Friday, 27 September 2013

The Forex Fallacy

Other than burning it, flushing it down the toilet or gambling in a casino what’s the quickest ways to lose money?

First things first. Why would you want to lose money? The only “legitimate” reason I can think of for deliberately wanting to lose money is when you want to launder it. Laundering money is when you take dirty money like the proceeds of crime and “launder” it so it looks like clean money earned using normal, legal means. More often than not the simplest way to do this is just to pass it from one person to another over and over again so that law enforcement officials like the police or BURS can’t figure out what is what.

The quickest way to do this used to be to set up a cash loan business. You didn’t need premises or even a bank account. I knew people who ran such businesses from under trees in car parks or from their government offices. Almost everything was done with cash and virtually no records were kept.

But then came NBFIRA and their requirements that loan sharks operate from offices, had bank accounts with a minimum amount of money in it, stopped taking victims ATM and Omang cards and registered themselves. The result was dramatic. The majority of loan sharks stopped trading. A few are still operating undercover but the majority just went away and that’s good because at least some of them (some experts suggest most of them) were laundering money for organised crime. We have a regulator that drove crime away.

But there are other ways to lose money, just so others can make some. One of the easiest is to trade foreign exchange. I don’t just mean going to the bank and buying some US dollars, hiding it under the bed and later converting it back to Pula when the exchange rate has changed in your favour. I mean online trading where you sit at your computer switching between currencies perhaps many times per day.

It sounds so simple when someone in a flashy suit and tie presents it to you, they portray it as an “opportunity” to make a lot of money and to reach “financial freedom”. But it’s simply not true.

I have yet to meet ANYONE who has made appreciable amounts of money by trading Forex. Rather than comment myself on why this is the case I contacted an expert. I won’t tell you who he or she is but rest assured that this person knows the financial markets as well as anyone I know. This is what my expert said about trading Forex:
“Forex trading is Gambling. The Casino in this case is a forex trading website, which takes a small cut of each trade. Apart from owning one of these websites, the only sure-fire way to make money in forex is to sell a trading system or an education plan to suckers who want to make easy money.

There’s nothing illegal about it, as the system is sold as ‘education’ with lots of caveats in the small print. It might cost you anywhere from P2,000 to P50,000 to buy a trading system and learn how to use it.

However forex is the biggest and most liquid market in the world (estimated three trillion dollars a day) so if you have a successful system you could trade it on a vast scale and literally make billions. Why would anyone sell a successful system to the general public for (say) $5,000 each?

The facts are that the forex industry admits that 95% of people lose money when trading forex. As there is no underlying profit in a forex pair (as there would be from shares in a company) the market is a zero sum game. The 5% must make money from the 95%.

If successful trading systems do exist, then it is a given that they are used by Goldman Sachs and other companies to make vast amounts of money. These investment banks then are the majority of the ‘5% success’, so not even luck is going to keep the public trader in profit.”
My industry expert makes an important point. He says that forex trading is a “zero sum game”. This means that when all the trading is done there is no more money in the system than there was to begin with, it’s just moved around a bit. But that’s not actually true. There are actually THREE parties to a forex trade. The seller, the buyer and another party: the people who own the trading mechanism, the ones who recruited you, the ones that make little commissions on every trade you do. It’s actually a net loss game for the buyers and sellers.

Unless you are Goldman Sachs or just extremely lucky you are destined to lose. Mere mortals such as you and me simply can’t compete in this game against companies employing economists, strategists and (often disgraced) former politicians with insider knowledge.

Add to all of this the variety of rather shady characters involved in the forex or stock market education market and you have an industry that is based on deceptions and distortions. Do you remember Stock Market Direct, which offered “education” on how to trade stocks and shares and whose founder, the mythical “Tony Samuels”, skipped the country with millions he’d taken from gullible investors?

Just ask yourself one question before you sign up for any scheme that says it will teach you how to make money. How do the company selling the education make money? If their system is so good why are they teaching other people how to use it instead of doing it themselves? Rest assured that if I find a way of making a fortune I’m not going to tell you about it!

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