Trading Forex Is A Positive Sum Game

Discussion in 'Forex' started by dewton, Nov 15, 2012.

  1. dewton


    Trading Forex Is A Positive Sum Game

    by Richard Olsen

    Have you ever played dice with a friend? Betting a fixed amount of money each turn, you win if the number on the top face of the die is one, two or three, your friend wins in all the three other cases. At any single point in time, the sum of all the profits and losses amount up to exactly zero. This is an example of a very simple zero sum game.

    A more precise definition is that a zero sum game is a [mathematical representation of a] situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s).

    On a first observation, the combination of the example and the more formal definition leads to the conclusion that the utility is represented by the amount you win or lose. This is the first misconception. In many cases it is convenient to assume that this equality holds (like in the game of dice) but that is not generally the case.

    Think of a large multinational institution that has exposure in many different countries, hence exposed to fluctuations in the respective currency rates. For proper financial planning this institution hedges a part of its exposure. The counter party might be a normal retail trader (although quite unlikely) with a different goal in mind. The utility of these two counterparties could not be more different: the institution 'does not mind' losing (regarding its utility) while the retail trader wants to profit from this single trade. In this scenario, the utilities of the two parties are not offset by each other because if the hedge is carried out perfectly, the institution is 'flat' while the retail trader wins.

    Regarding utility, all trading activity is by definition a positive sum game: when two parties agree to make a trade, each of the parties considers the good it is receiving as more valuable than the good it is delivering.

    For the further discussion, let's assume that utility is represented by the financial loss/profit. A short term trader can sell his position to any another participant, regardless of the investment horizon of the counterparty. Contrary to playing dice, there is no 'round end' when one sums up profits and losses. This means that the short term trader as well as the long term trader (as well as the broker/market maker) can make a profit on the position. The markets are an infinite (and not finite) multiplayer game.

    Finally, it does not make sense to view the FX market isolated from the 'rest' of the economy. The currency market as a whole can appreciate or depreciate relative to other measures of value (commodities, resources, …), i.e. both EUR and USD can appreciate with regard to grain. Hence, the trader long EUR and the trader long USD both make an objective profit (with regard to grain).

    Trading forex is a positive sum game because market participants trade with different subjective measures of 'value' called utility and may have different time horizons, in such a way that both parties can realize a profit. This, however, does not imply, that the majority of traders lose money in the markets; this is due to other reasons and worth another article.

  2. Forex can't be defined with a equation or game. Someone winning and someone losing that doesn't necessarily bring equilibrium to the market. Everyone can be a winner here if market is judged well. So, does that mean market will have a unstable phenomenon? I think that's a pretty bad idea to think like that.
  3. FX_Gigi


    I think Forex is not the game of numbers it is the game of planning and strategies. We can plan forex in right direction and we can succeed otherwise not.
  4. Dr. Olsen is FOS. Again. No surprise there.

    FX trading can be an apparent positive sum game due to traders' accounting under different numeraires. See Siegel's paradox. However, denominated in corn or the global standard commodity (Sraffa), FX trades remain zero sum or negative sum after transaction costs.
  5. ssss


    Statistic of FXCM

    more as 40 month competitions

    70 % of 5000 Account's lose money in one month King of the micro
    competition ( most of them have account equity 500-1000 $)

    one person win approx 1000 -3000 %

    Your respectfully
  6. Yes right, Forex requires proper strategies and plans so that trading can be done properly. Trader should make and follow trading plans with proper discipline to achieve their goals of earning good profit.