Forex Foreign Exchange

This is a question often passionately debated in the Forex community, so it’s time to put things in their perspective. The definition of a zero-sum game is an event or situation in which a participant’s gains must be matched exactly by the same loss amount incurred by a competing rival.

Many traders consider incorrectly that Forex is a zero-sum game. They have mainly obtained this opinion from the vast amount of misinformation that is published on the internet and in print. In order to resolve this confusion, let us consider some simple and clear examples about what comprises a real zero-sum game.

Suppose you and a friend decide to make a bet on an event that can only have two results such as tossing a coin. Imagine that you both wager $10 and place the total $20 in a safe place. After the toss is completed and the result recorded, consider that you win and claim the full $20 prize making a $10 profit in the process. However, your friend would have lost his $10 and would walk away from the bet with nothing. In addition, there will be no money left in your safe place as well at the end of this event. In conclusion, you would have just taken part in a zero-sum game because there could only ever be one winner and one loser.

So, does the Forex exhibit the same features? This question can be answered clearly by the following example. Suppose you made a decision to trade the EURUSD short. Simultaneously, another trader opts to trade the same pair long with an equivalent bet using the identical broker. The broker would then match the two new positions whilst claiming the spread as a profit.

If the Forex was a zero-sum game, in the definitive sense, then at some later stage either you would win or loss whilst the other trader could only obtain the exact opposite result. In other words, there could only be one winner and one loser. Suppose you’ve won this trade, than you would earn the total combined wager of both you and the other trader, whilst the other trader would receive nothing.

However, the Forex market clearly does not operate in this way and as such cannot be considered a zero-sum game. For instance, in the previous example, you and the other trader can both win or both lose. You may consider incorrectly that the only outcome of such an event is that only one of you can win.

However, this is incorrect because the EURUSD could move down initially resulting in a win for you. The pair could then reverse direction sometime later resulting in the other trader’s long position also recording a profit assuming that it was not stopped out by the initial down movement.

In addition, your Forex broker could also realize a profit from claiming the trading spreads. As this outcome clearly demonstrates that this event could generate as many as three winning parties and no losers, the Forex cannot be considered as a zero-sum game in any context.

Some people still strongly make the following argument that Forex can be considered as a zero-sum game. When you decide to buy EURUSD, you are activating a contract to purchase Euro whilst another trader does the equivalent by buying the equal amount of USD. As both of you cannot withdraw your purchases until after your contracts are closed with winning positions, this is the basic argument for stating that Forex is a zero-sum game.

However, this viewpoint completely overlooks the fact that there are many variations whereby both you and the other trader could both be winners or losers from this situation. The predominant concept to remember is that both of you have not taken out contracts with each other but with your Forex Brokers. These important points clearly negate any argument claiming that Forex is a zero-sum game.

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