Forex-Zone

The foreign exchange market is a zero sum game[7] in which there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attention full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Although it is possible for a few experts to successfully arbitrage the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbritrages themselves are a rival good. (To draw an analogy, the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of a treasure map.)

Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of gambler's ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.

The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be "resettled" each day, each time costing the full bid/ask spread.

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' "[15]

Paul Belogour, the Managing Director of a Boston based retail forex trader, was quoted by the Financial Times as saying, "Trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But I say to customers: if this is money you have worked hard for – that you cannot afford to lose – never, never invest in foreign exchange." [16]


[edit] The use of high leverage
By offering high leverage, the market maker encourages traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases his profits, but increases the risk that the trader will receive a margin call. While professional currency dealers (banks, hedge funds) never use more than 10:1 leverage, retail clients are generally offered leverage between 50:1 and 200:1[2].

A self-regulating body for the foreign exchange market, the National Futures Association, warns traders in a forex training presentation of the risk in trading currency. “As stated at the beginning of this program, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital; in other words, funds you can afford to lose without affecting your financial situation.“ [17]


[edit] Convicted scammers
Russell Cline
Russell Erxleben
Richard Matthews, Jr.
Joel N. Ward

[edit] Under criminal investigation
WinCapita[18][19]

[edit] References
^ a b Karmin, Craig (2008-01-12). "How a Money Trader went Bad; Bets on Currency Prices Become 'Fraud du Jour' Amid Regulatory Holes". The Wall Street Journal (Dow Jones and Company): p. B1. http://online.wsj.com/article_print/SB120010072930285383.html. Retrieved on 2008-01-12.
^ a b Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100". The New York Times. http://www.nytimes.com/2005/06/19/business/yourmoney/19fore.html?_r=2&adxnnl=1&oref=slogin&adxnnlx=1191337503-g1yHfewhqPWye0XtI+Eq0A&oref=slogin. Retrieved on 2007-10-30.
^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits". The Wall Street Journal (Dow Jones and Company). http://online.wsj.com/article/SB112233850336095645.html?mod=Markets-Main. Retrieved on 2007-10-31.
^ a b Forex Fraud Investor Alert North American Securities Administrators Association, accessed January 12, 2008]]
^ "Regulators Join Forces to Warn Public of Foreign Currency Trading Frauds". U.S. Commodity Futures Trading Commission. 2007-05-07. http://www.cftc.gov/newsroom/generalpressreleases/2007/pr5332-07.html. Retrieved on 2008-03-18.
^ "CFTC establishes task force on currency fraud". 2007-08-11. http://www.washingtonpost.com/wp-dyn/content/article/2008/08/11/AR2008081100818.html. Retrieved on 2008-08-22.
^ a b Douch, Nick (1989). The Economics of Foreign Exchange. Greenwood Press. pp. 87–90. ISBN 13 9780899304991.
^ SOFTWARE VENDOR CHARGED CFTC News Release 4789-03, May 21, 2003
^ CFTC complaint Forex Advisory Firm and Trade Risk Management Firm Charged With Fraud
^ Fraud charges against multiple forex Firms Commodity Futures Trading Commission (CFTC) Release: 4946-0
^ Foreign Currency Fraud Action Commodity Futures Trading Commission (CFTC) vs. Donald O’Neill
^ FOREX Advisory Commodity Futures Trading Commission's FOREIGN CURRENCY TRADING FRAUDS
^ Forex Information Commodity Futures Trading Commission (CFTC) Forex Information for investors
^ National Futures Association (NFA) NFA launches learning program
^ Karmin, Craig; MICHAEL R. SESIT (2005-07-26). "Currency Markets Draw Speculation, Fraud". The Wall Street Journal (Dow Jones and Company). http://online.wsj.com/public/article/SB112233048975295402-NbzPFRn1JqQly3JoxqjuFM_9kn8_20060805.html. Retrieved on 2007-10-31.
^ Garnham, Peter (2006-05-17). "FX gamblers geared to win (or lose)". Financial Times (The Financial Times Ltd). http://www.ft.com/cms/s/0/e44487aa-b5f9-11da-9cbb-0000779e2340.html. Retrieved on 2008-03-10.
^ NFA Forex Training
^ Finnish Police News Release
^ Helsinki Times Over 700 criminal complaints on WinCapita -Finnish police, August 13, 2008