Since NoDoji has been misinterpreted, it will be of value to quote her reply here: Trading, in other words, is a "zero sum game" only for those who aren't prepared. It is not by definition a zero sum game.
1. Company A will produce 1000 units of X in the next two months. 2. Company A shorts a futures contract to manage the risk of price fluctuation. 3. I buy the contract, because I am willing to take their risk in exchange for a potential gain. 4. In two months, the market is ready and willing to pay $2 more per unit than at the time of our transaction. --- Explain to me how this is a zero-sum game. Who exactly is the loser here?
If the CEO of company A shorts a futures contract, let's say wheat, he is in fact betting that the price of wheat will drop soon. If I buy the contract and the price of wheat increases, I make money. Where is that money coming from? From the CEO's pocket. If the price of wheat decreases the CEO wins and this time MY money goes into his pocket. Zero-sum game.
Or the price does in fact fall, after which the CEO covers his short at a profit by selling it to you. You buy it expecting that price will rise, which it does. You both make money.
The OI results in a zero PNL. Commissions are another matter. The sum of all contracts traded results in no wealth creation or destruction. Like conservation of energy as an analogy. They're derivatives and zero-sum as no futures contract is "inherited."
Company: Short futures + producing unit of X (which means more or less long X) You: Long contracts of X Price: Ends up $2 up. Result: Company loses on futures + gains on price of each units of X Net result: The gains coming from the rise in price of X are not materialized for the company because the futures contract 'reduced' the profit by the amount of the futures contract. This reduction in gain or profit is shifted to 'You' who was long the futures and taken from the company. Assuming a perfect hedge and no broker costs, the potential gains because of hedging were shifted to 'You'. from the company. In the absence of that hedge the company would have gained $2 value per unit of X which it didn't in this case. In other words the company locked in it's price of unit X when it sold futures short. The later gain in price is all shifted to the futures buyer. Hence a 'zero-sum' game. Although this example may not have been most lucid, I do believe what Db is trying to point out is something different. I am not certain what it is but perhaps he'll illuminate us later. Gringo Edit: It is quite possible for both to make money, but the idea isn't that two parties are playing a zero-sum game. The idea is that 'someone' loses and those loses are shifted to the winner. In the above response case as Db pointed out recently, where CEO buys back the contract after drop and makes money, the price of unit X is still dropping, lowering again the earlier profits on unit X. Now if a third party gets involved the loses could be shifted to that party and the first two participants may end up making money. But I am too rusty with this futures business and could make an error in judgement, so tread with caution. When CEO shorted, he sold to 'someone' who's losing money. When 'You' buys it at the bottom, and price goes up. CEO made money, and 'You' made money, but the sucker CEO sold short to 'lost' money.
But you said you disagree with point one. Positive expectation is necessary for consistent profits. What's the disagreement? So how many trades do you use to determine winrate and consistent profitability? People were performing successful tape reading long before charts came along. The notion that only charts can provide good trading signals is a strange one. Not a problem.