Why forex trading isn’t everyone’s cup of coffee
Forex trading is not dissimilar to gambling if you’re not an appropriately qualified and experienced trader, and it should be avoided altogether, unless you are among the few South Africans whose financial planning affairs are in order, says top financial planner Craig Gradidge.
Your financial affairs are “in order” when you have enough saved to cover your retirement, your children’s education, your emergency fund, and your lifestyle, says Gradidge, who holds the certified financial planner qualification and is a director of Gradidge-Mahura Investments, a financial planning practice approved by the Financial Planning Institute.
Then, and only then, should you consider forex trading, “and only as an alternative to gambling”, he says.
“The random outcomes in forex trading are similar to that of betting on black or red on the roulette table. There’s a one-in-36 chance that the green could come up in roulette, so perhaps forex is slightly less risky, as the currency could go up or down.”
However, given how few South Africans can afford to retire and maintain their standard of living and our high level of exposure to debt, there are very few people who can safely dabble in forex trading.
While it’s not impossible for the average person to make money from trading forex, the odds are stacked against you.Craig Gradidge, who holds the certified financial planner qualification and is a director of Gradidge-Mahura Investments
The people who make money [from forex trading] are often those who sell training programmes or offer forex trading platforms, Gradidge says.
While it’s not impossible for the average person to make money from trading forex, the odds are stacked against you, he says.
Gradidge says he has seen scams offering a guarantee to double your money in 30 days. He says if such returns were possible and you could invest R100,000, and re-invest it and the returns every month, your investment would grow to R3.6-billion after two years and R1.7-trillion in under four years.
Such guarantees are meaningless and aimed at getting you to part with your money. “You are the source of their ‘return’,” he says.
Faizan Anees, the co-founder of broker ThinkMarkets.com South Africa, says consumers need to be careful not to be lured by the marketing tricks used by people posing as forex traders.
As an investor, you should ask yourself why some stranger would want to make you ultra-rich, he says. Successful forex traders are unlikely to share their hard-earned tips and tricks with Joe Public.
To protect yourself from being scammed, he says you can check that the broker or bank they’re trading with is reputable, whether the company is regulated and how long it has been in business, and you can ask to see trading statements.
Ask to see signed and certified statements from the broker and check if the broker is regulated.
Anees says you should be careful of people who try to put you under pressure. “If the opportunity will expire and never return, beware!”
He advises that you begin by investing only a small amount. “A trader that has a profitable strategy can perform with small and large funds, so there should not be any rush to invest everything. Plus, only commit money that you can afford to lose.”
No more ‘Cashflow’
Last week, the Financial Sector Conduct Authority (FSCA) reported the conviction of conmen posing as forex traders in two separate scams.
Port Elizabeth-based David Wilmot, through his company Nava Shore Holdings, took funds from clients under the guise that he would trade forex on their behalf. The FSCA says Wilmot “infiltrated” a local church and exploited relationships within the church to misappropriate most of his clients’ funds. In 2013, the FSCA warned the public about Wilmot, advising that he was not an authorised financial services provider (FSP) or a representative of one. He has since been convicted for money laundering.
Meanwhile Jabulani “Cashflow” Ngcobo and Mzabalazo Welcome Dlamini also misrepresented themselves as authorised FSPs that could trade forex on behalf of their clients, the FSCA found after investigating the two. “This is a criminal offense, and the FSCA welcomes the sentence imposed on them, as it sends a clear message against unscrupulous financial entities and scams,” the FSCA says.
The pair were sentenced to six years imprisonment, two of which were suspended, and a fine of R200,000 wholly suspended for five years.
What is forex trading?
Forex trading is when you trade currencies – also known as foreign exchange – on the belief that one currency will weaken or strengthen relative to another. Gradidge explains: “You buy the one that you believe will strengthen with the one you believe will weaken, and then reverse out the trade when the currency moves in your favour, or cut your losses if it does not.”
Currencies are notoriously difficult to predict in the short term, and trading is a short-term activity, he says. “Yes, the rand tends to weaken against the dollar over time, but it can be stronger over a period of a day, a week, a month, even a year or two. So, knowing that the rand weakens against the dollar over time doesn’t help at all when it comes to forex trading because you could have lost all your money by the time this plays out.
“Most forex trading platforms offer gearing, which means that you can ‘double up your bet’ without necessarily having the money to do so. If the trade goes wrong, traders can lose a lot more than the money they put on the trade. This is often where it goes wrong for most inexperienced forex traders.”
Given the random outcomes in any short-term trading, this is not the place to expect guarantees, Gradidge says.