Business Maverick

BUSINESS MAVERICK: Forex trading

When someone offers easy money… run

When someone offers easy money… run
If you are very lucky in forex trading you will break even, but in all likelihood you will blow whatever savings you have squirrelled away – particularly in volatile markets, says the writer. (Photo: Pxhere)

Forex trading has got a bad rep over the years, but that’s because there is a small cohort of cowboys who give the industry a terrible name.

“Has Covid-19 put you in quarantine? Learn forex, make money, and come out better off it!” So reads a recent headline on an online trading platform. 

The article carried on with the puff…

“It’s not all doom and gloom — while Covid-19 completely wrecked our economy, it also constantly creates new opportunities to make some money. Or maybe even more than just ‘some’…” 

With thousands of people cooped up in their homes with time on their hands, perhaps with no salary or a lowered salary, the forex trading marketeers have swung into overdrive.

Learn a new skill, they say. Seven reasons to start trading now, they say. A path to financial prosperity they say. It’s fun, they say.

Well, I can tell you with a reasonable degree of certainty that it’s not fun. Being chained to your screen for hours in a day on a path to elusive prosperity is not fun – it’s highly stressful. If you are very lucky you will break even, but in all likelihood, you will blow whatever savings you have squirrelled away – particularly in volatile markets.

Yet local newspapers, like the Sandton Chronicle and Cape Business News, (yes they have to make a living too), have been full of self-help stories which suggest, among other things, that forex trading could be a viable option for those considering a side hustle.

So it comes as no surprise to see that the Financial Sector Conduct Authority (FSCA) has issued a warning, advising the public against doing any financial-related business with forex trading platforms that promise an income stream during the Covid-19 lockdown.

At this point, I should say that trading forex is an entirely legal and legitimate activity and that there are many legitimate forex trading platforms in South Africa.

But there are others that are less than legitimate, and whose marketing strays from what is considered reasonable.

These forex trading platforms have been telling the public that risks associated with forex trading are quite low and that people with limited trading experience can earn a steady income in volatile financial markets. 

Stay away from these firms, the FSCA cautioned.

Even though trading platforms offer clients the comfort of demo accounts, these accounts have been set up to simulate normal trading conditions that would lead to favourable outcomes, and do not simulate the high volatility the financial markets are currently experiencing. 

In fact, while experienced traders love volatility, and can profit off it, it is precisely this volatility that is so risky for inexperienced traders.

“Speculating during times of high market volatility may be attractive to those seeking to profit off market uncertainty; however, unlisted derivatives such as contracts for difference are often highly leveraged financial products that could result in significant losses,” says Bridget King, a director at attorneys CDH, whose clients include forex brokers (including banks and large institutions). 

Garth Mackenzie, who runs trading analysis and education platform TradersCorner.co.za, says he has been inundated by people with no trading experience who are eager to take up trading as a way to replace their income and utilise the current time off to become full-time traders.

This, he told Business Maverick, “terrifies me”.

After 20 years of trading, he knows that it is not nearly as easy to succeed as is marketed. 

“I’ve witnessed many stories of people who have been financially destroyed in the financial markets,” says Mackenzie.

“I get annoyed when I see scummy forex firms that are registered in questionable jurisdictions portraying trading in a glamorous way in order to lure in starry-eyed wannabe traders. We’ve all seen the adverts: Some guy with a gorgeous girl on his arm, alongside a Ferrari or a yacht or a helicopter. All the implied trappings of riches that come from trading in the financial markets. What nonsense.” 

He discusses this in some depth in this podcast and here.

The problem, he says, is that the barriers to entry have become lower over the years. With the advent of online trading, it has become easy for private individuals to enter an arena that was previously reserved for qualified brokers and investors who had financial muscle or the backing of large firms behind them.

Yet, today, anyone can open an online trading account with a broker, download their trading software, transfer some funds to the account and start trading. 

While this is democratising an elitist industry it does make ordinary people vulnerable. 

The success rate of people who take up trading for themselves is very low, he says. This is particularly the case on leveraged products such as forex, futures, spread betting and contracts-for-difference (CFDs).

Which is not to say, don’t try your hand at trading, just be aware. “People should be aware of the complexity and high-risk nature of foreign currency trading products,” says King. 

They should also check whether the online trading platforms they are using are provided by companies that are licensed as financial services providers under the Financial Advisory and Intermediary Services (FAIS) Act and where forex derivatives are being traded; and whether the providers of the foreign currency derivative instruments (often called contracts for difference) are licensed as over-the-counter derivatives providers under the Financial Markets Act. BM

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