When You Lose Money in the Forex Market What happens to it?
A "trade" is comparable to a real estate investment.
Some consider forex trading to be a zero-sum game. I'll say no, not really, and not every time.
Allow me to explain.
Forex is a business in which you buy from someone who is willing to sell to you and vice versa. Assume you bought a piece of land, its value changes (increases or decreases), and you then sell it. If you lose the money, where did it go? And, if you win, where does the money come from?
Assume you paid $500 for the land and it depreciated in value, causing you to sell it for $400. You have a $100 loss. Let's say the buyer waited a while and then found another buyer who agrees to buy for $600. He would have profited $200. So the question is, where did your $100 loss go, and where did the $200 profit come from for the second guy?
I can generalize any trade and apply it to the preceding example.We buy and sell currencies in forex trading.
For example, suppose you place a BUY trade on GBPUSD. It means you purchased the base currency, GBP, and sold the quote currency, USD. (Which means someone sold you GBP and the same person bought your USD) So let's name the person you made the transaction with "Alex".
When you close your GBPUSD BUY order, you are selling GBP and buying USD.
Assume you profit from the GBPUSD transaction; does Alex suffer a loss?
I'll answer this in two ways.
1. Yes, it is possible if, after you close your GBPUSD buy trade, Alex immediately closes his sell trade.
2. No, Alex may still make money if he did not immediately close his SELL trade after you closed your BUY trade. This means that when you closed your buy trade, which translates into a SELL, someone else, not Alex, BUY the same pair from you.
As a result, if Alex waits and then closes his trade, he may later transact with someone else and profit.
When you closed your BUY trade, Alex was thinking,?What if I hold on and don't close my SELL trade?
So when you closed your BUY trade, someone else had to BUY from you before you could close your BUY trade. (This means you sold what you purchased).
So Alex is still not closing because he is thinking? The pair will continue to fall or turn bearish.
As a result, the other order you closed was BOUGHT from you by someone other than Alex.
Assume Alex was correct, the market fell again, and he profited.
And keep in mind that when Alex closed his sell order, it means that someone else SOLD to him because he simply bought it back when the value decreased, implying that he made a profit.
Allow me to use this illustration to help you see things more clearly.
Assume I have a box with something inside and you have $20 USD. I agree to sell my box and its contents to you for $20 USD. After an hour, Steve looks at your box, carefully examines it, and says, "Don't you know what's inside that box? It contains a $100 bill." Steve pays you $100 for the box. So you made $80 and I "lost" $80 because I didn't wait until Steve needed the box.
After 8 hours, an inspector begins to inspect the box and declares, in his expert opinion, that the box is completely full of bullshit.
Steve can't believe it? he just bought it for $100 a few hours ago. So Steve began looking for someone to sell this garbage to?
Nobody wants to buy a box of nonsense, so Steve ended up selling it to a book store owner for $1.
So, in the long run, I now have a $20 profit on my box of bullshit, you have a $80 profit on your box of bullshit, and Steve has a $99 loss on his box of bullshit.
Will Steve blame you for his loss because you sold him the box? And will you hold it against me because I sold it to you?
No, you should not hold anyone responsible because this is a business.
KEY LESSONS:
A zero-sum game is one in which if one party loses, the other party wins, and the net wealth change is zero.
Zero-sum games can have as few as two players or as many as millions.
Futures and options are considered zero-sum games in financial markets because the contracts represent agreements between two parties and, if one investor loses, the wealth is transferred to another investor.
The majority of transactions are non-zero-sum games because the outcome can benefit both parties.
So, what happens to your money when you lose?
The simple answer is that someone else profits from it. And if the person isn't careful, he can turn your loss, which is now his profit, into his loss and make it someone else's profit. It is a cycle.
That is both business and forex.
So, how do forex brokers make a living? This will be addressed in a future article.