Principles of economic theory will tell you that the forex market meets the criteria of a zero-sum game, but not for all participants. Central banks are at the top of the totem pole in terms of forex hierarchy, and they do not play a zero-sum game when they enact national monetary policies or balance their reserves. The same goes for American tourists who visit Japan and exchange dollars for yen.
Understand the Zero-Sum Game of Forex Trading
Individual forex investors, on the other hand, engage in currency exchange speculation when they take any kind of position. Whether you go long or short on EUR/USD, you can be sure that there will be other traders taking the opposite side of that position. The retail platform you use for forex trading will take funds from the losing trades in order to settle the positions that come out on top; naturally, the broker will also pocket a few pips for commission purposes.
much better odds based on fundamental analysis
If the definition of a zero-sum game reminds you of a casino, you have thoroughly understood it. When you go long on USD/JPY with the hope that the Bank of Japan will issue a lukewarm economic growth forecast, you are taking a speculative risk, which to a certain extent is similar to betting at the roulette table albeit with much better odds based on fundamental analysis.
Using Compound Interest to “Win”
Now that we have established that forex is a zero-sum game for individual traders, you should not think about this in a negative way; what you should think of, however, is how to make the most out of it. Virtually all forex brokers operate with two accounts per client: One is a deposit account where you keep your funds, and the other is your portfolio of positions. Your deposit account should be earning compound interest in order to make your trading experience more profitable, and you should make it a point to keep as many of your profits as possible in this compounding account.
The goal is to always have an earning advantage when you settle your trades
If your forex broker does not pay compound interest to your client account, you do not necessarily have to take your trading elsewhere; look for a bank that offers high-yield savings accounts where you can deposit your forex profits. The goal is to always have an earning advantage when you settle your trades.