Forex is a fast-paced market that promises lucrative outcomes in a short time. But many experts suggest that newcomers think twice before entering the market. They argue that Forex is a zero-sum game in which a beginner is bound to lose for a proficient to win.
Forex isn’t always a zero-sum game. If you consider the additional fees when you open a hedging position or use leverage, it can be a negative-sum game. In the long term, it can also be a positive-sum game if a trader is patient enough to see prices go up. So, both the seller and buyer can profit.
This article presents different scenarios in which Forex can be a zero-sum, positive-sum, and negative-sum game. It also explains how these concepts affect your trading.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is a Zero-Sum Game?
A zero-sum game refers to a game where, for every winner, there has to be a loser. So, if a trade is zero-sum, every trader loses the same amount that another trader gains. In other words, if we add up the losses and gains and subtract from each other, the final result will be zero, hence the name.
An example of a zero-sum game is poker. Suppose two people bet $100 each, and at the end of the game, one person walks away with $200, and the other person gets $0. That’s because one person wins $100, and the other one loses $100; there’s nothing in between.
In this sense, a zero-sum game is different from a win-win game, which creates value for both players.
Forex as a Zero-Sum Game
So the question is now if one person’s profit in a Forex trade equals another person’s loss. Trading in Forex takes place in currency pairs. For every trader, there has to be a counterparty who buys or sells that currency pair. These counterparties could be a bank, a broker, or another retail trader. The important point is that for a trader to win the trade, the counterparty has to lose and vice versa.
In Forex, people make money by betting on the future movement of a currency pair. If a person predicts that a currency will go up or down against another, they can make money by closing the trade.
Suppose you think a currency’s value is going down. The counterparty is a trader who thinks that currency’s value is going up. Only one of these predictions can come true. So, if you win, the other party will lose. That’s when Forex is a zero-sum game.
However, this is not always the case. One argument against Forex being zero-sum is that not all Forex participants trade based on speculation. For example, tourists change their currencies to another when they go on holiday. Market movements don’t affect them while they’re away. So, after returning, they can again change their extra cash to their national currency regardless of the movement.
In the following situations, Forex can be a negative-sum or positive-sum game as well.
Forex as a Positive-Sum Game
For a person to make a profit in this market, does another person have to lose money? Not necessarily.
Suppose a trader buys a euro for 1.2670 and sells it for 1.2768 the next day. This way, they make 98 pips in a day.
So, what about the seller? What if the seller had bought the currency at 1.2600 a few days before selling? This way, they also made a profit of 70 pips. So, a person’s gain doesn’t mean the other one’s loss.
One might argue that if the seller hadn’t sold their currency and held it for another day, they would make more profit. So, they were at a loss. But that’s not logical reasoning in trading, where we don’t consider potential losses or gains. We don’t talk about how it could have been, but what happened.
Let’s consider another scenario. Suppose a trader takes a short position on USD/EUR and another trader enters a long position on this pair. That’s a perfect scenario for the broker since they can receive the spread and keep a flat position.
In this scenario, there’s no need for one trader to lose and the other to win. For example, suppose one of them has entered a long-term trade, and the other has started a short-term trade. The latter may profit with their short-term trade, but the former doesn’t have to lose their trade.
So, if the first trader waits long enough for the prices to reverse, they can also profit. In this case, the broker and both traders made money, proving Forex to be a positive-sum game. Thus, your win doesn’t have to be another person’s loss. Instead, your exit equals someone else’s entry and vice versa.
Forex as a Negative-Sum Game
Some people disagree with Forex being a zero-sum game and argue that it’s a negative-sum game. In their opinion, the fees retail traders have to pay brokers make them start the trade below zero and not at a breakeven.
They also claim that not everyone opens a position to make a profit. Some traders open positions to hedge against risks. Imagine a person has opened a long position but doubts the market will move in that direction. So, they open a short position on the same pair to avoid losing money. Here, the trader doesn’t make a profit; they just don’t lose money. But the fees, commissions, and spreads they have to pay, make it a negative-sum game.
Another reason contributing to Forex traders losing money is leverage. Forex investors see leverage as a double-edged sword because it can help you make huge profits or simply drain your account. You borrow money from a broker hundreds of times larger than your deposit, hoping to make a profit that you would never make with your original capital.
The problem with Forex is that traders aren’t buying and selling physical currencies. Instead, they take positions in the movements of currencies.
With leverage, it’s like a trader buys an asset worth 1000 dollars with 10 dollars. The remaining $990 is provided by the broker as the leverage. But, if the currency’s value drops, the trader is on the line for the whole 1000 dollars. That means if the asset’s value drops by 10%, the trader will lose 100% of their money. So, if the trader doesn’t know how to use leverage, they’ll end up blowing their deposit.
How Does It Matter?
So, Forex can be a zero-sum, positive-sum, and negative-sum game under different circumstances. It all depends on the trader and how they go about entering the game. However, Forex is a zero-sum game where the total amount of money circulating in the whole market doesn’t change. Whenever a trader closes a trade with loss, another trader might have potentially closed a trade in profit.
But the Forex game doesn’t have to involve an absolute winner or loser because, with enough knowledge and experience, everyone can make a profit.
Of course, most traders who lose money in Forex are either inexperienced or don’t have deep enough pockets to tolerate failures until they make profits. These novices want to hit the jackpot overnight.
So, if you want to win in this game, make sure to enter the market with knowledge, skills, and risk-management tools. Have enough patience, self-discipline, and consistency to tolerate drawdowns and use tools like leverage wisely. This way, you can establish yourself as one of the 10% winners that oust the other 90% out of the game.
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Conclusion
As a whole, Forex is a zero-sum game due to the relatively fixed amount of money circulated every day. But under different conditions, it can be a win-win or lose-lose game for both traders on each end of the trade.
If you’re patient and knowledgeable enough, you can make sure to profit without incurring loss to another trader and vice versa.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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