| Author |
Message |
Alan Connor
Guest
|
 Posted:
Wed Oct 26, 2005 8:01 am Post subject:
Is Forex "zero sum"? |
|
|
I've read that Forex is a "zero sum" game.
Let's say one speculator buys EUR/USD at 1.1930, then later sells it to me
at 1.2079. I then sell it to someone at 1.2105, who later sells it at 1.2121
to a buyer that sells it at 1.2099.
3 winners, 1 loser. How can that be "zero sum"?
|
|
| Back to top |
|
 |
David Wilkinson
Guest
|
| Posted:
Wed Oct 26, 2005 8:01 am Post subject:
Re: Is Forex "zero sum"? |
|
|
Alan Connor wrote:
| Quote: | I've read that Forex is a "zero sum" game.
Let's say one speculator buys EUR/USD at 1.1930, then later sells it to me
at 1.2079. I then sell it to someone at 1.2105, who later sells it at 1.2121
to a buyer that sells it at 1.2099.
3 winners, 1 loser. How can that be "zero sum"?
In every deal there is a buyer and a seller. If the price subsequently |
changes then one is a paper winner and the other is a paper loser. In
your 4 deals there are 4 buyers and 4 sellers, and potentially 4 winners
and 4 losers.
Take the first deal. Speculator A sells to B at 1.1930. The price goes
up to 1.2079 so B makes a notional paper profit. A has missed the rise
so he would make a loss if he bought back at the new price. Note that B
has not made any money while he still holds the EUR. He only makes a
gain or loss when he completes the second deal and sells again. If he
sells back to C, who might be A, say, then B makes a profit and A/C
makes an equal and opposite loss from selling when it was low and buying
back when it was high.
If you take a pool of dealers buying and selling to each other then no
one is putting in any new money or adding any value. Some will make a
profit and some a loss and the capital will be redistributed between
them. This is a zero sum game, like poker.
Of course this is an idealisation which ignores fees and commissions.
For every deal there will be some costs so the winners will win slightly
less than the losers lose. This means it is actually a negative sum game. |
|
| Back to top |
|
|
News
Guest
|
| Posted:
Wed Oct 26, 2005 4:00 pm Post subject:
Re: Is Forex "zero sum"? |
|
|
"David Wilkinson" <david@wilkinson6337.freeserve.co.uk> wrote in message
news:djn8gk$eu8$1@newsg4.svr.pol.co.uk...
| Quote: | Alan Connor wrote:
I've read that Forex is a "zero sum" game.
Let's say one speculator buys EUR/USD at 1.1930, then later sells it to
me
at 1.2079. I then sell it to someone at 1.2105, who later sells it at
1.2121
to a buyer that sells it at 1.2099.
3 winners, 1 loser. How can that be "zero sum"?
----------------------------------------------------------------------------
In every deal there is a buyer and a seller. If the price subsequently
changes then one is a paper winner and the other is a paper loser. In your
4 deals there are 4 buyers and 4 sellers, and potentially 4 winners and 4
losers.
Take the first deal. Speculator A sells to B at 1.1930. The price goes up
to 1.2079 so B makes a notional paper profit. A has missed the rise so he
would make a loss if he bought back at the new price. Note that B has not
made any money while he still holds the EUR. He only makes a gain or loss
when he completes the second deal and sells again. If he sells back to C,
who might be A, say, then B makes a profit and A/C makes an equal and
opposite loss from selling when it was low and buying back when it was
high.
If you take a pool of dealers buying and selling to each other then no one
is putting in any new money or adding any value. Some will make a profit
and some a loss and the capital will be redistributed between them. This
is a zero sum game, like poker.
Of course this is an idealisation which ignores fees and commissions. For
every deal there will be some costs so the winners will win slightly less
than the losers lose. This means it is actually a negative sum game.
--------------------------------------------------------------------------- |
It is a negative sum because both the buyer and seller are paying fees
and commissions. This will reduced not only the winners' net winnings
but will increase the losers' losses.
Another way to explain it is that open interest represents one buy side
and one sell side (actually the open interest is double the reported
amount) and if one side profits, then the other side loses. Of course,
unless the trade is on an exchange, you don't know the trading
position of the Forex dealer. But someone always has an opposite
position even if it is the dealer customers. Some new traders may
not realize when you are trading with a dealer, you are not trading
in a centralized market but only with the dealer and his prices.
|
|
| Back to top |
|
|
Alan Connor
Guest
|
| Posted:
Wed Oct 26, 2005 10:35 pm Post subject:
Re: Is Forex "zero sum"? |
|
|
"News" <news@charter.net> wrote in message news:bTM7f.2$0d3.0@fe06.lga
| Quote: | Another way to explain it is that open interest represents one
buy side and one sell side (actually the open interest is double
the reported amount)
|
I regard your comments as inadequate and unconvincing; there is NO "open
interest" in a spot market. Forex is a spot cash market. |
|
| Back to top |
|
|
News
Guest
|
| Posted:
Thu Oct 27, 2005 12:01 am Post subject:
Re: Is Forex "zero sum"? |
|
|
"Alan Connor" <i3x9mdw@j9n35c.invalid> wrote in message
news:3s9t30Fn21alU1@individual.net...
| Quote: | "News" <news@charter.net> wrote in message news:bTM7f.2$0d3.0@fe06.lga
I regard your comments as inadequate and unconvincing; there is NO "open
interest" in a spot market. Forex is a spot cash market.
There is no open position reported for spot markets but there is still an |
open
position that has the same effect as futures until the transaction is
settled when
you are buying on margin. In a true spot cash transaction, there is no
margin.
The discussion, I believe, was about buying/selling Forex through a dealer
using margin. In such a transaction, it is a zero sum game. In a true cash
transaction, only the person holding the currency has market exposure. |
|
| Back to top |
|
|
maxima
Guest
|
| Posted:
Fri Oct 28, 2005 12:01 am Post subject:
Re: Is Forex "zero sum"? |
|
|
News wrote:
| Quote: | "Alan Connor" <i3x9mdw@j9n35c.invalid> wrote in message
news:3s9t30Fn21alU1@individual.net...
"News" <news@charter.net> wrote in message news:bTM7f.2$0d3.0@fe06.lga
I regard your comments as inadequate and unconvincing; there is NO "open
interest" in a spot market. Forex is a spot cash market.
There is no open position reported for spot markets but there is still an
open
position that has the same effect as futures until the transaction is
settled when
you are buying on margin. In a true spot cash transaction, there is no
margin.
The discussion, I believe, was about buying/selling Forex through a dealer
using margin. In such a transaction, it is a zero sum game. In a true cash
transaction, only the person holding the currency has market exposure.
|
a valid point and a good one. |
|
| Back to top |
|
|
|
|
|
|
FAQ
Memberlist
Register
Profile
Log in to check your private messages
Log in