A Minus-Sum Game

Winners in a zero-sum game make as much as losers lose. If you and I bet $20 on the direction of the next 100-point move in the Dow, one of us will collect $20 and the other will lose $20. A single bet has a component of luck, but the more knowledgeable person will keep winning more often than losing over a period of time.

People buy the industry's propaganda about trading being a zero-sum game, take the bait, and open accounts. They don't realize that trading is a minus-sum game. Winners receive less than what losers lose because the industry drains money from the markets.

For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. You and I can get into in a minus-sum game if we make the same $20 bet on the next 100-point move in the Dow through brokers. When we settle, the loser will be out $23, and the winner will collect only $17, while two brokers will smile on their way to the bank.

Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end. A trader must support his broker and the machinery of exchanges before he collects a dime. Being simply "better than average" is not good enough. You have to be head and shoulders above the crowd to win a minus-sum game.

From the book

STUDY GUIDE

FOR THE NEW TRADING FOR A LIVING

DR. ALEXANDER ELDER