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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Foreign exchange (“Forex”) trading is a complicated thing. The foreign exchange trader should take into account what may be called the basic factors of a country’s economy (i.e. the qualitative factors that may have a bearing on its currency’s exchange rate). So, what are such basic factors? They contain political developments (such as changes to a country’s government’s economic policy) and appropriate resolutions made by a country’s central bank. They also include any relevant pieces of economic news affecting the country in question. The Forex trader should not only be aware of this information at an early stage, but to efficiently “second guess” how the money markets will react to it. It would perhaps be not so smart for traders to ignore these fundamental elements and to just ground their market decisions on technical analyses.

Approximately three trillion dollars is traded every day on the foreign exchange market, creating it the world’s most liquid market. FX trading is quite different to stock trading. For example, in the Forex market, currencies are “paired” in that when one is bought, the other is sold, and vice versa. As such, investors may find FX trading to be a beneficial means of diversifying their investment portfolios.

A number of aspects make the Forex market unique (in addition to its liquidity, spoken above). These include the fact that the market operates 24 hours daily, 6 days a week, and that traders in the market usually generate low benefit margins (when compared with other markets).

The Forex market has changed quite dramatically since participation was started in the 1970’s; now, it is not just the banks, but a range of institutions that every day take part in the market. If you do select to operate in this market, you would be well advised to enroll in a reputable course to learn the nitty gritty of the complicated world of currency trading, find out about the different ways that this could be done and to consistently apply Forex trading strategies that function.

The important factors that a Forex trader should consider when conducting a fundamental analysis of a country’s economy include that country’s GDP, employment rank, trade balance and most recent budget. Much of this information is publicly available online.

The results of a basic analysis could influence a trader’s course of action in a number of ways. For example, a trader may employ basic analysis to define or predict the direction and extent to which a given country’s official interest rate can change. Grounded on this analysis, the trader may sell the state’s currency if he/she foresees interest rates will cease, or purchase the country’s currency if he/she predicts interest rates will increase. Certainly, large investors may take this matter a step further by searching for effectively influence the value of a country’s currency. For example, such investors could fund industrial development in a country and subsequently sell back that country’s currency at a higher rate.