Forex Mania & Forex Scams
Foreign exchange (forex) trading speculation has seen a recent rise in popularity. Forex trading is the buying and selling of currencies in the global foreign exchange market with the aim of making a profit from the exchange rate fluctuations.
What has caused the mania?
In addition to advancements in technology, globalization, and easy access to online trading platforms, several other factors have contributed to this mania.
1: Platforms: Some platforms have tried to take advantage and perpetuate the Forex trading mania by promoting unrealistic expectations and making false promises of guaranteed profits. They may use social media, email marketing, or other advertising channels to target novice traders with promises of easy money and quick profits.
2: Herd Behaviour: People who are lured into the mania of Forex trading may claim that they are making large sums of money from it for several reasons. One reason is that they may feel pressure to conform to the expectations of their peers or social media followers who may be hyping up the potential profits of Forex trading. They may also want to appear successful and may feel that sharing their supposed gains can increase their social status. Moreover, individuals may have experienced temporary gains in Forex trading, but these gains may not be sustainable in the long run. Forex trading involves high volatility and significant risks, and it is not uncommon for traders to experience significant losses as well. Therefore, traders who claim to be making large sums of money from Forex trading may be exaggerating or may be unaware of the risks involved.
3: The Gambling Instinct: The gambling instinct has played a role in the popularity of Forex trading, particularly with respect to the high volatility and leverage involved in Forex trading. The high volatility of Forex trading, which can lead to significant gains or losses within a short period. This high volatility can trigger the gambling instinct in some traders, who may be attracted to the potential for quick profits or the excitement of taking risks. Moreover, the high leverage offered in Forex trading can amplify the potential gains or losses, which can further fuel the gambling instinct. With leverage, traders can control large positions in the market with relatively small amounts of capital, which can lead to large gains or losses. This can be tempting for traders who are looking for ways to increase their profits quickly.
4: Scams: Additionally, some individuals may have fallen prey to scams or fraudulent trading platforms and may not realise that they are not actually making any profits. Scammers may manipulate trading account balances or provide fake trading reports to make it seem like the trader is making gains, even when they are not. This type of investment scam is very common, when fake platforms manipulate account balances to convince traders they are making money, and encourage them to make more deposits. Unfortunately, these deposits, rather than going to custodian banks, are going straight into the bank accounts of the scammers, and the victims will find they’re unable to make withdrawals when they attempt to do so.
Why is speculating on Forex a suboptimal investment strategy?
1: No/Low Yield: Many investment assets provide the owner with interest, rent, dividends or earnings. However, currency deposits at banks via a trading platform offer little or zero interest. The “rollover interest” or “swap rates” offered by some platforms is much lower than the risk-free rate in that currency. Meanwhile, this money could be earning yield by investing in bonds, stocks, property or money market funds.
2: Technical Analysis Limitations: Many forex traders rely on technical analysis to make trading decisions, looking at charts and market data. However, technical analysis has limitations and may not always accurately predict market movements, leading to losses.
3: Transaction Costs: Forex trading costs can have a significant impact on a trader's ability to make a profit. These costs include spreads, commissions, and slippage, among others. The spread is the difference between the bid and ask price of a currency pair, and it represents the cost of trading. Spreads mean that traders need to make larger profits in order to cover the cost of trading, which can be challenging. Commissions are another cost that can affect Forex traders' profitability. Slippage is a phenomenon that occurs when the price of a currency pair moves against a trader's order before it can be executed. Slippage can increase the cost of trading and reduce a trader's profitability.
4: Unsustainability: Individuals may have experienced temporary gains in Forex trading, but these gains may not be sustainable in the long run. Much like going to a casino, it is possible to win initially, but the more you play the more money will be lost through commissions and spreads. Additionally, Forex trading can be time-consuming and may not be feasible for individuals with other commitments.
Conclusion
To conclude, Forex trading is largely based on speculation using highly questionable technical analysis. In essence, traders are simply guessing whether a currency will go up or down. 50% of the time they will be correct, 50% of the time they will be wrong. But over time, they’ll just end up paying for the transaction costs. Even if a trader is able to make sufficient profit to cover the costs they may still be worse off than if they’d invested in an asset with yield, such as bonds, property or stocks. Despite this, Forex trading has continued to increase in popularity due to marketing by platforms, herd mentality, the gambling instinct, and scams.