero sum because there are also just straight exchanges. For example, if I were to travel to London I’d swap dollars for pounds. I’m not taking a short position in dollars doing so. I’m just “buying” pounds so I can spend them.
And when you leave you would swap pounds for dollars. The exchange rate would most likely be different and you would either make or lose money on the exchange.
I was wondering whether someone was going to make that argument.
I will grant that you are in a long/short position with whatever money you converted but didn’t spend. It doesn’t really factor into the zero sum equation, though, because the fact that you’re holding pound notes doesn’t mean someone else is short them.
I suppose you could try to say that by holding one currency you are automatically short all the rest, but that gets absurd.
Please don’t get me wrong, I am not trying to argue with you. My point was that you exchange one currency for another, time passes, and you then exchange back. In most cases, the rate of exchange has changed and you will either make or lose money when you exchange. When you bought the pounds with your dollars, the seller is now holding dollars. Is the seller “short” pounds? The seller stands to gain when you lose, and lose when you gain assuming you are the only 2 traders in this transaction. Of course, the seller could have exchanged your dollars for someone else’s pounds.
I think most people when they repeat the, “forex is a zero sum game,” don’t understand that, that is meant overall. Since when someone wins someone is on the other side losing. The market it’self is, “zero sum.”
It doesn’t mean traders can’t make money because forex is so hard or something or that the market will eventually take it all back if you keep trading. Their are traders that consistently make money and keep it.
But, thats why people usually repeat over used phrases like that out of context, because they just got their ass handed to them in a trade and need an excuse to as to why they lost.
I agree with your last statement. I think if you have to worry about whether or not FOREX is a zero or negative sum game, it misses the point entirely. There is oodles of money to be made by anyone with the right skill set. There is more than enough to go around for everyone who can cut it.
hmmm, i just read the following in currency trading for dummies.
[I]Estimates are that upwards of 90 percent of daily trading volume is derived from speculation (meaning, commercial or investment-based FX trades account for less than 10 percent of daily global volume)[/I]
would really like to see some official stats on this stuff…
There may be truth to that when talking strictly of the spot market, but swaps are the single biggest volume area (especially in the London market) and that is generally not a speculative vehicle.
With demo accounts I have been doubling the amount of cash in the account every week or so.
Now you don’t tell me we cannot make money with forex because this is not true. With bullbearings trading I started with 100K and now I have more than 400K in that account.
Forex trading is a “zero sum game”. That means the only money in the Forex market is from the traders and institutions trading in the market.
If you buy a share of a company, that company (theoretically) produces a product, service, etc., thereby adding value (or loss if the company is not doing well) to your stock and your investment.
The Forex market does not work the same way – it is basically a huge pool of money that traders and institutions trade back and forth.
Since there are no “products or services”, there is no outside “gain” in value. All the money in the Forex market comes from traders and institutions trading in the pool.
If you understand this, you will understand why every “winning” trade is offset by a “losing” trade. If you made a profit from your trade, it means that someone else lost their trade.
But there are products and services in forex. What things cause demand for currency? well the GDP of a country… Is England producing Potatoes cheaper than anywhere else in the world? If yes then I wan’t a load of GBP so I can buy potatoes for my Chip Making Factory… Are the interest rates better in America? Yes? well I want to buy USD so I can invest them in T-Bills… Are production costs (Cost Push Inflation) rising in Germany? Well in that case I’m going to sell my Euros and look for producers in China…
An Economy is in essence a company. Just on a larger scale.
Forex is not a zero-sum game because there is always one winner in any forex transaction who you pay every time you place a fx trade. The broker through their spread.
