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Financial Happenings Blog
Wednesday, October 31 2012
Technology is definitely bringing the world closer and closer together.  Aspects of the investment world highlight this point.  Investors can be sitting in the comfort of their own home trading seamlessly across markets right round the world.

As with many other areas of technological development, new capability does not always bring beneficial results to the masses but can lead to areas of exploitation and danger.

Jim Parker in his latest Outside the Flags posting, highlights this when it comes to currency trading.

I often reflect with clients that if they think equity markets are tough to gauge currency markets are much more difficult and hazardous.

Please take a look at Jim's insights in his article that has been reproduced below.

October 30, 2012
Dollars and Sense
Vice President
"Making money in the global markets is just a click away", the commercial promised, without mentioning that losses are just as instantaneous.

For many people, one consequence of poor investment returns over prolonged periods is that the lure of the easy-money, quick-fix trade becomes even stronger.

This is how marketers of foreign exchange trading programs – betting on currency movements "from the comfort of home" – are finding such a ready audience right now.

Despite horror stories of people losing fortunes in high-speed, leveraged and extremely speculative activity, the appetite for this casino approach seems stronger than ever.

In one case, an Australian online entrepreneur is being sued by US regulators over an allegedly fraudulent forex trading scheme that cost investors in the US, Australia, the UK, Germany and other countries more than $50 million. 1

According to the US Commodity Futures Trading Commission, the company 'Investment Intelligence' used online marketing to solicit clients worldwide to open currency trading accounts, lured by promises of a 9% monthly return and low-risk.

In one night in May, the CFTC said clients awoke to discover they had lost more than 60% of their investments. This occurred when the company entered more than 200 trades in each client's account, violating representations made to them earlier.

Of course, not all such online currency ventures are fraudulent. But there is often a large disconnect between the promise and the reality. Many ventures tell individuals that just by attending a short course and learning a few trading techniques, they can make substantial money via trading currencies from home.

But the reality is that even the most highly skilled and knowledgeable investors – including global banks with hundreds of analysts – have difficulty predicting movements in currencies with any consistent success.

In fact, none other an authority than the former chairman of the US Federal Reserve Alan Greenspan once said that predicting exchange rates has a "success rate no better than that of forecasting the outcome of a coin toss".

So if global institutions and central bankers say it's an impossible task, what are the chances of an ordinary person, working on their own at home with a software program and a few charts, making a living out of currency speculation?

Recognising this threat, the Australian Securities and Investments Commission has issued a warning to retail investors to exercise extreme care before committing to get-rich-quick, currency trading schemes and courses.

"Forex trading is very risky even if you have years of skill and experience in this type of trading," the commission says. "You will need plenty of spare money if you have to cover a margin call. Risk management systems such as stop loss orders, will only give you limited protection by capping your losses."

As well, ASIC warns of the dangers of 'counterparty' risk if the forex provider can't fulfil its obligations. Liquidity or technology issues can stop you being able to make a trade, margins or spreads can eat up any profit you make and promotional offers of trading being "free" or "no loss" inevitably have strings attached.

On top of all that, you are expected to remain constantly on top of what is going on in the 24-hour global forex market – a market where turnover totals $4 trillion each day, according to the Bank for International Settlements. And you must be aware of all this while living your non-trading life – sleeping, eating and seeing your family and friends.

It just defies logic that anyone could do all of this without going either broke, bewildered or insane - and perhaps all three.

1. 'Foreign Exchange Trading: Money Smart', ASIC, April 23, 2012

Posted by: Scott Keefer AT 12:00 pm   |  Permalink   |  Email
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