Forex Futures: The Quickest Way To Bankruptcy Court

2009 November 4

by Kyle

from → Investing And Investments

Forex futures (or FOReign EXchange futures) are contracts between buyers and sellers of a various currencies to exchange a given sum of one currency for a given sum of another currency at some fixed future date. Simply put, forex futures are roughly equivalent to stock options. Many recent get-rich-quick scams have hyped the forex market as an easy-to-understand, can’t-lose investment opportunity. But like your mother always said, if something sounds too good to be true, it probably is.

Forex Futures Will Not Make You Rich

Since the forex futures market is loosely-regulated at best, traders have the ability to commit to buy or sell massive amounts of currency with a relatively small upfront investment, sometimes as little as 5% of the value of the trade. Needless to say, that kind of leverage is dangerous, especially when applied to an asset as volatile and unpredictable as currency.

Now I’m not going to say the forex market can never present a compelling investment opportunity, and I suppose one could make the argument that a small allocation to forex futures (along with commodities) could serve as a good portfolio diversifier consistent with a conservative investing strategy, but the fact of the matter is that the forex market is dominated by large institutions trading massive amounts of currencies every day. The small independent trader hasn’t a prayer against the big guys.

Naive investors often convince themselves they see patterns in the data and that they can use those patterns to predict the market. In reality, if you stare at a random series of numbers long enough, your brain will inevitably begin to see “patterns” in the data. But if the random sequence didn’t cause the market to move a certain way, it has no predictive power. Because of the leverage involved, the vast majority of small investors who try to play the forex futures market will get burned. Repeat after me: forex futures will not make me rich, forex futures will not make me rich…