Is trading a zero-sum game?

motorway · 28 February 2009

Trembling Hand said:
Besides Brokerage why?

Is Forex a Zero Sum Game?

It is between a buyer and a seller
But not when shorting is allowed
Besides, wealth can be “created” by leverage

Richard Olsen

Of course we are seeing wealth vaporised by leverage too

but others do not have to make what others loose
or have to loose what others make

inventory can be just marked up or down

Techs point maybe ?

motorway

a5e0i · 28 February 2009

It's not a zero sum game if you learn to play it well enough.

sails · 28 February 2009

pilbara said:
...forex/futs etc are zero sum games because every trade involves a matched pair of contracts, one short, the other long. The subsequent price movements will benefit one party at the expense of the other....

Not if they are combined with options...

a5e0i · 28 February 2009

True, sails and then it's knowing the right options to buy. Not all of them work well, or perhaps I should say...some options work better than others.

sails · 28 February 2009

a5e0i said:
True, sails and then it's knowing the right options to buy. Not all of them work well, or perhaps I should say...some options work better than others.

I am suggesting option synthetics where options and the underlying are combined together. For example, combining long stock/futures with short &/or long options can completely change the nature of the trade.

a5e0i · 28 February 2009

too in depth for me, that one. I understand it all, but don't have enough knowledge to think I can make it work at this point in time.

Trembling Hand · 28 February 2009

tech/a said:
I think your all missing the crux of the question.

Whats an example of a Zero Sum Game.

CHESS.

It is impossible for both players to win.

Trading anything.

Houses/Stock/Futures/Goods.
There can and are multiple winners and multiple losers.
At times un equal and never is the balance 100% winners or 100% losers.

There fore it cannot possible be veiwed as a zero sum game.

What are you guys talking about!! Derivatives are zero sum (excluding brokerage)

How are they not in balance 100% tech??

theasxgorilla · 28 February 2009

tech/a said:
I think your all missing the crux of the question.

I think I get it perfectly

Take shares, the original question, when does that game stop? Close of trading for the day, week, month, year? A buy out? Maybe it never stops.

In an uptrend with a stock that has just made a new all-time-high there are no losers...bar the buyer of the last share traded who is down his brokerage, and those that maybe shorted...and that is a whole other aspect to consider. How does adding capital stock to the market via shorting affect the balance???

So if we mark to market like so many believe is the only righteous way to track a portfolio of liquid assets, there are situations where there are no losers, on paper. And unlike futures there is no requirement to close out positions, make a delivery etc.

For what it's worth, I don't think the financial alchemists of the world want zero-sum. With so many basket-case companies out there who in their right mind would invest in the multitude based on "value". Nope, smoke and mirrors and making something from nothing is what it's about.

Temjin · 1 March 2009

Now I want to ask the question, what is the definition of a "zero sum game"? In the context of the financial markets that is, and not CHESS.

In fact, I am quite confused because it seems different people have different interpretation of it.

My economic friends tell me trading is a zero sum game and conclude that no one can ever make money out of it over the long term. It's a sure loss thing in their own definition.

motorway · 1 March 2009

It is between a buyer and a seller acting on the same scale

( You might say timeframe )

BUT

The length of the coast line (potential profit opportunity) depends on how you measure it ( how long is the coastline )

A trader that reacts at a smaller scale has higher potential for profit than one who reacts on a larger scale ( You might say day trader / End of month trader )
Even with perfect foresight, ( that is their trading has perfect timing )

one may be buying when the other is selling

Not only different scales

But different information drivers

Classical Economics

Adam Smith’s theory was politically motivated
For that reason, he assumed individuals behave uniformly
In reality, they don’t

What classical economics does not capture

Different players have different time horizons
They will have different present value calculations
So when a piece of news come out, which says the value of a company will go up by 10% this year
A long term trader may decide to buy
But a short term trader may sell
Relative values are more important than absolute values

Different Expectations for Different People

Different People could act differently to the same piece of information
Evidence, though not a proof:
Go into a bank and ask the manager:
How much does it expect a trader to earn?
How much does it expect a portfolio manager to earn?
The former is certainly higher than the latter
So the latter must use a higher discount rate in present values calculation

Richard Olsen

+ leverage

+ trading always happens only at the margin

Shares do not have to trade to change in value

No one makes what the other loses

In fact trading is a win win

because traders operating on different scales
and on different information

provide liquidity to each other

when trading activity ceases or becomes homogeneous
then the markets are lose lose

( Importance of the technical position RDW)

A intra day trader might buy or sell
to a pension fund
both can be winners

or EOD trader to a EO-Month

They can all have correct profitable
signals

All providing liquidity

motorway

aleckara · 1 March 2009

motorway said:
It is between a buyer and a seller acting on the same scale

( You might say timeframe )

BUT

The length of the coast line (potential profit opportunity) depends on how you measure it ( how long is the coastline )

A trader that reacts at a smaller scale has higher potential for profit than one who reacts on a larger scale ( You might say day trader / End of month trader )
Even with perfect foresight, ( that is their trading has perfect timing )

one may be buying when the other is selling

Not only different scales

But different information drivers

+ leverage

+ trading always happens only at the margin

Shares do not have to trade to change in value

No one makes what the other loses

In fact trading is a win win

because traders operating on different scales
and on different information

provide liquidity to each other

when trading activity ceases or becomes homogeneous
then the markets are lose lose

( Importance of the technical position RDW)

A intra day trader might buy or sell
to a pension fund
both can be winners

or EOD trader to a EO-Month

They can all have correct profitable
signals

All providing liquidity

motorway

The biggest risk in markets is not necessarily the loss but that for some reason there is no market to make a transaction IMO. If there are no buyers the commodity you hold is effectively worthless on the market.

This is why liquidity is important. In my opinion it is important as it is a direct measure of how effective the music is playing. The money is there in the market until the music stops.

The fact that you need liquidity to me in the asset supports that the market is a ponzi like market although with no guaranteed return which makes it sustainable as people ride off their losses instead of them accumulating until a crash occurs.

The different scales just mean that the losses are deplayed into the future for the buyers that bought off the traders that had the profitable signals. You forget that the value of your shares is guessed by the last price - in other words if there wasn't a market the last price is meaningless. It's there to say in current market conditions this is what you probably will get. There is no value until you actually sell them - they aren't cash gains, just paper ones.

pilbara · 1 March 2009

sails said:
I am suggesting option synthetics where options and the underlying are combined together.

each of the derivative markets might be zero-sum when you consider each entire market in isolation, but an individual trader can synthentically create combinations of trades between these markets.

Is trading a zero-sum game?

motorway

a5e0i

alex144

sails

a5e0i

alex144

sails

a5e0i

alex144

Trembling Hand

Can be found on the bid

theasxgorilla

Problem solved... next bubble.

Temjin

motorway

aleckara

pilbara

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alex144

alex144

alex144

Can be found on the bid

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