Thursday, March 31, 2011

Untold secret of Forex: Make rich quick

FOREX( Foreign - Exchange) trading is probably one of the most well known get rich quick dream scheme on the planet.It is still luring a lot of people into it, there are many "gurus" and FOREX training centers out eager to sell you their wining, secret formula for Forex. Most promises are very very attractive: "Get rich quick", "escape from the rat race and earn thousands of dollars from home", etc. Some even do not request any effort, they have autotrading systems which can trade and earn money for you. Earn money while sleeping! Sounds too good to be true. Well it probably is.

To be fair there is a well kept secret about FOREX. You may wonder what is this secret of the FOREX trading? The secret is this: FOREX market is a zero sum game! Yes, FOREX is a zero sum game. This means in FOREX market your earnings and losses will add up to zero in the long run. You will either wipe out all your money in a short period like 85-90 percent of retail traders do thanks to high leverages or lose it all slowly thanks to spreads you are paying to brokers in each trade.

So does this mean you will have all the fun and lose anything because it is a zero sum game. It would be if you were not paying to play! Even your earnings and loses add up to zero, you will lose money because in each trade you are paying a commission as spread. Do not believe in the FOREX advertisements, you pay commission in FOREX, high ones indeed, as spread.

So secret formula of FOREX trading is this simple equation:

Your Earnings = Wins(t) + Losses(t) - Commissions(t).
(t) is the number of your trade. As (t) increases Win(s) + Losses(t)  goes to zero and formula becomes:

Your Earnings = - Commissions(t)

But although a quick internet search would show that 85-90 percent of the retail traders lose all their money in this market, people still want to believe that they belong to the lucky minority of 15 percent. Bankruptcy rate is so high in this market because traders without any notion of risk uses 100-400 times leverages and are wiped out with small fluctuations. Traders who do not use high leverages usually lose their money slowly to the spread between buy and sell prices. Losing money sooner or later should not be the  main target in any investment!
"I had a bad streak," says Matthew Smith, a 23-year-old personal trainer in Colorado Springs, Colo., who lost more than half of the $10,000 he had in an online account while trading 17 currencies. Now that he focuses on the British pound versus the dollar, he thinks he can make it all back. "I'm hoping to do [currency trading] as my most significant source of income," Mr. Smith says. 
Professionals don't think that is such a good idea. Kevin Morrison, head of the U.S. foreign-exchange desk for Citigroup Private Bank, says many of his clients trade currencies. But he advises that this trading come from the 10% of overall capital that investors put aside for riskier bets. "This is not a core asset," he says. 
Even people running the trading shops warn clients against trying to time the market. "If 15% of day traders are profitable," says Drew Niv, chief executive of FXCM, "I'd be surprised."

So who do you make rich? Who can make steady income from Forex? Well your broker company will definitely do. Every time you trade, you win or lose they earn the spread (remember the house always wins). That Forex training course provider will do. And the writers of the books which promise to teach you earn money while you are in sleep will have steady income thanks to Forex.

As a result, FOREX looks like a "get rich quick" tool but it is actually a "make rich quick" tool where small traders makes others rich.

Currency trading risks abound by CNN_International

Think it again: at the opposite end of the table there are those bright wall street types who funds speculations from Shanghai real-estate to Russian stocks with cheap Japanese carry trade and in this side there is you. Doesn't it remind you the infamous poker quote:

"Look around the table, and if you can't tell who the sucker is, it's you!"

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