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Karen, just have a has a quick question. Yeah. He wants to know why Forex is often described as a zero-sum game, and wants to know whether it’s true that, in the sense that one person’s loss is another person’s gain and vice versa in the trading world. So thanks for the question, Karen.
It’s a great question. Something also to consider right is whether it’s true or not, whether that is really something that should affect the way that we trade or the way that we view the market. And let me explain why. So let’s first see why FX trading is usually considered as a zero-sum game.
So every trade that you place as a retail trader needs to have a counterparty. So whether the counterparty is another trader in a ECN or Electronic Communications Network or whether it’s a bank that acted as a liquidity provider or whether it’s your broker. In the case of a B-book setup for every trade that you take, there needs to be a counterparty.
So logically, if you place a trade and a bank, for example is your counterparty, if you win the trade, they are incurring that loss and vice versa, because they are the counterparty to that trade. So if you lose the trade, they are of course gonna make a profit from it.
So in that sense, it is a zero-sum game because every time somebody loses there is someone else that makes a profit. But keep in mind that not every trader in the market or rather, every position. Lets rather say not every position in the market is there to make a profit.
So a big part of the market, if I recall correctly, about 20% of all currency transactions are not speculators. It’s basically hedge, hedging or hedge traders. So meaning that the holder isn’t looking to make a profit, they’re merely trying to offset the risk in case of big currency fluctuations.
So in that sense, it’s not really a zero-sum game, in the bigger picture scheme of things as for, as far as things go in the spot market where we trade, it’s probably more skewed towards actually a negative sum game as opposed to a zero-sum game. And the reason for that is that the odds are always skewed against you as a retail trader, from the start, because think about it this way, you never start any trade at breakeven, right?
You always start every trade in a negative because you always need to account for the spread, as well as the commission’s so this is why something like investing in stocks are normally seen or not seen as a zero-sum game, because if you gonna buy, let’s say you have Apple, you buy Apple shares, actual Apple shares, as long as the company is growing, and the share price is increasing both you and the company you’re making money as the share price and the value of the company moves higher.
So you basically bought that stock as as long as the value of the company increases, both of you are making money out of that. Of course, if you gonna trade the S&P 500 as a CFD, and you don’t physically, own any stock, then you gonna be right back at a negative-sum game.
Now, from all of this, the more important question, as we said at the start, is where they really matter. So knowing that the odds are stacked against you as a retail trader shouldn’t really be a surprise for anybody. These days, you can’t go into any reputable brokers website without getting lots of warnings, that says trading is risky. And saying that almost 80% or more than 80% of traders who trade with that broker normally loses money.
So just by the fact that the odds are against us, it shouldn’t really come as a surprise, so to speak. The good news of course, is that if you can reach a point where, you are in that group of traders that are profitable, and with that, let’s also say consistently profitable rather those type of things shouldn’t really matter from a trading point of view.
Apart from, acting as a constant reminder, I think the important thing about knowing that is, it should act as a constant reminder on why it’s so important for you to always trade within your means.
Firstly, always protect your account by keeping your leverage low trading un-leverage and using stop losses and of course, performing proper risk management tools and know the odds are skewed against us. Or that we actually trading in a negative sum game. It should act as a warning for us saying that listen this is risky.
But of course, as long as you keep to the rules, you stick to the process and you trade profitably and consistently profitably, it shouldn’t really be something that’s a deal breaker, so to speak.