A Game-theoretic model of forex trading with stochastic strategies and information asymmetry

TL;DR

This paper develops a game-theoretic model of forex trading that incorporates stochastic strategies and information asymmetry, revealing how market advantage can lead to consistent trader losses and informing better predictive analytics.

Contribution

It introduces a novel game-theoretic framework modeling market and trader interactions under imperfect information, highlighting the impact of informational advantage.

Findings

Market outperforms traders due to information asymmetry

Simulations show traders consistently lose against the market

Model suggests real-world forex favors well-informed market structures

Abstract

Interaction strategies for reward in competitive environments are significantly influenced by the nature and extent of available information. In financial markets, particularly foreign exchange (forex), traders operate independently with limited information, often yielding highly unpredictable outcomes. This study introduces a game-theoretic framework modeling the market as a strategically active participant, rather than a neutral entity, within a stochastic, imperfect information setting. In this model, the market alternates sequentially with new traders, each trader having limited visibility of the market's moves, while the market observes and counteracts each trader strategy. Through a series of simulations, we show that this information asymmetry enables the market to consistently outperform traders on aggregate. This outcome suggests that real-world forex environments may inherently favor market structures with greater informational advantage, challenging the perception of a level playing field. The model provides a basis for simulating skewed information environments, highlighting how strategic imbalances contribute to trader losses. Further optimization of the intelligent market scoring and refined simulations of trader-market interactions can enhance predictive analytics for forex, offering a robust tool for market behavior analysis.