Harris' observations on poker could easily be used to describe trader rationale. Clearly, there are some important parallels between online trading participants and online poker players. Next, we discover what Harris has to say about online traders.

As with poker, trading can be classified as a positive-sum, negative-sum, or zero-sum game subject to way profits and losses are defined (usually against a benchmark of fundamental value). Providing the benchmark is common to all participants, fundamental trading profits and losses can be calculated relative to the common benchmark. Harris points out that, "...If the price is greater than the fundamental value, the seller will profit at the buyer’s expense. If the price is less than the fundamental value, the buyer will profit at the seller’s expense. No trader can profit without another trader losing. Since fundamental value cannot be observed with certainty, neither trader will be able to recognise their profits and losses with certainty. Their uncertainty at the time of the trade does not change the zero-sum character of the game."

There are additional benchmark permutations that Harris discusses, however, for the purposes of this article we will not look at those now. Suffice to say that Harris concludes the section on zero-sum games by telling us that, "...Common fundamental value benchmarks produce zero-sum games. Common return benchmarks produce games that can easily be adjusted to produce zero-sum games. In both cases, no trader can profit without some other trader losing. In this sense trading is a zero-sum game."

Harris discusses trading as a positive zero-sum game because, "... rational traders will not play a true zero-sum game in which they only value trading profits. If all traders were alike, all expected returns would be zero and no one would benefit from trading. If some traders are more skilled than others, the skilled traders would want to trade but the unskilled traders would not. No one would trade."

Again, Harris reminds us that as with poker online traders trade for external benefit as well as for expected profit. He goes on to clarify the reasons why rational traders trade, including, "... to hedge risk, to move funds from one point in time to another, to exchange assets, to earn an unconditional expected return, to learn whether they can expect to profit from trading and to take pleasure from gambling." If the external benefits of trading are great enough traders will trade even when they expect to lose. "Skilled traders will profit to the extent that unskilled traders are willing to trade for external reasons. If no one traded for external benefits, skilled traders could not profit from trading."

From Harris' extensive research we conclude that online trading and playing online poker are zero-sum games where the participants obtain external benefits as well as the expectation of making profits. Gamblers do not represent as significant a proportion of the participants as originally feared. For this reason, opportunities exist for skilled traders and skilled poker players to profit from gamblers and other participants who expect to lose.

It follows, therefore, that we want to discover how to become consistently winning traders or consistently winning poker players. The answer lies in knowing when you have an edge...

NEXT: Knowing if you have an edge over competitors.

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