Currency trading – Just say NO! by Adib Motiwala, Motiwala Capital
This is a re-post
I came across this article about currency trading today. The title reads “Foreign currency trading is easy — an easy way to lose money”.
Everyone has their own style of investing , be it stocks, bonds, real estate, mutual funds, gold, oil and gas partnerships or some mix of all of them. However, one type of ‘investment’ that I would highly discourage everyone from is currency trading.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
People with little to no knowledge of finance, investing or trading are sucked into this game with advertisements. Low minimum account opening such as $50 – $100 is advertised. Free practice accounts are offered. Leverage in Forex is often 50-1. ( down from 100-1 a few years back). In comparison, stock margin accounts are 2-1 levered or maybe 4-1 depending on the broker.
My advice: Just don’t do it. Not for the fun. Not for the thrill. If you have any amount of money that you think you don’t mind losing, just donate it to charity. There are many causes that could use it.
Foreign currency trading is easy – an easy way to lose money
Reporting from New York — Dorothy Ouma began trading foreign currencies after seeing a TV commercial touting it as a way to make extra money, something she could use as a single mother raising three children.
“The ads made me think, ‘This is easy,'” said Ouma, 52, an administrator with the Grand Prairie, Texas, police department.
Ouma used her credit card to fund an account with an online currency broker. Within a few weeks of swapping dollars for yen and euros, she said, her $3,000 of borrowed money was gone.
“Even if you make money for a little while, eventually you just end up losing,” she said.
Ouma made two mistakes: investing on credit and trying to make a buck by predicting changes in currency exchange rates, something best left to professionals, according to personal finance experts. But she has plenty of company.
An estimated 615,000 Americans are dabbling in foreign currency trading, encouraged by advertising from the two biggest U.S. brokers, FXCM Inc. and Gain Capital Holdings Inc., both based in New York.
Combined, FXCM and Gain have about 260,000 accounts, a third of them in the U.S.
These customers are losing money in spectacular fashion.
At FXCM, 75% to 77% of customers lost money each quarter last year, according to newly required disclosures to the Commodity Futures Trading Commission. At Gain, which operates through http://www.forex.com, the number of unprofitable customers hovered between 72% and 79% every quarter last year, according to its filing.
Lots of leverage, lots of turnover
As if those statistics weren’t scary enough, the rules of currency trading allow investors to leverage every dollar they bet on a 50-to-1 ratio. This allows them to bet money they don’t have — a tactic that can boost profits but also losses.
The losses have triggered recent lawsuits and regulatory scrutiny — but haven’t stopped the swift growth of the industry, which barely existed a decade ago. Gain and FXCM went public on the New York Stock Exchange last December.
Executives with both firms say that they simply provide a conduit for people who want to trade currency, and that customers are given full disclosure of the risk.
“The majority of people today are on a quarterly basis not doing well,” Drew Niv, FXCM’s chief executive, acknowledged in an interview. “There’s lots of education showing, ‘Here’s how to do it right.’ … Do most people heed the advice? No, of course not.”
Trading experts, however, argue that the companies use aggressive advertising to lure inexperienced investors into an unusually opaque market.
Please read this article on LA times for further details.