So many people think that forex is zero-sum game i.e which means when one lose other wins but here in forex everyone can win if they can manage their trades well but i dont know why people used to call zero-sum game?
Any body can help why so many people call this zero sum game?:5:
Each game has zero sum if you count all players.
Forex Trading cannot be zero sum game just for traders. It is zero sum game if we count broker’s profits
you know the statistics that more than 90% of traders lose money in Forex so brokers earn from more than 90% traders.
So you cannot actually say that >90% traders lose money which are shared between successful traders.
The truth is: >90% traders lose money which are shared between brokers and successful traders and I strongly believe that brokers take most of money.
<the amount lost by traders> = <the amount earned by traders> + <the amount earned by brokers>
P.S. Yes, you can become a successful trader if you can mange your traders well, but I’d not call Forex zero-sum game for traders
Because financially retail forex trading IS a zero sum game - negative sum after factoring in spreads and/or commissions as noted by bteofx. This is not an arena where the market can lift (or sink) all boats like stocks. This is a market where there is a short for every long, so when one trader is winning, another is losing.
rhody its zero sum in the two body equation. I win a trade, make a profit. so someone else where loses the amount of the profit.
But given time effects, and that there are more than two bodies trading, it’s no-longer a zero sum game, although it does run the risk of “always a bigger fool” moral hazard (ie like residential house investing). So as a 3+ body problem, it is possible for the people to keep gaining advantage, this is also possible is that there is no finish line, as people come in and drop out all the time, with different [volatile] currency values.
In a way, the only way to lose is not to play (or play poorly)…like mattress stuffing or productive labour for a living (just doesn’t keep up with the inflation and the governments harvesting savings equity)
If it’s a zero sum for a 2-body equation, it must also be zero sum for an N-body equation. It is the structure of the market being liability based (like futures) rather than asset based (like stocks). In an asset market where most of the participation is by holders of the asset, the market as a whole can gain or lose wealth when prices rise and fall. That’s why the press talks about how much wealth was lost in the stock market when it makes a big decline. In a liability market, since every long must be matched by a short, it doesn’t matter what happens to pricing. There is no change in overall wealth because one side gains the same amount the other side loses. Retail spot forex is a liability market, not an asset market, since no currency ever actually changes hands.
To bring in the 3-body example…
Trader A is long and Trader B is short for EUR/USD 1.30. The rate rises to 1.40. Trader A is thus 1000 pips in the profit, and B is -1000 pips. Trader A wishes to take his gains. In order to do so, either Trader B must also be willing to close the trade (assuming any defined contract time frame has not been met), or Trader A must fined another trader to take his place in the position. Say Trader A finds Trader C to go long EUR/USD at 1.40 (effectively meaning A goes short, but on net he’s flat, of course). If EUR/USD falls, to 1.2000, then Trader B goes from -1000 pips to +1000 pips, but Trader C is then -2000 pips. On net, the total profits are 0: +1000 (Trader A) + 1000 (Trader B) - 2000 (Trader C)=0. If EUR/USD were to rise to 1.50, then Trader C would be +1000 and Trade B would be -2000. Again, net profits for the overall market are 0: +1000 (Trader A) - 2000 (Trader B) + 1000 (Trader C)=0.
Add in as many traders as you like, and have them come and go however you like, and it always adds up to zero.
No it’s not.
that’s why a 3-body relationship is unsolvable, unless it’s reduceable.
Take x + y = 5. If x is 2, you can “zero-sum” ie calculate y.
But if x + y + z = 5. If x is 2, then what is y? you can’t tell because it’s a three body system. you have to know or be able to relate y or z to one of (x, y or z) and thus create a two body relationship.
A series of 3 two-bodies relationships, is still only 2 body relationships. eg 3(x+y) = 15. x is 2. y is predictable.
However in the forex I can put in 2000 off my visa, make 100% in 20 days, pay off my visa, make another 100% (still have issues on how to calculate the yield on that…). And yet because of the inflation and position fluctuations, others might not have lost as much, and when I close a poor trade their return can cover some of their loss meaning that person is up. yet their currency might also lift, so when they stop out a few pips but are still in profit, the person who originally transacted my profit, might also end up in profit.
Otherwise, all the money will end up speculative and production equity would be totally destroyed. Likewise with futures, the market has to bring value-add otherwise it will collapse (steal the profits) from it’s underlying fundamentals.
In spot retail forex, as in the futures market, there MUST be an equivalency of longs and shorts. I cannot be long if there isn’t someone to agree to be short on the other side. You cannot be short unless there is someone (or multiple someones) taking the long side. Thus x+y=0, or x+y+z=0, or x+y+z+…+n=0. You may not be able to solve for y given x, but that doesn’t change the overall product of the equation being zero.
However in the forex I can put in 2000 off my visa, make 100% in 20 days, pay off my visa, make another 100% (still have issues on how to calculate the yield on that…).
All of your profits coming in the form of losses from other traders…
And yet because of the inflation and position fluctuations, others might not have lost as much, and when I close a poor trade their return can cover some of their loss meaning that person is up.
Inflation is exogenous to the retail spot forex market, thus is not part of the zero sum equation (and besides, negatively impacts all who hold financial assets).
As for the position fluctuations, although [I]some[/I] others might not have lost as much as you gained, as a whole the market must have been net exactly oppositely balance against your positions (x+y+…+n=0), so the market will have lost as much wealth as you gained.
… yet their currency might also lift, so when they stop out a few pips but are still in profit, the person who originally transacted my profit, might also end up in profit.
Their currency meaning the one in which their account is denominated? If so, then again exogenous to the retail spot forex market. Any change in wealth from exchange rate variation of that kind is based on holding that currency as an asset, which is somewhat like taking part in the inter-bank market, though obviously on a small scale.
Otherwise, all the money will end up speculative and production equity would be totally destroyed. Likewise with futures, the market has to bring value-add otherwise it will collapse (steal the profits) from it’s underlying fundamentals.
Retail spot forex IS primarily speculative. There is very little hedging activity (if any) in that market. Such action (and other “business” activities) takes place in the inter-bank market, which I have already noted is not zero-sum because currency actually trades hands, which isn’t the case in retail. These days there is also loads of speculative activity in the futures market, but there remains a goodly amount of hedging, which brings the value-add you note. Even there, though, there is no net wealth creation or destruction.
Hence the importance of noting the time and three-body effect.
But I simply do not have the interest in investing the time to catch you up on the maths and science qualifications if you can’t follow it.
Although if you’re saying retail forex exists so big fish can stophunt and pipout using their teir2+ accounts perhaps you might be on to something. Would explain why FXCM changed the rules about hedging after I was making above average profits (7-15% per day, 2 weeks; 90% of 3 months at >3% per day). So I must have been clearing out lots of folks…
I’ve been involved in forex since the middle 90s and I’m currently doing a PhD in this stuff, so I think I’ve got a pretty good handle on it.
Although if you’re saying retail forex exists so big fish can stophunt and pipout using their teir2+ accounts perhaps you might be on to something. Would explain why FXCM changed the rules about hedging after I was making above average profits (7-15% per day, 2 weeks; 90% of 3 months at >3% per day). So I must have been clearing out lots of folks…
I take it you’re referring to FXCM introducing margin in “hedge” trades. I think it’s nuts that someone with zero directional risk should be posting margin. But of course since any trades that can be done in a hedge fashion can also be done in a non-hedge fashion, one can quite easily get around that margin requirement.
Congrats on your profits, but the change was made due to unrelated reasons
Essentially what we found happening is that position sizes in a clients account could become inadvertently large which could cause a margin call when closing out one side of the hedge if account equity dropped in the meantime. Hedging a position in the current format would free up the margin allowing a trader to trade more. If the trader loses on the new position, that means the trader would likely not have enough available margin to keep positions open when one side of the hedge is closed. It defeats the purpose since traders with hedges often close out one side of the hedge when they think the market will turn around at that point to decrease the loss on one side of the hedge. Instead a margin call would result if there isn’t enough margin to keep the remaining side open.
Hope that helps clear it up, and let me know if you have any questions.
I think it’s nuts that they expect to park equity there and then gamble that the market will go one way, rather than use the standard tools to reduce risk, and get paid when the market moves one way then the other - which I’ve noticed it tends to do.
And if you studied a bit longer, you might realise that FXCM aren’t talk “pure hedges” they’re talking anywhere that there’s a Buy position and a Sell position on the Same pair. straddles, or even old trades you’re hoping will pan out eventually.
[B] It’s calculated on the Summary,[/B] if you have X Long, and Y Short. They take the used margin for whichever is the greater (X or Y). Where normally if you 20k GD Long (entered @1.6), and 10k GD Short ([email protected]) [crazy numbers, but used as example] then your used margin (and fluctuation in your usable margin) will show the 20k Long position (or possibly the 10k Short if thats a bigger loss - trying to get them to say which). as the market moves, so will your usable margin - the hedge will no longer allow your equity gain from one side to match loss on the other.
I suppose it could be argued that the above article is too narrowly focused being as it only relates numbers from US brokers. Maybe the rest of the world has a worse percentage stemming from a variety of sources (broker fraud, lax regulation, etc.) but at least for the US market, I would consider the numbers reliable as they come directly from the brokers themselves. Also, with the trend being down on profitability, that (in my mind) lends more weight to the numbers as presented.
Lets make that while zero sum counting all traders may apply at one time if all postion were simultaneously closed at once for all involved parties, that’s not what happens in the living market. Market makers are always taking drawdowns on trades they have to hold, and then eventually let them go when they reach some kind of profit. It is all about the time that expires between the trades, your opening a position may be someone else closing their’s at some kind of profit because they opened their position a long time ago at a more negative price, and want to cash in on TP. Yes, there are people that lose their positions becuase of hitting their SL, but the resulting trade doesn’t mean the other side is the same person\entity who originally traded that with them when they first opened the trade. And when you close a trade at a profitable TP level, that doesn’t mean the opposite side just took a loss, because they may have opened there side at a better price. Many traders buy when the price has already been going up in a trend, the people selling to them probably were taking their profits, that doesn’t mean the trend ends, there is still opportunity for the price to continue up for profit, then when that trade is sold the buyer may still be able to continue to ride the trend. There are probably a lot of losses at trend reversals, and retracements. Market makers do scale themselves in when using there own capital, almost like martingale, and also use a Delta hedge on the six majors to keep there books balanced, and have plenty of vast reserves to move the market if their margins feel threatened. So, in that respect, it is us versus them, but you still have opportunity as all others, to profit. There isn’t three parties by the way, there are millions, and that with the combination of simple time makes all the difference, and makes it impossible to define.
The real problem with those numbers is that they only represent a snapshot for each quarter. They do not tell us whether the same accounts remain profitable quarter after quarter. As a result, you cannot say that 39% of accounts are profitable in general, only that they were profitable over the given 3 month period. I’m not saying it proves the 90% fail thing, but it doesn’t disprove it either.
Provide me with an example of how you set up one of these positions using “standard tools” to get paid when the market moves to and fro.
And if you studied a bit longer, you might realise that FXCM aren’t talk “pure hedges” they’re talking anywhere that there’s a Buy position and a Sell position on the Same pair. straddles, or even old trades you’re hoping will pan out eventually. [B] It’s calculated on the Summary,[/B] if you have X Long, and Y Short. They take the used margin for whichever is the greater (X or Y). Where normally if you 20k GD Long (entered @1.6), and 10k GD Short ([email protected]) [crazy numbers, but used as example] then your used margin (and fluctuation in your usable margin) will show the 20k Long position (or possibly the 10k Short if thats a bigger loss - trying to get them to say which). as the market moves, so will your usable margin - the hedge will no longer allow your equity gain from one side to match loss on the other.
I haven’t traded with FXCM in many, many years, so I have no idea how they show positions these days. If, however, you go long 20k and short 10k you’re net long 10k, so not hedged (at least fully so), meaning you have a 10k long exposure and should be posting margin based on that since changes in the rate will most definitely change the value of your account and by extension your usable margin.
Actually, it is. All parties are constantly marked-to-market, which is functionally the same as netting out all positions at the same time.
Market makers are always taking drawdowns on trades they have to hold, and then eventually let them go when they reach some kind of profit.
Market makers are making the bid/ask spread (for the most part). It is they who make the market negative sum for everyone else, because they are constantly extracting the value of the spread out as transactions are done. If no new money were ever added to the market by traders, over time the total pool would slowly drain away because of this.
It is all about the time that expires between the trades, your opening a position may be someone else closing their’s at some kind of profit because they opened their position a long time ago at a more negative price, and want to cash in on TP. Yes, there are people that lose their positions becuase of hitting their SL, but the resulting trade doesn’t mean the other side is the same person\entity who originally traded that with them when they first opened the trade. And when you close a trade at a profitable TP level, that doesn’t mean the opposite side just took a loss, because they may have opened there side at a better price.
Time has nothing to do with it.
When a trade opens, one party (Trader A) agrees to be long and the other party (Trader B) agrees to be short. At some point, one of the parties will want out of the commitment (stop hit, target reached, etc.). To do so they enter into a second arrangement whereby they put on a reverse position. Let’s a Trader A wants to exit his long. He then enters a short position with Trader C (this is what actually happens, though your broker shows you out of the market - unless you’re using hedge accounting). This cancels his exposure (nets it out to zero) and creates a situation where Trader C is now the other side of Trader B’s short position. Up to the point where Trader A closed the trade, he and Trader B were perfectly offset in that whatever Trader A made in profit, Trader B experienced as a loss, or vice versa. Now that Trader C is matched to Trader B, any market moves will see the two experience negatively matched performance. You can expand this out to millions of traders, but it all comes out the same. Because there must be a long for every short, and vice versa, there is always half the market benefiting and half the market being hurt by any given market move.
Many traders buy when the price has already been going up in a trend, the people selling to them probably were taking their profits, that doesn’t mean the trend ends, there is still opportunity for the price to continue up for profit, then when that trade is sold the buyer may still be able to continue to ride the trend. There are probably a lot of losses at trend reversals, and retracements.
You’re thinking of retail forex like the stock market, which it isn’t. There’s no buying or selling of anything. There are longs and matching shorts. If the market is trending up, the longs are winning and the shorts are losing.
I dont know the way it goes … but i think yes it should be the same as exchanging real money in any moneychanger … one buy the other sell … but the real question is that how come a single candlestick can get real bullish when there is more buyers than sellers …
Retail spot forex is not like exchanging real money. It’s not an asset market like stocks or the inter-bank spot market where real money does change hands. It’s an obligation market where two parties agree to a future exchange which never actually happens. Different animal. If they were the same you wouldn’t see anything like the kind of leverage you see available.