These past 2 weeks we’ve periodically gotten a huge number of worldwide referrals from what appears to be a pornographic website, based on the verbage contained the referring URL. Running the link through a Whois search reveals it is in reality a Forex scam site. As is my custom I checked the wiki entries to see if the explaining could be made easy for me and sure enough the two wiki entries had a wealth of great information. (Those wondering about the Forex proper can click here.) For the balance of this post we’re going to concentrate on the scam I linked first and the implications therein so is there we now visit:
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. But “the market has long been plagued by swindlers preying on the gullible,” according to the New York Times. “The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records” according to The Wall Street Journal. 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.”
With the scam set let’s visit with the assertion it is possible to beat the Forex. I’ll note these same concepts apply to the stock markets too in varying degrees:
The forex market is a zero-sum game, 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.
…………..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.)
So it is the middle men who always make the money. Often the middle men also are taking a trade position too so the game truly is rigged. I mention this because the entry properly mentions information advantages. Indeed in my closest circle of stock trading friends we often discuss price/volume movements in issues we own in terms of buyers/sellers “with superior knowledge” or “access to information” the retail investor simply does not have. Properly analyzed the data can confirm previous buys or signal that it’s time to sell. These concepts also underpin the business of insurance where “information advantages” has a more proper name: Information asymmetry. Continue reading “A peek inside Slabbed as we set up some important financial concepts and introduce the ol’ Forex Scam. Anyone else remember Russell Erxleben?”