The power of the Internet means real-time forex trading is now open to the small investor working from home. Given the use of automatic stop-losses and available leverage of up to 200x this appears to mean the potential loss on a deal can be as small as $50, while the gains are in the $100s.
If the chances of winning/losing are 50% this appears to be a licence to print money, or does the old adage "if it seems to good to be true it probably is" apply?
Any comment/opinion welcomed.
The banks (who have real time info, years of experience, the latest tools and research, and traders who nothing but trade FX) have pretty much closed their proprietary trading desks. FX is a very fast, efficient market. I know very experienced people who've tried trading it, but in the end it's just the person who gets the commission who makes the money (that's what the banks figure too).
The short term fluctuations knock out stop losses too.
"FORECASTING exchange rates is an inexact business. As Alan Greenspan, the chairman of America's Federal Reserve, once said, the activity 'has a success rate no better than that of forecasting the outcome of a coin toss.' Recent years have borne this out: most currency forecasters would actually have done better if they had simply tossed a coin?at least they would have been half right. Yet over the next few years it seems an excellent bet that there will be a large drop in the dollar."
As for stop loss: remember the Lloyd's of London victims mostly had stop loss cover, and it didn't help them at all. Turns out they were all insuring each other and the agents were churning their investment, seizing the profits for themselves and hiding the real risks.
Leverage at 200x? Are you mad? In a falling market, a shift of 0.5% wipes you out. And that can happen in *seconds* on the FX markets. I can see real-time exchange rates at work, and I've seen this type of shift this year, where the USD/GBP rate bounces back and forth by a cent or more in a matter of a few seconds.
Of course it applies. It always applies. The chance of winning isn't a constant - read Mandelbrot's _The Misbehaviour of Markets_ about the coin toss theory. Every time major countries publish employment figures or change interest rates, the currencies shift. Every time Alan Greenspan opens his mouth, it seems, the markets spank the dollar.
Don't play in this market unless you have a block of money you can just throw away, in which case you could just give it to me. :)
...whoa-whoa-whoa, stop right there!
They aren't.
Go to a casino, and take a look at the roulette table. If the wheel had the numbers 1 to 36 on it, the casino would never do better than break even. The kicker, the little extra that gives the house the edge, is that green 0. (In the States, also the green 00.)
What gives the FX spread-bet firms *their* kicker is in their name: the spread. You've got to make several points in your bet direction before you've a penny of profit, and you take a loss if you cash out without the market even twitching.
The chances of winning are *always* worse than 50%; possibly considerably worse, depending upon your betting strategy and the amount of spread.
Look, if you want to spread-bet, do it on something whose underlying market you understand. Watch the news; listen to the radio; run news tickers on your PC. Find out the drivers in your chosen market, and correlate them to price movements using paper or simulation trading for a while. When you've a really good feel for where your strengths lie, start laying small bets and see if your nerve holds, and real life is like the simulation. Then, and *only* then, consider laying more substantial bets on fully-understood moves in well-understood markets.
That way, you *can* make money on spread-betting. All else is a mug's game.
Jon
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