Streetwise for Friday, June 1, 2018
One of the most difficult challenges in today’s investment climate is maintaining a reality check on your expectations. Given the performance of the markets over the past several months or even the past several days, it should be no surprise that many investors seem to have become disillusioned with respect to both the risks of investing, and the unpredictability of market returns.
Now, more than ever, careful and deliberate investment planning and fundamental security analysis should be the order of the day. Furthermore, you need to continually restrain yourself from falling victim to the temptation of chasing what some will tell is easy money in todayís volatile climate.
It will never fail to amaze me how otherwise intelligent and responsible people seem to disconnect their brain because they hear about or read about what amounts to those so called easy returns.
For example, I will never forget the experience I once had with a contractor doing work at my farm. The individual asked me what I did for a living. On telling him, he responded that he and his better half were forex traders, meaning they were trading currencies in the foreign exchange markets. Or rather they had spent the last two years learning to be forex traders.
She did it full time, whereas he worked during the day and used his wages to finance the venture. They both traded in the evening. I was left speechless. To say such a reaction on my part was unusual would be an understatement.
When I inquired as to their degree of success, he said the first year had been ok, the second year not so much so. However, he was quick to point out that you must pay to learn. And yes, he understood the risks involved but there was no deterring him. He wanted to return to his Polish homeland as a successful forex trader.
Forex trading relies heavily on margin, meaning you can control large quantities of foreign exchange by putting up a relatively small amount of cash. See here again is that concept of so-called ìeasy money,î or the ability to create large returns with little capital.
The result of such leverage is that price movements are magnified, resulting in magnified gains or losses that are disproportionate to the cash you have on the line. The result is that forex trading becomes an irresistible lure to amateur and professional speculators alike.
However, it is also no exaggeration to say that forex speculation can be a nerve wracking and expensive experience. Yes, some speculators are successful. I agree that they would not have been served well if someone prevailed upon them not to take the risks involved.
The other side of the coin, no pun intended, is that the ads advertising the opportunity to trade currencies, when the odds are that even experienced investors can and will experience substantial losses, is a great disfavor to the investing public. I have seen entire IRA accounts built up over years wiped out in weeks.
Unlike stocks, forex trading does not take place on a regulated exchange. It is not controlled by any governing body; there are no clearing houses to guarantee the trades; no uptick rule and no limits on the size of your position. In theory, you could trade $100 billion worth of currency by putting up the required margin.
No one will ever prosecute you for insider trading. There is no such thing as insider trading in foreign exchange. In fact, European economic data, such as German employment figures, are often leaked days before they are released.
Because currencies always trade in pairs, you will always be long one currency and short the other. For example, if you sell one standard lot (equivalent to 100,000 units) of EUR/USD, you would now be “short” euros and “long” dollars.
My advice to any would-be speculator in any market is to speculate only when all other financial responsibilities have been met. Yet, the reason most people speculate is to increase their net worth. If funds are available to take care of all the important stuff, then what does speculation accomplish…other than you have a lot to lose and little to gain.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.