Foreign exchange trading is popular among people who want to expand their margin of profitability. Its lucrative space offers just enough positive outcomes, and the returns are frequently immediate. As much as it is viewed as a potent space for profit, however, it can also bring serious financial stagnation.
This claim is specifically valid if we look at forex using the concept of a zero-sum game, a game theory that is imperative in trading specific financial instruments. Here, we discuss the idea at length.
The Zero-Sum Game Concept Simplified
Simply put, the ratio of wins and losses in the market is just equal. For every successful trade, there is a corresponding loss tallied by another trader. As a result, the correlation between gains and losses in the market is zero, hence the name.
The concept is applicable in most of the gambling we know, with poker being the classic example. Say that two players bet $100 for a round. When one loses his bet, the other one takes it. Since the gain of one is the loss of another, there is no presence of any practical value for both players.
Foreign Exchange as a Zero-Sum Game
Now, the same can be true for forex trading. Currencies are traded in pairs, and a single trade requires another transacting party to either buy or sell the pairs. It does not necessarily have to be an individual; a counterparty may be as large as a banking institution. Regardless, trades require a buyer and a seller.
The premise is simple: a trader’s win is a loss for its counterparty. Or it could be the other way around. Whichever is the case, the transaction has not established any sense of collective gain as there is a corresponding loss for every earning.
The Relevance of the Zero-Sum Concept
Many choose to believe that forex trading works through this concept. However, it varies according to persisting purpose and conditions. Take into account the history of forex, which was only accessible by large financial institutions before the public was given all-out access.
To date, almost anyone with reliable bandwidth and a capital can share a percentage of a particular currency, which means many traders pursue profitability even at the expense of someone else’s funds.
Other Opinions About the Zero-Sum Concept
In criticism of the zero-sum concept, some traders refuse to consider it the de facto case. Some believe that trading is a positive-sum game, which forwards the idea that someone in the market does not necessarily take the negative blow of another one’s profit.
For example, a trader who buys euro today and sells it the following day for a relatively higher price has earned a percentage. The seller, who bought it at a relatively low price before selling, also earns a percentage. With that, both the buyer and the seller have benefited.
There is also the belief that forex is a negative-sum game, which means profits and losses, when added collectively, are still below zero. This perspective then creates tighter market competition as the only way to stay winning is by taking advances from another party.
This concept is gleaned from how brokerage fees charge additional fees for different transactions.
Say, for example, a broker that employs a huge workforce charges additional fees to compensate. With this, buyers and sellers utilizing the broker’s platform have more losses than they actually record during trading. Collectively, both share the same level of loss as they are charged with the same amount of transaction fees.
What’s Your Next Move?
There are multiple ways to approach financial markets if you plan on entering soon. One of the best ways to help you decide is by looking at it as a zero-sum game. For every profit made by a trader is a loss tallied by another.
The exchange might not be as immediate. But if you look at it collectively, such is the case, especially for spot trading, which involves a high level of speculation.
Whatever your move will be, take your trading with Fair Forex. We help you gain desirable outcomes through trading tools, platforms, and a wide selection of accounts. We also offer a free demo for new users. Register now to get started.