Is trading a zero sum game?

#1
Is trading a zero sum game?

Traders often talk about zero sum games. This discussion came from a branch of game theory which deals with the decision making process. Game theory is not simply the study of games. It is the study of how many different and complex problems may have simple solutions. Game theory helps determine the proper decisions.

Successful trading is highly dependent on proper decision making. Game theory may be helpful in understanding some of the decisions required in trading.

A zero-sum game is a game where the amount lost by one or more players is equal to the amount gained by the other players. Chess is a two person zero-sum game. If one player wins, the other player loses. If there is a draw neither player gains or loses.

Poker is an example of a two or greater person zero-sum game. If there are more than 2 players, then one or more of the players can win at the expense of the other players. However, all players can not win because at least one player must provide the profits and therefore at least one player must lose.

The stock market is a nonzero-sum game. For example, I buy RIL for 375. I sell it a week latter for 385 to Stock Buyer-2. Stock Buyer-2 sells the same stock a week latter for 395. I made money and Stock Buyer-2 made money. No one lost money. This same process can yield losses when for everyone when stock prices declines. If I buy RIL at 395 and sell it to Stock Buyer-2 for 385 and Stock Buyer-2 sells RIL for 375, then we both have a loss. Everyone lost money.

To complicate the discussion, it is possible to have a negative sum situation. Commissions and overhead and other expenses must be considered in the real world. Unless the profits exceed the expenses, the result is a loss.

Want to know the single biggest reason successful traders win?

Successful traders profit from trading because their trading system has a positive expectancy.

Download the attached report on zero sum trading to go the path of successful trading!
 

sh50

Active Member
#2
I feel that there is still a strong element of gambling in trading because though you can reduce losses by correct decision making compared to other gambling setups, you cannot directly influence profits the way it is in other businesses. One keeps hoping that several losses are covered by few big prfofits but this can be only achieved on training with a thoroughbred.
 

Traderji

Super Moderator
#3
Fortunately, none of us serious trader types ever really gamble. We all take our trading very seriously, like a serious business person should.

Many people have asked me over the years what it takes to be a successful trader. The answer is not clear but here are a few thoughts to ponder and apply.

First, successful traders have a complete commitment to trading and do it full-time. If it is a hobby or a secondary pass-time, I know how the bottom line will be - a big minus. Trading must be addressed as a profession because if you do not treat it as such, let me assure you, those who do treat it this way will separate you from your money very quickly.

Secondly, successful traders fit their trading habits to their individual personality. If you are an impulsive individual, your style will reflect more trading than a calculating individual who waits for all the indicators to fall into place. The personality factor more than any other factor I know of, will determine success or failure. If you are an emotional person, admit that you are and structure your trading habits to make emotions a positive influence, not a negative one. If you are either greedy or fearful, that will affect your decision making on a position and without recognizing the governing emotion, your decisions will tend to be wrong. Whenever I am the most fearful of the market, that emotion helps make me decide to go long and buy. I know that my emotions tend to make me fearful most of the time. Whenever my fears become overwhelming, my discipline tells me to buy and discipline must win out or you are doomed to failure.

The work ethic can never be overstated. I watch the market all day long from the opening bell to the closing bell. I have kept diaries on every day in the market for the last seven years, sometimes having over 40 entries in my diary per day. If I do not do my work my profit suffers. There is no short cut in trading, the market will quickly find if you are lazy.

Planning is the objective part of trading. Start with the worst case scenario and work from there. You will never be more objective than before you execute a trade. Once you are in a trade, emotions take over so the plan must be in place before the activity takes place. Determine a plan that tells you when you are wrong and admit it. Get out, retreat, live to fight another day; these are cowardly approaches but it will keep you from the traders obituary. Remember each rehabilitation takes a long time, but death is final.
 
A

amarnath

Guest
#6
Hi Tradingpicks,


Ok pls disclose a system with positive expectancy ( If you are generous enough to disclose and learn /modity it ) :cool: . Just one system on each category rather than adviceing to trade a system with +Ve expectancy

scalping system

swing system ;)
 
#7
amarnath said:
Hi Tradingpicks,


Ok pls disclose a system with positive expectancy ( If you are generous enough to disclose and learn /modity it ) :cool: . Just one system on each category rather than adviceing to trade a system with +Ve expectancy

scalping system

swing system ;)
My post above was to inform members of this forum on Mr. Lawrence Harris's work on the origins of trading profits of the Zero-Sum game!

Over a period of time a trading system can deliver positive expectancy provided your trading system controls losses to a small % (0.5-2) of the trading capital and allows profits to run.

Unfortunately most investors/traders do not have the staying power to test out or trade a trading system (with positive expectancy) over a period of time simply because of two main reasons:

1)they are undercapitalized

2)they are undisciplined.

I want to reproduce below some of the reasons why most investors/traders are unable to succeed. You can read this complete article at http://www.tradersedgeindia.com/why_us.htm

Trading against the major trend - Fighting the momentum of the market. Not knowing the direction of the major trend and how to accurately define a change in trend direction. Not knowing how to strategically time market entry and exit.

Holding losing positions too long - Failure to accept losses as part of the trading process. Associating losses with being wrong or losing. Not knowing when to get out of a market that has signalled a change in trend to limit losses.

Exiting profitable trades too early - Fear of losing unrealised profits. Trying to outsmart the markets by getting out on a presumed extreme price, then missing the big trends when they occur. Not knowing when to hold a winning position to maximize gains.

Trading too big - Trying to make too much, too quickly. Allocating too much capital to one position, exposing the account to excessive risk and reducing the protection from balance and diversification. Not knowing or not managing the risk.

Trading too often - Over-trading or "churning" the account. "Day Trading" falls into this category if the total transaction fees (commissions) are too high relative to your account size. Not controlling the costs in trading.

You can read the complete article at http://www.tradersedgeindia.com/why_us.htm
 
#8
Excellent thread from TradingPicks and Traderji.......Great!!
 

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