THE MYTHS AND TRUTH ABOUT FOREX TRAD­ING

It’s a prac­tice that’s taken on mythic pro­por­tions and is be­lieved to be a way to get rich quickly, but M a Fisher-French know youYro ,

CityPress - - Business -

‘Irun an on­line share trad­ing plat­form and I don’t con­sider my­self a forex trader. In fact, I would not want to try make a liv­ing out of forex,” says Brett Dun­can, the head of retail eq­ui­ties at Stan­dard Bank. He says that the mar­ket­ing of forex trad­ing as a way to get rich quickly is mis­lead­ing. For­eign ex­change as an as­set class is im­por­tant be­cause it is the most liq­uid and largest mar­ket, and is how money is trans­ferred around the world.

A bank may, for ex­am­ple, buy and sell forex for a large im­port­ing com­pany; the same com­pany may be plac­ing a large prod­uct or ser­vice or­der that has to be paid in a for­eign cur­rency in a month’s time and will then use forex trad­ing as a hedge in case the rand weak­ens and in­creases the end price.

Forex trad­ing can also be used as part of a trad­ing strat­egy where your port­fo­lio may be over­ex­posed to one cur­rency and you wish to di­ver­sify, or if you be­lieve that a cur­rency will de­value due to po­lit­i­cal or eco­nomic events.

The con­cept of forex trad­ing as an in­vest­ment strat­egy within it­self has to do with the abil­ity to gear one’s po­si­tion to be­come one where a small move­ment in the cur­rency can re­sult in a large gain.

Say, for ex­am­ple, you have R10 000 and want to take a po­si­tion that the rand will de­pre­ci­ate against the dol­lar. The ex­change rate is R13.50 for $1, so your R10 000 buys $740.74. If the rand falls to R14 to the dol­lar, your $740.74 will buy you R10 370.

On a one-to-one ba­sis, if you bought the ac­tual cur­rency, that would give you a profit of R370, but, with gear­ing, you buy ex­po­sure to the move­ment of the cur­rency, not the ac­tual cur­rency.

As you are only buy­ing ex­po­sure to the cur­rency, the bro­ker can of­fer you a lever­aged po­si­tion where, for ex­am­ple, your R10 000 gives you R100 000 worth of ex­po­sure. In this ex­am­ple, your rand ex­po­sure in­creases from R100 000 to R103 700m so your profit is R3 700. You only phys­i­cally in­vested R10 000, so that equates to a 37% re­turn.

If the rand strength­ened to R13, your loss on R10 000 is R3 700 – more than a third of the value of your ini­tial out­lay. If the rand sud­denly strength­ens to R12.50, you can wipe out nearly 80% of your en­tire in­vest­ment. In this sce­nario, the gear­ing was 10 times the amount, but the higher the gear­ing, the eas­ier it is to lose money.

The get-rich-quick schemes will of­ten punt high gear­ing as a way to dou­ble your money overnight, but what they never tell you is that a sin­gle trade can wipe you out – and no one gets it right con­sis­tently.

For ex­am­ple, if you used 100 times gear­ing so that your R10 000 bought you ex­po­sure of R1 mil­lion, and the rand strength­ened to R13, you would lose R37 000 – three times the amount of your in­vest­ment.

In the re­cent Stan­dard Bank Web­trader cur­rency trad­ing com­pe­ti­tion, win­ner Ricky Ja­cob­sohn turned $100 000 into more than $1.3 mil­lion in just 30 days. This is the type of head­line that has given forex trad­ing its myth­i­cal status as an op­por­tu­nity to get rich.

But if you read the de­tails, 20% of the 1 300 in­vestors lost more than 20% of their vir­tual in­vest­ment, and only 5% made a 50% profit. The like­li­hood is that even those within the 5% would have seen their luck change if they con­tin­ued to trade.

Ja­cob­sohn ac­knowl­edged that, if he had been in­vest­ing his own money, he would not have taken the gear­ing and risk that he did dur­ing the sim­u­lated trade.

Any real trader will tell you that spend­ing a week­end learn­ing the “se­crets of trad­ing” will not make you a trader, only ex­pe­ri­ence will.

As Si­mon Brown of on­line fi­nan­cial ed­u­ca­tion site ju­s­tonelap.com ex­plains, forex trad­ing is more or less a zero-sum game – for a trader to make money, some­body needs to lose.

“It’s the most liq­uid mar­ket in the world and the best traders in the world grav­i­tate to forex, so you need to beat the best. This will take time,” he says.

Dun­can com­pares forex trad­ing with learn­ing to drive a car – if you try to drive a car af­ter only read­ing the learner’s li­cence man­ual, you are go­ing to

nceet’sdow’ ufa t in­rvi­teests a fe­way years and ed­u­ca­tion. If you are not will­ing to do that, you will have an ac­ci­dent

for elab­o­rate Ponzi schemes. In the case of Profit Trad­ing, an in­ves­ti­ga­tion by the Fi­nan­cial Ser­vices Board found that not one trade had been placed.

Dun­can says that mar­kets are highly ef­fi­cient and even if some­one has de­vel­oped an al­go­rithm, by the time it is widely mar­keted, the mar­ket will have dis­cov­ered it and be trad­ing against it.

Elaine Ma­biletsa, who works at the JSE as a spe­cial­ist on bonds, cur­ren­cies and in­ter­est rates de­riv­a­tives, says what in­vestors don’t re­alise is that forex trad­ing is very risky – and for every win­ner, there is a loser.

“Not even a bank with ac­cess to in­for­ma­tion and re­search con­sis­tently makes money out of trad­ing cur­rency. For some­one to pre­tend they have de­vel­oped a sys­tem that con­sis­tently pro­duces profit is im­pos­si­ble. If they had, they wouldn’t be try­ing to sell cour­ses and soft­ware to peo­ple – they would be too busy mak­ing bil­lions,” says Ma­biletsa.

The very na­ture of trad­ing is that you win some and lose some, so a claim that a fund can de­liver a con­stant monthly re­turn is false and a warn­ing sign that it is a scam.

How to le­git­i­mately trade forex

Get used to trad­ing with­out gear­ing:

Dun­can be­lieves that a new trader should start with geared forex – they need to first get used to trad­ing on a nongeared ba­sis.

“Go buy a forex ex­change-traded funds and get used to it. Even add some shares and learn about trad­ing be­fore you have a go at forex,” says Dun­can.

There are dif­fer­ent in­stru­ments you can use to get ex­po­sure to for­eign ex­change with­out gear­ing, such as the Absa NewWave cur­rency ex­change traded notes, which give you ex­po­sure to dol­lars, pounds or euros with­out us­ing your for­eign ex­change. You could also in­vest in ex­change-traded funds that in­vest in in­ter­na­tional in­dices through CoreShares.

If you in­sist on tak­ing a short cut and go for geared forex trad­ing, at least start with sim­u­lated trad­ing. How­ever, only do this on a trusted plat­form be­cause there are many scams on plat­forms that fal­sify your trades and make you think you are mak­ing, thereby lur­ing you into com­mit­ting real funds.

Trade vir­tual money first: Only use cred­i­ble plat­forms:

There are sev­eral cred­i­ble plat­forms in South Africa where you can trade forex, in­clud­ing Stan­dard Bank’s Web­trader, San­lam iTrade and PSG on­line. All of them use the Saxo Bank trad­ing plat­form, but of­fer dif­fer­ent in­ter­faces and ed­u­ca­tional tools that can in­clude on­line tu­to­ri­als.

Global Trader and IG.com also of­fer forex trad­ing. Global Trader is owned by the JSE-listed Pur­ple Cap­i­tal Group and IG is a UK-listed com­pany with of­fices in about 15 coun­tries, in­clud­ing South Africa.

The ben­e­fit of trad­ing through stock­bro­ker plat­forms is that you also have ac­cess to in­ter­na­tional shares and ex­change-traded funds. You can build up a more holis­tic port­fo­lio than just forex trad­ing if you wish to.

“Mak­ing money from forex trad­ing, in­deed even mak­ing a liv­ing from forex trad­ing, cer­tainly is pos­si­ble, but the idea of it be­ing easy and quick is not true,” says Si­mon Brown.

He says that, like any skill, it takes time to learn the tech­niques and strate­gies.

“One also has to learn risk man­age­ment and then the hard­est part is man­ag­ing the psy­chol­ogy – the wild emo­tions of fear and greed. Ex­pect this learn­ing curve to be mea­sured in years,” says Brown, who rec­om­mends read­ing Trad­ing in the Zone by Mark Dou­glas and Rem­i­nis­cences of a Stock Op­er­a­tor by Ed­win Le­fevre.

Ed­u­cate your­self:

PHOTO: ISTOCK

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