As seen in FA News
Be wary of promises that forex trading will help you get rich quick – there’s a lot more to it than you might realise
Forex trading is setting social media ablaze, with many lured in by its promises of making big money with minimal effort, particularly as a lucrative side hustle. So, what’s the deal behind all the hype? Is it simply a get-rich-quick scheme or is it really possible to start earning megabucks?
What is forex trading?
The foreign exchange (forex) market is a global marketplace where foreign currencies are traded, and it is the largest and most liquid market in the world. It is certainly not a scam in itself, but it is becoming increasingly occupied by scammers, for several reasons.
“Forex trading is conducted in currency ‘pairs’ (i.e. USD/ZAR), and these currencies increase and decrease in value relative to each other every day. The act of trading involves selling one currency and buying the other, just as with any other stock, says Arthur Procopos, Strategic Business Architect at Metropolitan GetUp.
“As an example, let’s say the exchange rate between the British Pound and the Rand is 1 to 20 (1:20) at a point in time. If you bought GBP1000 on the forex market at that moment, you would pay ZAR20000. If the exchange rate later fluctuated to 1:21, you would be able to sell GBP1000 for ZAR21000, meaning that you made a profit of R1000.”
Seems simple, doesn’t it? Not so, says Procopos. “Bear in mind that trading is conducted online, which means that all transactions occur through computer networks, between one trader and another, rather than via a centralised exchange. Given its decentralised nature, forex trading is an easy way for unethical online traders to take the money of unsuspecting individuals, because it has low entry requirements, explains Procopos. “This means that you can start trading with very little money, and so it is easy for these traders to show some evidence that they are actively trading.”
Another reason that forex trading is susceptible to scammers is the matter of ‘leverage’. What is leverage? One law site explains: “This is basically a loan by the broker to the trader allowing the trader to trade at a margin. A typical margin ratio will be around 50:1, 100:1 or 200:1 depending on the amount of currency being traded. At 100:1 the trader only needs to put up £1000 to cover a £100,000 trade. The reason brokers provide such high leverage is because currency fluctuations in the forex market are not usually more than 1% during any trading. However, even with small fluctuations, high leverage attracts inexperienced traders who may think the Forex market is a get rich quick market.”
Leverage can be a double-edged sword. It’s up to you as an individual to decide how you want to engage it, depending on your appetite for risk.
How to spot a forex scam
While it’s possible to make money in forex, it’s important to be able to identify a scam, says Procopos. He cites a couple of red flags that you need to be on the lookout for:
– The trader or broker approaches you first. It is illegal for them to approach you – you need to reach out to them, which indicates an interest to trade, and consent to being contacted
– The independent trader or brokerage is based off-shore and cannot provide you with their FSP license (or you can’t find the FSP license on their website)
– You cannot seem to track down a human being at the brokerage
– They request large amounts of money from you, and cannot seem to provide any live trading data
– They make claims of outrageous returns or advertise unreasonably high win rates
As a benchmark, Procopos says that if up to 60% of your trades are profitable, you are considered to be successful. Be wary of those who promise significantly higher returns than this.
How to make forex trading work for you
While legitimate opportunities exist and trading can make you money, it takes a great deal of time and effort if you want to do it yourself. “There are professional registered platforms and qualified, experienced brokers who will be able to assist you, says Procopos.
“Without experience, the reality is that most of your trades will be losses. You can lose more money than you had to begin with,” he adds.
For those interested in trading, Procopos says there are several things to keep in mind:
• Engage an expert: Legislation passed recently made it mandatory for derivative brokers to obtain licences to trade forex, and potential clients are advised to look for traders that hold over-the-counter derivatives products (ODP) licence.
• It is easy to conduct due diligence to ensure that you are dealing with a professional, registered trader or trading company – just ask them for their name, FSP and ODP license number or FAIS registration.
• Secondly, and as a South African, it is advisable to trade only on a forex platform that is rooted in the country and has Financial Sector Conduct Authority (FSCA) ODP approval.
He concludes that if something looks too good to be true, it generally is. “The danger is that many people are using their pension or savings to trade, seeing this as an easy way out and losing their money in the process. Make sure you know all the facts before you lose money, in the hopes of gaining more.”
