Is Forex Trading a Zero-Sum Game ?

By | August 16, 2014

For those of you who don’t know, a zero-sum game is defined as a situation in which one person’s gain is equivalent to another person’s loss. Just to give you an example, if trader A wins $5k on a long Eur/Usd position, the zero-sum theory holds that the money came from one or several traders who lost that amount having a short Eur/Usd position.

Approaching forex trading from a zero-sum game perspective might change one’s focus from the market towards the other traders. If, for instance, trader A is long the dollar, all the traders who are short become his enemies, people who are out there to take his money away from him. So what does he do to protect himself ? He finds other  traders who are also long the dollar and searches the internet for news and analyses which reinforce his belief that he is in the right trade. Instead of trading being just between himself and the market (which is impersonal), he transforms it in a fight between himself and his group against the rest of traders.

Is that the correct way of looking at trading ? Is it a fight between longs and shorts ? No and no.

I don’t believe that trading forex is a zero-sum game. Forex is a market with an average daily volume of more than $4 trillion dollars. It has a wide variety of participants that we can divide in two categories. The commercials, from the British  holiday-maker who needs to buy Euros for his visit in Paris to big firms like Amazon or Google who buy dollars when they repatriate overseas profits. The non-commercials, from the beginner trader who tries his hand with a $500 account to the big banks and hedge-funds who deal in billions.

Now that we have the big picture, I hope it becomes obvious that it’s not necessary at all for someone to lose in order for trader A to win his $5k on Eur/Usd.