People who are desperate to provide themselves and their families with a better lifestyle may well be sucked in by the glossy ads on TV, in newspapers and on the web about the easy money that can be made through foreign exchange trading.
But it's not as easy as it may sound with an estimated 95% of foreign exchange traders likely to fail. But it's not just the risk of losing money while trading that's a problem.
In Australia, foreign exchange brokers are legally allowed to use their client's funds as collateral – unlike other countries. In other words, the brokers can pledge your cash to banks. Should something go wrong, retail foreign exchange traders could get wiped out – without even trading. Some of Australia's largest foreign exchange brokers, IG Group, CMC Markets, Oanda and GFT want the government to introduce laws to segregate client accounts – but local brokers have branded the move uncompetitive.
Now most of the time, you might be fine, but as we saw last week with the 40% jump in the Swiss franc, something did go wrong. Two of the three largest brokers suffered massive losses with UK-based Alpari filing for insolvency, and Denmark's Saxo Bank has admitted it could face hundreds of millions of dollars in losses. They weren't the only ones either.
To make matters worse for its clients, Saxo Bank has advised them that it will revisit client orders and all executed trades would be revised and amended to reflect more accurate levels (exchange rates). In other words, it appears that the bank is going to pass some of its losses onto clients.
And then we come to trading.
As the Australian Financial Review notes, brokers can trade against their clients – as with 95% of retail traders (punters) pre-programmed to lose, it's a win-win situation for the broker. Leverage can be applied when trading foreign exchange, and in some cases, traders are risk 100-400 times the capital they have invested in a trade. Add in some questionable activities such as fees for "cost of carry" and widening currency bid-offer spreads, and retailer traders could see their stop losses triggered automatically.
It's one reason why you'll see a number of brokers constantly advertising for new clients – they seem to keep losing their old ones.
When the odds are stacked against you as they are in the foreign exchange markets, you may as well set fire to your cash right now – chances are, you'll lose it.
