When You lose Money in Forex Where Does it go?
You can compare “a trade” to a real estate investment.
Some people say forex trading is a zero-sum game. To me, I will say not really and not every time.
Let me explain.
Forex is a business where you buy from someone because someone else is willing to sell to you and vice versa.
Let’s assume you purchased a piece of land and its value change (decreased or increased), and then you sell it.
Where did the money go, if you lose it? And where does the money come from, if you gain?
let’s say you bought the land for $500, and then the value depreciated and you then sell for $400. You have lost $100.
Now let’s say the buyer waited a while and found another buyer that then buys for $600. he would have made a $200 profit.
the question then is; where did your $100 loss go to, and where did the $200 profit come from?
I can generalize any trade and compare it to the above example.
In forex trading, we buy and sell.
For example, if you place a trade on GBPUSD let say BUY. it means you bought the base currency which is GBP, and sold the counter currency which is 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 BUY order of GBPUSD, it means you sell back your GBP and buy back USD.
Now let’s assume you gain profit from the transaction of GBPUSD, does Alex make a loss?
I will answer this in 2 ways.
1. Yes, it is possible if after you close your buy trade of GBPUSD, then Alex immediately closes the sell trade too.
2. No. it is possible that Alex still makes money if when you closed your BUY trade, he didn’t close his SELL trade immediately. This would mean that when you closed your buy trade which translates into a SELL, someone else BUY the same pair from you, not Alex.
Therefore if Alex waited and then closes his trade, later on, he would be transacting with someone else and it could be a profit.
Now when you closed your BUY trade, Alex was thinking 🤔what if I hold on and not close my sell trade.
So when you closed your BUY trade someone else, not necessarily Alex needed to BUY from you before you can close your BUY trade. (Which means you sold back what you Bought).
So now Alex is not closing yet because he is thinking 🤔 the pair
will still go down or go bearish.
Therefore, the other order you closed was BOUGHT by someone else from you, not Alex.
Assume Alex was right ✅, the market came back down and he also made his profit.
And mind you, when Alex closed his sell order it means someone else SOLD to him because he just bought it back when the value decreased which means he gained 📈 profit.
Let me bring this illustration to make you see things more clearly
So let’s say I have a box with something inside, you have 20USD. I agree to sell you my box and its contents for 20USD. After 1 hour Steve looks at your box, examines it carefully, and says “Don’t you know what is inside that box? It has a $100 bill in it.” You sell the box to Steve for $100. So you made $80, I “lost” $80 by not waiting until Steve wanted the box.
Now after 8 hours, an inspector starts to inspect around the box and declares in his expert opinion that the box is 100% full of bullshit.
Steve can’t believe this 😢😢😥 , steve bought this for $100 a few hours ago. So Steve started looking for someone he can sell this crap to🤒😵. No one will want to buy a box of bullshit and steve is ended up selling it to a book store owner for $1.
So in the long run, I now have a $20 gain for my box of bullshit, you have an $80 gain for my box of bullshit, and the steve has a $99 loss on the box of bullshit.
Since Steve has a loss, will Steve blame you because you sold the box to him? And will you blame me because I sold it to you?
Nope, you should not blame anyone because this is a business.
A zero-sum game is a situation where, if one party loses, the other party wins, and the net change in wealth is zero.
Zero-sum games can include just two players or millions of participants.
In financial markets, futures and options are considered zero-sum games because the contracts represent agreements between two parties and, if one investor loses, then the wealth is transferred to another investor.
Most transactions are non-zero-sum games because the result can be beneficial to both parties.
So where does your money go when you lose?
Simple answer: Someone else makes a profit from it.
And if the person is not even careful he can also turn your loss which is currently his profit into his loss and make it someone else’s profit. its a cycle
That is business and that is forex.
How then do forex brokers make money? I will answer this in a future article