Don’t believe FX trading sites’ get-rich-quick hype

Foreign exchange trading, known widely as forex or FX trading, is highly risky and far less glamorous in reality than forex trading platforms portray in their marketing.

So says Simon Brown, financial writer and radio and TV host, who runs the share trading and investment website Just One Lap.

Meanhwile, the Ombud for Financial Services Providers or FAIS Ombud warned against unauthorised dealers who use high-pressure tactics to get traders to sign up and outright fraudsters who prey on those motivated to try forex trading as a way to make quick profits.

Brown says there are many risks for potential forex traders, but the primary ones are the regulatory issues around trading platforms based outside South Africa and the high leverage needed to make trading affordable.

Offshore platforms’ questionable credentials

“A platform may open a local office and obtain a financial services provider (FSP) licence from the Financial Sector Conduct Authority (FSCA). But many of these companies are headquartered in Belarus or Malta or the Seychelles – places with lax regulation,” Brown says.

“So if things go pear-shaped, how much can the FSCA really do? If a local bank does something wrong, the FSCA can take action against the bank, being a South African company. But if the company is in Malta, what authority does the FSCA really have?

“Many platforms have an FSP number on their website and appear legitimate, but they are still coming at you from weird and wonderful parts of the world,” Brown says.

Fraudsters playground

The ombud warns that consumers are being approached by people who claim to be forex trading agents. They offer to assist you in opening a trading account but ask you to share share your login credentials. They then withdraw funds from your account without your consent.

The ombud says consumers are lured into investing by fake social media accounts that claim to be associated with prominent people in the forex trading industry and some traders use bot advertisements that claim you can make unrealistic annual returns on investments as high as 85 percent.

Complaints to the ombud reveal that some forex trading account managers pressure consumers to deposit money without taking into account your financial situation or your ability to take the risk of trading.

They also pressure consumers who have made losses to invest more in order to recover those losses, but there is no genuine strategy, only a reliance on consumers continually making deposits, the ombud says.

Leverage amplifies gains … and losses

Brown says another big risk is leverage – amplifying the trading amount multiple times so that retail traders can operate within an affordable price range. This is known as “trading on margin” and it exponentially increases the risks in what is already a highly volatile market Read more: What is forex trading?

"Currencies are traded in lots, and the regular lot is 100 000 units – for example US$100 000. That’s a large sum of money, which retail clients don’t have. There's a mini-lot of 10 000 units, but that’s still a big number. 

So the provider says ‘that’s not a problem, we’ll give you leverage’. This is anything from 100 to 1000 times, which means you’re ‘borrowing’ vast amounts of money,” Brown says.

“I’ve been trading for 30 years and for me the ideal leverage is three or four times. A hundred or 1 000 times for an inexperienced trader means you’re going to lose money. The question is not whether you will or won’t; the question is will it be today or tomorrow.”

Using leverage means that if the trade goes the wrong way, you can theoretically lose more than you invested. However, the platform will try to close your position before you reach a negative balance. “They are not interested in chasing you for money,” Brown says.

Glitzy, dodgy marketing practices

Brown says another problem with the forex trading industry is its deceptive marketing practices. “I was at an forex conference recently and it’s all fast cars and women in skimpy clothes – a get-rich-quick type of scenario. And with my experience I can tell you that trading is not the way to ‘get rich quick’.

“So they sell you false dreams, they say you can start with a small amount of money, and tell you they are completely legitimate and regulated … and all three of those are lies,” he says.

The shorter the term of your trade – so-called “scalp trading” happens in mere seconds – the more reliant you are on luck than being able to read the markets. Brown suggests that if you want to take longer-term positions on the currency markets there are better, less risky ways to do it – by investing in offshore exchange traded funds (ETFs), for example.

The attraction for wannabe forex traders, Brown says, is the false promise that, with R100, you can own a Ferrari in double-quick time. “It’s just not possible. They sell you a lie and they make it seem true,” he says.

“Trading, in anything, is a skill, which needs to be learnt. And that takes time, which is not measured in days or weeks, but in years."