Is Forex Trading Really a Zero Sum Game?

Many people say that trading is a zero sum game, meaning that if you lose $10 someone else gains $10.  This is not actually the case because of the cost of trading, which is your broker’s spread.

Because of the spread Forex trading is a negative sum game.  There are three participants:  the buyer, the seller and the broker.

This means you have to be above average to beat the Forex market.

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Most retail traders operate through a broker, and brokers provide the link between traders and the inter-bank system. Brokers are in business to make profits, and one of the ways in which they do this is to charge us a spread. Assuming a 4 pip spread, if a trader wants to buy GBP/USD at $1.6540, he will be quoted $1.6544 and if he wants to sell he will be quoted $1.6540. The difference, in this case 4 pips, goes to the broker. That’s their profit for facilitating the trade.

It is important to remember that if a currency is bought, it has to be sold eventually. Vice-versa, if a currency is sold, it has to be bought back to close the trade. In effect, if a sell order is placed at $1.6540 and the market doesn’t move it has to be bought back at $1.6544. It can be seen, therefore, that even on a non-moving trade a cost of 4 pips would be incurred. So as soon as a trade is placed it costs 4 pips and if you are trading a standard lot at $10 a pip this would be a loss of $40 you have to make back just to get even!

Spreads vary from broker to broker. I’ve seen retail brokers offer the GBP/USD at a 1.8 pips spread, while some charge as high as 5 pips. I’ve seen retail brokers offer the EUR/USD at 0.9 pips, while some charge as high as 3 pips.

This is a very competitive market, so always shop around to get the best deal on spreads.  I use Oanda because they have the lowest spreads I’ve every seen (among other reasons).

By |2015-11-05T22:15:33+00:00March 5th, 2012|Featured, Forex Risk Management, Phil's Forex Blog|2 Comments
  • forex says:

    nice and interesting post.

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