Respond to the article on wikipedia about forex trading?

A forex (or foreign exchange) scam is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading “has become the fraud du jour” as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.[1] But “the market has long been plagued by swindlers preying on the gullible,” according to the New York Times.[2] “The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records” according to The Wall Street Journal.[3] The North American Securities Administrators Association says that “off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud.”[4]

“In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists.”[5]

In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud.[6] In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on " a number of improper practices" in the retail foreign exchange market, “among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals.”[7]

The forex market is a zero-sum game,[8] meaning that whatever one trader gains, another loses, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, technically making forex a “negative-sum” game.

These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,[9] improperly managed “managed accounts”,[10] false advertising,[11] Ponzi schemes and outright fraud.[4][12] It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.[13]

The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.[14]

An official of the National Futures Association was quoted as saying, “Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically.”[15] Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds.[1] CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, “Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?”

Not beating the market

The foreign exchange market is a zero sum game[8] 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.

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.

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 arbitrages 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 the treasure map.)

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.’ "[16]

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.” [17]

[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) seldom use more than 10:1 leverage, retail clients may be 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.“

This article seems to talk much more about fraud that some companies in FX practice. Sure there is fraud - you have to be careful who you deal with. But you can be in the small minority that succeeds at FX if you go with legitimate brokers and understand it will take years to learn how to trade. If you go in thinking you’re going to get rich quick, you’ve already lost.

Good Lord, I wonder who wrote this article?
A lot of the ‘information’ contained is plain wrong, a lot more inaccurate and obviously sloppily researched.

My favourite part is the one about CFTC ‘[I]loosely regulating the foreign exchange market[/I]’.
Right. Just like Stalin, Hitler and Mao have ‘loosely governed their respective countries’.

O.

Wikipedia is not always a reliable source of information. Remember it’s written by who ever wants get on there and write something. Wikipedia is loosely regulated.

lol, yeah.

Wikipedia definitely isn’t accurate always, but surely they have some kind of verification process (by Wikipedia itself or by other contributors editing/correcting articles) … at least I hope they do.

Which reminds me to write a Wikipedia article about BabyPips. :smiley:

Cheers,
O.

Well: at first (and as anybody that MAY be ‘Subscribed’ to this thread and therefore will have received an ‘Instant Email Notification’ or some other type of notification will know) I posted a ‘smart ar*e’ response. But then I read the article again (as opposed to ‘skimming over it’ as I am want to do from time to time i.e. bad habit of mine). So I deleted my original post.

IS this article indeed SO inaccurate???

That said: WHY OH WHY did you decide to resurrect what was CLOSE to becoming a ‘corpse thread’??? LOL!!!

Regards,

Dale.

Hehe, I stumbled over it and had to reply, since it annoyed the crap outta me.
And yes, it indeed is SO inaccurate.

Hehe, let’s hope this thread fades into oblivion soon, indeed.

O.

Well: I don’t know so much about ‘factually correct’ but the ‘general content’ of the article ‘smells’ familiar!!!

When is the last time you checked the titles of the threads on the new traders’ forums (on any site)??? Take a look!!! Spoil yourself!!! Scroll a few pages back!!! LOL!!! Or find some of those threads on forums (on any site) on the topic of PAMM/MAM Accounts of Managed Funds. OR: take a look at some broker ads!!! LOL!!!

Factually incorrect??? MAYBE!!! Like I said: the ‘general content’ has a familiar ‘smell’!!!

And, well, you know how I feel about the NFA, CFTC, SEC, and Dodd-Frank (and the list goes on)!!! LOL!!!

Funny thing: the only POSITIVE comment in the article was made by none other than the Managing Director of a Retail FOREX Broker!!! LOL!!! (I’d better shut up here lest I get myself in trouble AGAIN)!!! LOL!!!

Regards,

Dale.