Late-night infomercials and Internet ads are like sirens, calling would-be trading wizards with this alluring pitch: “You, too, could make a fortune trading currencies!”
There’s little doubt that there’s money being made in this market. Just ask legendary investor George Soros, who “broke the bank of England.”
Yet currencies are hard to track by even the most seasoned traders and it’s not for the average investor. And you’re no George Soros, although you’ll surely end up breaking something — your own bank account. Even institutions can get scammed.
Called “Forex,” short for “foreign exchange,” this form of trading requires guessing on whether a currency or basket of them rises or falls. There are more scams out there than regulators can keep up with and some schemes even ensnare experienced institutional investors.
A $4 trillion market, Forex is dominated by big banks and institutions, who trade around the clock based on constantly changing streams of information. There’s a reason why the big boys play this game. It’s volatile, turns on a dime and is not predictable.
Currency swings often have nothing to do with the day’s headlines and could be manipulated by big traders. No matter what the FOREX ads say, you will have no advantage over the biggest players. None whatsoever.
Still, if you feel that you need to bet on currency movements, use only a small amount of your net worth (under 5 percent) and look at some of the funds available. The Merk Hard Currency fund mixes in gold with a basket of non-U.S. currencies. It’s basically a bet on the dollar falling.
If you’re bullish on the dollar, you might consider the Rydex Strengthening Dollar 2X fund, which will produce gains if the buck gets stronger against other currencies.
Hedging against a specific currency is another matter. I would employ this strategy if you are making a large business or personal transaction in another country. You would want to protect your investment from currency fluctuations. For this, you would need to buy a specific forward contract. I would employ the services of a broker or registered investment adviser who has experience doing this. Don’t do it on your own.
For those of you still compelled to take the plunge into currencies, here are some warnings. Always do your homework before you invest:
Have you already invested your money and lost it? If you think you’ve been taken by a flim-flam artist, call the CFTC: 1-866-366-2382..
I recall 1987 – when I was blindsided by the crash. However your point about institutional investors and their influence/control of FX market needs to be repeated often!
Thanks.
Fx Markets are very predictable, and trade worthy, with a 6 year consistent profitability, I can say this.
But, yes forex trading does need a lot of indepth understanding on why the market moves and why the price moves the way it does. Without a detailed study its like walking in the dark.
The average pensioner should use .5 percent of there net worth let alone 5 percent of their net worth on exchange rate arbitration
should not use use .5 percent * edit
A basic understanding of economics reinforces this idea–Forex markets are essentially perfectly competitive markets, i.e. no long run profits for the average partakers. That isn’t to say there are some people who are statistical anomalies or people with inside information who can constantly turn profits, but for every winner, there’s someone out there who lost just as much.
Let me clarify. As with all of the riskiest investments, you should NOT invest more than 5% of your net worth in them. Of course, if you can’t afford to lose anything, you should stay away from them altogether, especially if you don’t understand what you’re doing.
People get so weird on this stuff. Had a client that came back from a visit to her daughter who was studying in France, really determined she wanted to go back and spend more time. She was convinced the dollar would erode and she would end up short. Wanted me to explain FX and set her up to trade.
Going through her finances we discovered her ‘4-6 month reserve fund’ in case her plumbing leaked or her car broke down was more like a couple thousand in an old credit union account. She was on a pension, struggling to figure out how to make her monthly health insurance contribution while trying to figure out how to hedge against movements in the Euro and dollar.
She didn’t like me as an adviser. I got lucky on that one.
can anybody recomend a reputable broker ?
I agree, FX markets are mostly a fixed game, where you are more likely to lose than to gain money…stay away
What absolute rubbish. Market manipalation happens in all markets, whether it be Stocks, Futures, FX etc. To single out a market based on big players is again nonsense. All markets have players who carry very large positions in either direction and will use their weight to protect those positions. The author simply belongs to the 95% of retail traders who have made an attempt at beating the pros at their game and failed. Hence the article bashing the marketplace as a whole. Or maybe a bit of push from the FTA to promote the centralised dealing of FX on CME’s futures. Nice one.
Foreign exchange trading is almost completely controlled by Governments, not private institutions or individuals.
Currency debasement is an old game, thousands of yeas old, practiced to defraud the holders of currency of some of the “value” they hold. Once that involved reducing the size but not the denomination of gold and silver coins, but today since we have paper currencies with no intrinsic value, it mainly involves printing paper dollars, pounds, euros, yen, or yuan.
It essentially involves guessing what the short term strategy of Central Banks will be. More politics than economics in the short run. The relation of exchange rates to trade is more obscure. The best way is to found a country and start printing money. Works for almost all Governments!
The article was short and sweet so it can be forgiven on some items but it leaves a lot of misconceptions on the table. Here are a quick two…
1 – “Currency swings often have nothing to do with the day's headlines and could be manipulated by big traders.” Sure, so could (and does) Equities, and Futures markets too. In fact, I’d bet much MUCH more (gold, oil and have you seen any pull back in the S&P lately? a’hem)
2 – “There are more scams out there than regulators can keep up with and some schemes even ensnare experienced institutional investors.” Have you been to Boca, or heard of Madoff, or Stanford? — scams are everywhere and in any market that has any margins. I dont think thats fair to pin on Forex specifically, but on the people that dont take the time to ask questions.
I am impressed with the bit on doing your homework – that’s prudent for anyone putting money anywhere- the NFA/CFTC can give a lot of insight into that and if you cant find the firm you are looking up (because they are in BVI) you have your answer. And the Rydex item with the 2X leverage. You can get Forex accounts for 2X leverage, no leverage, 10:1, 5:1, whatever if you wish but I think the point here is do you want to speculate” or “invest” – the title of the article says “trade” so we’ll leave that to interpretation.
Now how about an article on Risk Management? (thats pretty much market neutral and worth its weight in inflated ………………………. dollars.
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