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Zero-sum game

A zero-sum game is a situation where one person’s gain is exactly another person’s loss. In other words, the total amount of value in the system stays the same — it just gets transferred from one participant to another.
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In trading, certain markets — especially short-term and speculative ones — often function like zero-sum games. If one trader makes money on a trade, someone else on the other side of that trade loses the same amount.

Imagine you and a friend make a bet on whether Stock XYZ will go up or down tomorrow:

  • You bet $100 that it’ll go up.
  • Your friend bets $100 it’ll go down.

If XYZ goes up, you win $100 — your friend loses $100.
If it goes down, the reverse happens.

The net gain is zero — one wins, one loses. That’s a zero-sum game.

Not all trading is zero-sum, but many short-term strategies operate this way:

  • Options trading: For every call or put bought, there’s a seller. One side profits; the other loses.
  • Futures contracts: Traders bet on the future price of commodities, indexes, or rates — gains and losses are directly offset.
  • Forex (foreign exchange): For every currency bought, another is sold — gains come from someone else's losses.

In these markets, especially among active traders, you’re competing directly with other market participants. Your edge is their mistake — and vice versa.

It’s important to note that long-term investing in the stock market is not a zero-sum game. When you buy a stock and the company grows, value is created, and both you and other shareholders can benefit.

In contrast, short-term trading is often zero-sum — especially in markets where no value is added, only price speculation.

Understanding the zero-sum nature of certain markets helps you:

  • Realize that you’re competing with others — including institutions, algorithms, and pros.
  • Manage expectations: Not everyone can win, and consistent profits require skill, discipline, or an edge.
  • Choose your strategy wisely: Long-term investing grows with the market; short-term trading means someone wins, someone loses.

In many areas of trading, your gain is someone else’s loss — and vice versa.
That’s what makes it a zero-sum game. Knowing when you’re in one can help you understand the rules of engagement, manage risk better, and improve your decision-making.