This does not apply if you are trading shares through an Exchange like the JSE. When you buy shares, you invest in and own part of the company you are investing in. That company uses the money from all the Investors to grow their business, and when the business grows the value of the shares goes up and all the shareholders gain (everyone wins). Of course the opposite holds true as well..
However, when you are trading Forex, or CFD's (Contracts for Difference), or Spread Trading, or Commodities, then this important concept applies
So, trading is a zero-sum game
What amazes me is that so many people talk about trading, or try to lure you into trading, without them ever mentioning this important fact. What exactly do we mean by this? Let us take an example
Example: Let us say we are trading in an Instrument X (may be a forex pair, a CFD, whatever). And let's say that the current price of X is 1000. When the price moves, it moves 1 unit at a time (thus no decimals). Every one point that it moves by means R10 profit or loss for us. (Thus if we bought it at 1000 and the price moves up to 1005, we will make (1005-1000)x10 = R50 profit). Everyone works through a Broker (B), the broker takes R5 commission for every transaction.
Now let's add a couple of traders, I'll call them A, B, C, etc. but let's give them names. Alex thinks the price of X is about to rise and he wants to buy. In order for him to buy, he needs to find someone willing to sell to him. Luckily the market is really big, there are a lot of traders in there, all with different opinions. Charlie thinks the price is about to collapse and he is willing to sell to Alex. The Broker collects R5 from Charlie and R5 from Alex (two separate transactions, one for Charlie to sell and one for Alex to buy).
The price moves up to 1050. At his point A is happy and wants to take profit. Dumisang is very excited about this recent move and wants to be a part of this. So D buys from A at 1050 (and B collects R10 (R5 from each)). The price goes to 1055, but then turns around and drops to 1020. D is a bit nervous, but being a conservative trader decides to keep his losses small and exit the market. Erica was waiting for this drop to get into this market and buys from Dumisang at 1020 (and B collects R10). Erica is wrong, the market collapses (as anticipated by C right at the beginning. (D of course is very happy about his conservative approach). The price drops to 940. E is in a bit of trouble, but hangs on. C of course is very happy...
Now, let's see at this point:
|Market Player||Description||Profit / Loss|
|Alex||Bought at 1000, sold at 1050, 50 points = R500 minus R10 to broker (R5 each when he bought and sold)||R490|
|Broker||R10 each for (C - A; A - D; D - E)||R30|
|Charlie||Sold at 1000 (R5 to broker), still in at 940, sitting with an unrealized profit||R595|
|Dumisang||Bought at 1050, sold at 1020, 30 point loss, plus R10 to broker (two transactions)||-R310|
|Erica||Bought at 1020 (R5 to broker), still hanging in at 940 with an unrealized loss of 80 points||-R805|
|TOTAL||(490 + 30 + 595 - 310 - 805)||R0|
The SUM of all profits and all losses ARE ZERO !!
You can repeat this exercise at any price level and with any number of players in your market. The sum of all profits and losses will always be zero
So what does this mean, how does this affect you?
It means that if you are making money, someone else must be losing money! And if you are making a lot of money trading, then either someone else is losing a lot of money, or a lot of someone else's are each losing a little bit of money..- but someone is losing! In the trading business you have:
- Massive Brokerage Houses trading worldwide, hiring the best of the best of Traders and Analysts - guys that dedicate their lives to trading, full time
- All the Merchant Banks, Commercial Banks and other financial institutions, they all have trading desks with professional traders and advisors
- Huge Investment Funds, each employing the best fund managers
- Professional Traders
- etc. etc.
These guys employ the best. They trade for a living, they dedicate every hour they are awake to one thing - trading, making money out of the markets. Collectively, all of these guys are making billions of dollars each year out of the markets.
If they are all making money, exactly who is it that are losing money?
The ODDS are stacked against you!
Right at the outset it is important that you understand this. It my sound a bit as if we are trying to talk you out of the trading business instead of promoting it. What we want you to do is just think about it for a moment, it is important that you understand the business, it is important that you are able to understand the huge marketing hype, where it comes from, why do all the corporate players want everyone to get involved in trading, why is everyone trying to remove all hurdles, trying to make it as easy as possible for you to enter the trading arena.
Understand the ODDS. Then ask yourself how do you change those odds to work for you instead of against you. What are the odds of winning the Lotto? If you had a choice to rather own the Lotto company instead of playing the Lotto, how will that change things? Sure, from time to time you will have to payout a Lotto payment, but you will take consistent small payments from your Lotto sales. The one or two payments from time to time is not a problem. It surely is much better than paying to play the Lotto and hope for the win!?
What we will show you is how to change the odds, how to start owning the business.. - but first you need to be aware of the pitfalls!