Nowadays, the term trading somehow being perceived as easy way to get rich. Maybe it’s because so many self-proclaimed gurus are selling the dream of easy money. Just follow their courses/methods, everyone will be rich. What those gurus won’t tell you is that trading, especially in the short term, is fundamentally a zero-sum game—meaning that for every winner, there must be a loser. It’s basically impossible for everyone to be rich, even if all of people in the world follow the same strategy.
What is zero-sum game?
A zero-sum game is a situation where one person’s gain is exactly equal to another person’s loss. The total money in the system does not increase or decrease—it is merely transferred from one participant to another.
Imagine you’re playing a game of poker with friends. If you win s50, someone else (or all of the other players) at the table loses total of $50. The total amount of money in the game doesn’t change—it just moves from one person to another. This is the essence of a zero-sum game: one person’s gain is exactly balanced by another person’s loss.
Why is Trading a Zero-Sum Game?
Unlike long-term investing, where the value of assets can grow over time, trading, which operate in the short term time period, is a zero-sum activity. When you buy or sell stocks, currencies, or other financial instruments, your profit comes from someone else’s loss, and vice versa.
For a trade to occur, there must be both a buyer and a seller. If you buy a stock at $100 and later sell it at $120, you made a profit of $20. However, the person who bought it from you at $120 can only profit if they find another buyer willing to pay more. If the stock price drops instead, that person takes a loss.
In ideal world, we would want the price to keep going up. But we all know that in short-term, price of any instruments will oscilate. At one point, someone will buy the stock near the top, and will have to sell at loss.
Why does this matter?
Many people enter trading with the expectation that they will easily make money. But in reality, for every trader who wins, another (or more) must lose. New traders mostly will only focus on the potential rewards. But the zero-sum nature means the potential losses is equal (or maybe even bigger than) the rewards. Before jumping into trading, it’s important to educate yourself, understand the risks, and be prepared for the possibility of losses.
Remember, trading isn’t just about numbers. It’s also about what people on the other side of the trade are doing.
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