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90/10 Statistic the Obvious- For New Traders
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90/10 Statistic the Obvious- For New Traders

  #31 (permalink)
Hi Mom!
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SamJames View Post
The zero sum game theory is not really correct, you must take into consideration that everyone in the market has a different time frame, so not all transactions are opened and closed during the trading day. The zero sum assumption would be correct if trading was don only on one instrument and all traders were forced to liquidate the positions at the end of they day.....but then probably market would spin / around and go up and down and then come back to the opening value.

You actuvally see this this in very rotational days, in which there are no market partecipants with a longer timeframe, moving the market. Zero sum game is like the random walk theory, or Black Sholes model....it's just a math simplification. Mathematicians that never really traded made a lot of false assumptions on the market, that allow them to develop closed formulas for everything. For instance they modeled price movements are Wiener processes..... which is just BS.

Forget about trying to understand market as a science, it's an art....there is a rythm in it, there are sensations and emotions. Imagine playing piano, you can put all the notes in a computer.... but you would always recognize Bach played by Glenn Gould and Bach played by a computer. It's the same.

The "theory" is absolutely correct because it's not a theory. Futures markets are absolutely 100% zero sum. They're actually negative sum because of transaction costs. It's not really open for interpretation. For you to buy someone has to be willing to sell to you. The open interest on a front month contract is an exact tally of all outstanding contracts. Once the contract expires and there is no more trading volume, every transaction that took place is accounted for and trading ceases at expiration. Any profit anyone has made trading that contract month comes directly from someone else's loss. The winners divide up the loser's money. You cannot get blood from a stone. It's the way these markets are designed, and it's why they're so competitive.

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  #32 (permalink)
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TheShrike View Post
The "theory" is absolutely correct because it's not a theory. Futures markets are absolutely 100% zero sum. They're actually negative sum because of transaction costs. It's not really open for interpretation. For you to buy someone has to be willing to sell to you. The open interest on a front month contract is an exact tally of all outstanding contracts. Once the contract expires and there is no more trading volume, every transaction that took place is accounted for and trading ceases at expiration. Any profit anyone has made trading that contract month comes directly from someone else's loss. The winners divide up the loser's money. You cannot get blood from a stone. It's the way these markets are designed, and it's why they're so competitive.

Yes, I undestand what you say.... but my point is that this is true if you compute the loss /gains at the end of the day, that is if you look at it from a daily perspective.
However thinking of it as zero sum game brings nothing new to the table, and it can confuse the understanding.
Many market partecipants are hedgers and the care nothing about the end of the day close, because their timeframe is larger.... they keep a position on for weeks or months.

For purpose of understanding zero sum is quite confusing, because it semplifies what happens. On top of that you should consider hedgers that have true physical inventories behind a future contract.
Markets are not self contained like a poker match or a video game, there are so many external factors that you can hardly draw a line a say: "here are the losers and here are the winners".

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