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February 26th 2009

Forex is a Zero-Sum Game

I recently stumbled across an article that argued that forex trading is not a zero-sum game. The author is (unwittingly) correct in his conclusion, although not in his reasoning that it is possible for a trade to produce two winners. The conclusion verged on truth only because after accounting for broker commissions (i.e. the bid/ask spread), forex trading is actually a negative-sum game. It is important to recognize that the nature of forex is such that all currencies cannot simultaneously appreciate, and hence, every trade involves a winning party and a losing party. Even if all parties manage to break even over the long run, the existence of spreads and commissions ensures a long-term average return that is negative. This does not mean that it is impossible to to profit in forex, but rather that the profits of the winners are underwritten by the losers. While one cannot expect to always occupy the winning side, there are steps that can be taken to minimize being on the losing side. Admittedly this is vague; the idea here is simply that it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are “fundamentally” sound.

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Posted by Adam Kritzer | in Investing & Trading | 12 Comments »

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12 Comments of “Forex is a Zero-Sum Game”

  1. Yohay Says:

    This two see saw is what makes forex so fascinating…

  2. Alan Says:

    Do you have a link to the article? I’d be interested in reading it – not because I think it could be true (how can it? it’s that kind of thinking that helped us get into the mess we’re in now) but purely out of interest.

  3. Samuel Says:

    That shows the importance of being well informed when you want to start trading… A lot of newbies fail because they don’t get those kind of informations which are really vital ! Keep On the good work ! Samuel.

  4. Forex Achieves New Prominence | Forex Blog Says:

    […] Of course, that also means that it will become more difficult to turn a profit, which is why “it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are […]

  5. Frank Says:

    It’s not a zero sum game because the currency market as a whole can appreciate or depreciate relative to other measures of value.

    For example, right now all forex traders are winning due to global deflation because no matter which currency you are holding you can buy more (tacos, real estate, etc).

  6. Giovanna Says:

    Hi Frank
    I think Adam was saying that each trade typically ends up with a loser and a winner, with the loser subsidizing both the platform and the other side of the trade, but when you look at the broader macroeconomics currency is just one form of wealth storage. What you are saying makes a lot of sense, that during periods of deflation the destruction of loans decreases the overall money supply and the value of the remaining currency in supply increases relatively.

    I wonder what type of inflation we might have in the next few years with the central banks being so aggressive in printing money and bailing out so many companies. When do we turn the corner on that and see inflation again?

  7. Alex Tibay Says:

    ” …it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are “fundamentally” sound.”

    …it is only half of the answer when some do trade base on “technical viability”. Like there is always two sides of the coin. Proper positioning is the key element, getting in a market is easy, getting out alive is the next best thing!

  8. Marcella Says:

    Actually, Forex is not a zero sum game because it does not have a finite ending point. It is not like a basketball game, which has a definite winner, loser, and end.

  9. Emed Says:

    not just forex, every financial market in capitalism system is zero (or negative) sum game. is money reproduce it self? no, it isn’t. place some money in your locked room for several time, did your money raise?? it will never, ever. btw it just sophisticated gambling.

  10. pedro Says:

    if forex is that bad, how it is possible that 3$ trillion are traded everyday?

    is everyone nuts?

  11. David Says:

    I think that Forex isn’t a zero-sum game we can make money but sometime we win and sometime we loose. Beginners loose money because they trading without any knowledge. Anyway do you remember link to that article?

  12. Sam Says:

    Of course – money is never generated in a forex trade, it is simply moved from one party to another.

    Marcella says that it’s not zero sum because it doesn’t have a finite end, well, the forex market might not have a finite end (though I’m sure it will end one day ;)), but your trade does!

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