Opinion

John Wasik

Forex folly: Why you shouldn’t be trading currencies

February 7, 2011

A picture illustration of crumpled kuna, Dollar and euro banknotes, taken in Zagreb January 18, 2011. REUTERS/Nikola Solic 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:

  • Check out the FOREX company first. You can obtain information about any firm or individual registered with the Commodity Futures Trading Commission, including any actions taken against a registrant.
  • Also check the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website. You can also find out if someone is registered by calling the NFA at 1-800-676-4632.
  • Ignore promises that sound too good to be true. Most of them are frauds. Hang up on unsolicited phone calls offering investments, especially those from strangers.
  • Don’t sign a check or transfer any funds until you fully understand what you’re investing in and how you can lose money.

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..

Comments
7 comments so far | RSS Comments RSS

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.

Posted by hariknaidu | Report as abusive
 

The average pensioner should use .5 percent of there net worth let alone 5 percent of their net worth on exchange rate arbitration

Posted by SwissMaestro | Report as abusive
 

should not use use .5 percent * edit

Posted by SwissMaestro | Report as abusive
 

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.

Posted by johnwasik | Report as abusive
 

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.

Posted by ARJTurgot2 | Report as abusive
 

I agree, FX markets are mostly a fixed game, where you are more likely to lose than to gain money…stay away

Posted by johny2 | Report as abusive
 

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!

Posted by txgadfly | Report as abusive
 

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