Tag Archives: zero-sum

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In the following few posts I’ll try to give a few examples of how game theory is applied to trading the forex market hoping to shed some light on the mathematical aspect of trading and the value of collaboration in this market.

The most common statement I hear from traders is “The forex market is an efficient zero-sum game market and therefore sharing information may expose my edge.”

So what is a zero-sum game and how do I know if the above statement is true? Let’s start by talking about game theory and the different types of mathematical games.

Game theory is relatively young and quite complex branch of mathematics applying math to structurally define strategic situations in games. Mathematical games are most commonly defined by the number of players, duration of the game, game sum (more on this in a minute), simultaneous/sequential, and information flow. So for example chess is a two player, finite, zero-sum, sequential perfect information game because there are two players, the game ends when one of the players wins, only one player can win, the players take turns in playing and each player sees the actions of the other trader. (This is what defines perfect information flow.)

Economy, in general, is a multi player, infinite, positive-sum (Hold on, I promise I will explain why this is), simultaneous, imperfect information game.

Zero-sum games are games where a win by one player means a loss by the other player; the term has little to no relevance when describing multiplayer infinite games. The reason economy is a positive-sum game is because it’s an infinite game where value is built throughout time due to value growth in the overall economy.

So what about retail forex trading? Is forex a zero-sum game?

The short answer is that it doesn’t really matter because it’s an infinite, multiplayer game. The long answer is that it’s not a zero-sum game and it largely depends on the way the broker operates. Brokers that operate as a dealing desk, for example, (also known as market makers) mathematically resemble the way a bookie operates in a horse race. This becomes a negative-sum game because mathematically the players in the game are all traders using the same broker.

So what is the best strategy to play in a multiplayer infinite game with imperfect information – like the retail forex market? – More on that in future posts …

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.