With non-zero transactions
There is a certain notion among certain traders that for each transaction on the foreign exchange market there must be a winner and a loser. Even books that have been published recently claim that trading in the market is a "zero-sum game". In order to understand this situation, let's first understand what the phrase "zero-sum game" means.
Suppose you make a friendly wager with an acquaintance on the result of a soccer game. You each bet an equal amount of money (say, 100$), and at the end of the game, one of you will walk away with 200$ and the other will be 100$ poorer. This is the "zero sum game"in its classical sense. If there is not one winner and one loser at the end of the game, it is a different "game.
Let's apply this concept to the foreign exchange market
Suppose that you open long position on the currency pair EUR/USDThe broker simply follows your orders, while another trader opens a short position on the same currency pair. The broker simply follows your orders and takes the spread. That's exactly what the broker wants: to get the full spread while maintaining a neutral position.
Does this imply that in this scenario one side must win and the other must lose? Not at all! In fact, both traders can win or lose. Perhaps one trader made a short-term deal, and the other one made a long-term deal.
It is possible that the first trader will take a profit quickly, but it is not necessary that the second trader closed his trade at the same time as the first trader. Later, the price will change and the second trader will also take his profit. In this scenario, the broker made money (on the spread) and both traders would also take a profit. This example clearly illustrates the common misconception that every trade in the market is a zero-sum game.
What about the stock market?
At the same time, it is worth noting that trading on the stock market - is also not a zero-sum game. Suppose you buy 100 XYZ shares at 40$ и you sell them at 50$. Another trader buys them from you at 50$ and sells them at 60$. Another trader buys them at 60$ and sells them at 70$. Which one of them lost money? Obviously, none of them, since they all made 10$ per share.
The question arises - what about those traders who held short positions in XYZ stocks? There is also no rule that says someone has to be short XYZ stocks, and it is not necessary that there be as many short positions as there are long ones.
Thus, which trade can be accurately called a zero-sum game?
Naturally, it comes to mind. options: Let's assume you bought a number of XYZ call options. Where do they come from?
In order for you to buy these options, someone else must sell or "write" them to you. If the price of the XYZ stock reaches the strike price of the options, the buyer wins, and if the price fails to do so, the option seller wins.
While this represents a true zero-sum game, it is clear that such a market situation is the exception rather than the rule. Trading in financial markets can be a zero-sum game, but it is not always the case. Therefore, I want people to get the gist of things right before stating emphatically that any trading in the market - is a zero-sum game.