Trading is a negative sum game.

What that means, is that for every trader that ‘wins’ an amount of money, there is a trader that ‘loses’ at least the same amount of money.

Imagine the following: Jack buys a share of stock XYZ for $10.00 from John, and later sells it back to John for $15.00. This means that Jack ‘won’ $5.00, and John ‘lost’ $5.00. The sum of the gains and the losses equals zero. Easy and simple.

If you think only about the situation as described above, then trading would be a zero sum game.

However, there are a lot of factors that actually make trading a negative sum game for Jack and John.

In todays time, a stock is bought via a broker. This broker charges commissions, which both John and Jack have to pay for their trade. The total sum of this game is therefore equal to -2 x commissions. Whenever you pay a broker commissions to buy a stock, another person is also paying a broker to sell that same stock.

Let’s say these commissions are 1$/stock, then Jack would not have won $2.00, but only $1.00. John would have lost $3.00 instead of only $2.00. The total sum of gains and losses here is -$2.00, equal to twice the commissions.

So if you include commissions into the equation, trading becomes a negative sum game. Or at least, for every day traders like you and me.

I have been thinking about the concepts of zero sum games and negative sum games, I can spend hours just thinking about it.

For example, some of you might notice that once you add the brokerage’s gains to the previous situation, then it becomes a zero sum game again!

The broker has gained twice the commissions on Jack and John’s trade, which is $2.00. Therefore, the sum of all gains and losses equals zero again.

But then why do I suggest that trading is definitely a negative sum game?

Because I believe that everything comes to an end. Every company, no matter how big or small will eventually fail. Whether it will be a year, a decade or a century from now. I believe that companies like Apple, Tesla or Facebook will someday cease to exist. And I’m not even talking about small-cap companies, they are a totally different story.

So no matter what John, Jack, the brokerage or anybody gained on a trade, eventually the stock will become worthless. I know this is far fetched, but this is why I think trading is a negative sum game.

If you think about it long enough, then you could say life is a zero sum game at best. We all live and die, and at the end, everything we have accomplished has come at the cost of something equally as big. Everything you have ever earned has been paid to you by somebody else.

That’s why I understand why traders are mysterious people who don’t want to share their successful tactics. They need other people to lose for them to be profitable. That’s the simple truth, and that’s what I’m trying to say here:

For every trader who wins an amount of money, there is another trader who loses at least that same amount of money.

That makes it extra  eerie that 90% of traders lose money. That means that 10% of the traders are collecting all the losses of their ‘colleagues’. Food for thought It’s actually quite sad if you think about it, but that’s for another blog post.

Also, that’s why it’s actually super weird trade to cheer for other traders, right? If I see someone post a winning trade somewhere, why should I congratulate that guy? The fact that he is winning means my changes of winning are smaller. But that’s also for another blog post.

Cheers