Forex for Everybody?

[This Thursday Re-Run first appeared November 18, 2009.]

Last week Moolanomy ran a long post on Forex Trading Basics and How It Works. Although reasonably factual, the post qualifies as bad money advice Chicklet-currency for strongly implying that there is a possibility that investing in forex might be a good idea. It also ends with a paid link to a forex broker-dealer.

Forex, if you don’t know, is trading in currencies, also known as foreign exchange. And if you didn’t know that, I’m sorry I told you. You could have probably lived happily ever after without knowing that this particular intersection of investing and gambling existed. Oh well. Too late now.

Superficially, currency markets are simple. A person might buy some Japanese Yen, for example, in the hopes that it would go up in price relative to the dollar. If it does, it can be sold for a profit, if it goes down, for a loss.

Two things make this more casino-like than most financial markets. First, currencies trade very actively, literally 24 hours a day, so whatever the time of day or night there is some action to be had. Second, for reasons that are hard to explain, the margin requirements are tiny. 100 to 1 is relatively ordinary, meaning that you can buy $1,000,000 worth of Euros with $10,000 down and $990,000 borrowed. If the Euro goes up 1% you double your money. If it goes down 1% you’re wiped out. What fun!

Problem is that unless you are the kind of person who knows the names of the men in charge of the major central banks of the world, you are unlikely to have any kind of edge in this game. I’ve got a variety of financial credentials and years of experience running global (multi-currency) equity funds and I would never dream of trying to make money here. Seriously, on-line Texas Hold ‘Em is more exciting and more likely to result in profit.

I’ve several times repeated my advice on investing in individual stocks: do it if you enjoy it, but don’t expect to do better than index funds over the long haul. And, relative to forex, the stock market is a comparatively easy place for an amateur to make money. Pricing is transparent and stocks move mostly based on news that is widely available and generally understandable.  There are also elaborate regulations and occasionally even regulators to make it harder for you to do foolish things.

Forex is one of several non-mainstream investments that occasionally spark the interest of those who should know enough to stay away. Commodities, including precious metals, and collectibles, running from fine art to baseball cards, are other examples. And they all have basically the same problem. You are competing, and trading, with people who do this for a living. Not only do they know more about it, they are probably rather good at it, because if they weren’t they couldn’t make a living.

No Comments

  • By Mr. West, November 11, 2010 @ 2:25 pm

    “You are competing, and trading, with people who do this for a living. Not only do they know more about it, they are probably rather good at it, because if they weren’t they couldn’t make a living.”

    Understood … so Frank, why aren’t you working again?

  • By Aaron, November 11, 2010 @ 10:10 pm

    I always suspected there was something fishy about forex.. Mostly because the advertisements I have gotten for forex trading have mostly been spam.

    Our of curiosity, why do you group commodities trading with forex? Is commodity trading not regulated like stock trading?

  • By Frankie, November 11, 2010 @ 11:39 pm

    Problem is that unless you are the kind of person who knows the names of the men in charge of the major central banks of the world,

    Seriously? Who doesn’t know who Jean-Claude Trichet, 白川 方明, 周小川 and Henrique de Campos Meirelles are?

  • By Observer, November 13, 2010 @ 11:26 am

    Short-term speculation in foreign currencies is like any other form of speculation, agreed. But how about diversification into long-term investments priced in foreign currencies? For an American, that would seem to be reasonable hedge against a long-term decline in the U.S. dollar. The purest way of doing that, it would seem, is investing in foreign government or high-quality corporate bonds . . . which turns out to be almost impossible for a not-large investor in the United states to do.

  • By mc, November 13, 2010 @ 10:21 pm

    There are mutual funds that invest in foreign government and corporate bonds, such as FNMIX.

  • By Landon, November 15, 2010 @ 10:11 pm

    No way dude, my coworker says he has a system that will double his money everyday called the Longcandle system! He also believes in UFOs….

  • By Nona Mills, December 22, 2010 @ 1:07 pm

    [This Thursday Re-Run is from November 20, 2009. I’ve updated the dates to fit with 2010.] We are coming up on what we Americans call the Holiday Season. And it is a season: not just one holiday, but a joyous period in which every day is special. A few of those days don’t have names [...]

  • By wanna lose your shirt? trade forex or cfds, January 20, 2011 @ 1:56 am

    Trading anything is gambling. Although you can minimise the risks by doing the research blah blah blah… it’s still essentially gambling. I have had colleagues tell me that they made thousands trading forex and cfds and on the other hand, I have the ones who tell me that they’ve lost thousands.

    The odds are stacked against the plebian mass because central bankers manipulate currencies. You only have to look at China who is artificially keeping the value of their Yuan down, the US who can’t print money fast enough to keep up with the debt/interest payments/bond issues and the Euro which is imploding due to the unstable nations in its European Unions (Ireland/Portugal/Italy/Spain).

    It would be interesting if you wrote what about your opinions are on gold and the USD and its stability or lack of… What are your thoughts on the USD?

  • By ross, July 15, 2011 @ 4:07 pm

    I’ve been looking into different types of investments like dividend stocks, bonds, and internet properties but i would never drop alot of money before i felt like i knew what i was getting into.

    To be honest i don’t know anything about forex, but i’m sure if you know it well enough, there are some safer ways to do it.
    It just becomes a problem when people that are novices jump in things like forex and the stock market thinking that they will make easy money. There really is no such thing as easy money.

  • By شات بنات مصر, October 12, 2011 @ 12:22 pm

    thanks

    I’ve been looking into different types of investments like dividend stocks, bonds, and internet properties but i would never drop alot of money before i felt like i knew what i was getting into.

    To be honest i don’t know anything about forex, but i’m sure if you know it well enough, there are some safer ways to do it.
    It just becomes a problem when people that are novices jump in things like forex and the stock market thinking that they will make easy money

  • By Traveler Service Provider, January 11, 2012 @ 3:16 am

    You have to have three things to become a good and successful forex trader:
    1. Knowledge
    2. Experience
    3. Suitable mental and psychological condition
    If you lose more than what you make in forex, you don not have at least one of the above essentials.

  • By http://badmoneyadvice.com/, February 15, 2012 @ 1:22 am

    To be a Forex trader we need to be highly experienced and knowledgeable, and need to be update in every aspects

  • By Ryan Maccarty, September 4, 2012 @ 2:47 am

    FX traders should not typically exclusively base decisions on one type of analysis or another. However, trend investors (long term) and counter-trend advocates (short term) do have very different approaches. Trend investors tend to do better when they focus on fundamental factors and their potential affect on currency exchange rates.

  • By Courtney Watral, August 2, 2013 @ 7:22 am

    My dream retirement would likely be a few several years in distinct countries, enjoy and absorbing the earth around me with a loved 1!

Other Links to this Post

  1. Forex for Everybody? | Bad Money Advice @ Forex Expert Advisors — November 11, 2010 @ 7:04 pm

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