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Generate greater profits while protecting your investments in the world’s largest market
Much has changed since leading forex expert and educator James Dicks introduced retail investors to trading in the foreign exchange currency market. The market’s daily turnover has grown considerably, and more and more traders are achieving financial success by trading currencies—many thanks to Dicks’s advice. Now, in The Forex Edge, he warns you about the less-than-honest practices and ...
Generate greater profits while protecting your investments in the world’s largest market
Much has changed since leading forex expert and educator James Dicks introduced retail investors to trading in the foreign exchange currency market. The market’s daily turnover has grown considerably, and more and more traders are achieving financial success by trading currencies—many thanks to Dicks’s advice. Now, in The Forex Edge, he warns you about the less-than-honest practices and elaborate schemes many brokers use to prevent prosperous traders from retaining their wealth.
This cautionary book is the result of Dicks’s personal investigation into an assembly of forex brokers after a suspicious reversal of fortune forced him to close his trading account. It shows you how dishonest brokers pass themselves off as legitimate, the types of scams they run, and the ways you can use this information to your advantage. It outlines a straight-through process for taking more control over your trades to minimize your exposure to the risk of deceptive practices. With The Forex Edge at your fingertips, you’ll be armed with:
From how the forex works and how brokers make money to the most common ways traders lose money—this accessible guide gives you everything you need to ensure your trading strategy draws maximum profits from the biggest financial market in the world. It features the same practical formulas and strategies Dicks uses to beat even the trickiest brokers.
In today’s forex market, you need more than a good trading strategy to survive. You need The Forex Edge.
THE FOREX MARKET AND FRAUD
HOW THE FOREX STARTED
In theory, foreign exchange (forex) trading dates back to ancient times when traders first began exchanging coins from different countries and groups. In 1944, the postwar forex system was established as a result of a multination conference held at Bretton Woods, New Hampshire, and remained intact until the early 1970s.
At this conference, representatives from 45 nations met to discuss the forex system. The conference resulted in the formation of the International Monetary Fund. It also produced an agreement that fixed currencies in an exchange rate system that tolerated 1 percent currency fluctuations to gold values, or to the dollar, that was previously established as the gold standard. The system of connecting the currency's value to gold or the U.S. dollar was called pegging.
In 1971, the Bretton Woods Accord was first tested because of dramatic, uncontrollable currency rate fluctuations. This started a chain reaction, and by 1973, the gold standard was abandoned by President Richard M. Nixon. The fixed-rate system collapsed under heavy market pressures, and currencies were finally allowed to float freely. Thereafter, the forex quickly established itself as the financial market—the world's largest financial market.
WHERE THE FOREX MARKET IS
Forex trading is not bound to any one trading floor and is not a market in the traditional sense because there is no central exchange. Instead the entire market is run electronically among a network of banks, continuously over a 24- hour period. This market is considered an over-the-counter market, providing off-exchange spot foreign currency transactions.
Banks have a natural flow of forex business from their customers, who buy and sell currency according to individual needs. The banks must manage their currency deposits in the changing light of their customers' transactions.
Investment managers deal globally and must take positions in the currencies, as well as in more traditional instruments such as bonds and equities. For example, if a fund is invested in U.S. bonds, the manager must decide if the fund should be invested in U.S. dollars or a different currency. Again, it is a question of hedging, another layer of risk to manage.
WHERE THE FOREX MARKET IS GOING
According to the Bank for International Settlements, as of April 2010, the average daily turnover in global forex markets is estimated at $3.98 trillion, a growth of approximately 20 percent over the $3.21 trillion daily volume as of April 2007. Some firms specializing on the forex market have put the average daily turnover in excess of $4 trillion.
The $3.98 trillion breakdown is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in forex swaps
$43 billion currency swaps
$207 billion in options and other products
In addition to the above-listed growth, retail transactions on the forex will continue to grow. The United States will remain comparatively small in the overall growth of forex transactions, with overseas, China, and surrounding areas being the driving force behind the huge growth.
With all the new regulatory oversight of the forex industry, I have noticed that the forex brokers are starting to look at different business models. They will continue to offer retail off-exchange forex, but the forex brokers in the United States are going to be looking into offering swaps, forwards, and other regulated investment vehicles.
The word I am hearing on the street is that if the forex brokers are going to be so highly regulated in the United States, then they might as well get in all the way. What I mean by this is that the forex brokers are going to be offering commodities and equities in the near future.
In addition to commodities and equities, you are going to see forex options become much more mainstream for the average retail forex customer. I already know of two brokers that have not traditionally carried a forex options product but will be offering such products by the time this book has been printed.
While the big equities brokers are out there struggling to get new customers, the forex brokers are not having that problem since, by continuing to add new trading services that include equities and commodities, they are the ones getting all the leads. As a result of the changes in forex services, the big equities brokers will start looking at the big forex brokers as targets for acquisitions, thus increasing the customer acquisitions of the big equity brokers. So look for industrywide consolidation coming soon.
WHO ARE THE VICTIMS?
These days, and particularly in the United States, there is a huge investment-oriented culture. The list of financial investing instruments freely available to the retail individuals is expanding day by day. We can choose among forex currency trading, options, futures, stocks, bonds, real estate, franchises, and other business ventures that contribute to reinforce the economy of the country while securing good profits and making the markets move.
This variety and freedom has allowed some unscrupulous individuals and companies to simulate legal investment schemes and abuse the investors through the promotion of unrealistic returns and well-elaborated but deceitful programs, only seeking to make money for themselves.
Anyone can be the prey of these fraudsters, and especially those of you who think you will never fall for such a scheme. Financial swindlers are quite clever and know very well how to manipulate and target all kinds of potential investors, from the wealthiest ones down to precisely those who might be struggling with financial difficulties or have little or no capital.
The less wealthy will be more sensitive to the offers that promise large returns overnight. One of the most employed sales pitches is that only the "guru" is able to show you how to become rich and teach you the precise and "proven" investment strategies that all the wealthy people or the "big boys in-the-know" usually employ.
Don't get me wrong; I personally follow many so-called gurus, though I always take everything they say with a grain of salt; but you cannot go around with blinders on and be so negative that you can't see the forest for the trees. I have gotten little golden nuggets from many people out there who may not be the best traders or have the best intentions, but they certainly gave me some great ideas that I was able to research and develop into some really good trading strategies.
The victims of investment scams come from very diverse backgrounds. Among them, we can find successful professionals and political figures, as well as thousands of hardworking people. However, all of them share two important characteristics: unlimited greed and a desperate need to believe whatever feeds or promises to feed that greed.
INVESTMENT FRAUDSTERS: WHO ARE THEY?
Many of these swindlers and scammers are very successful, and the total amount of stolen funds has been estimated at billions of dollars a year. They will convince you of their legality and use every ingenious trick they can think of to assure you that they are the real thing so that they can gain your trust and cooperation. They will offer you such an exclusive and time-limited opportunity to make lots of money easily and quickly, moving you around and pushing your "greed and need" buttons so cleverly that you will believe what they say if you are not prepared and do not know about their usual modus operandi.
If you find yourself on the spot in a pressure situation, the best advice is to take a step back and go out and do some homework. You can rest assured that in most cases, or at least in the legitimate cases, you will be able to still take advantage of any special deals, and there will be some to hold on to and some to stay away from.
The reason it is so difficult to identify financial scammers is that they do not exhibit a definite profile. Therefore, you will need to get rid of any stereotype you might have about the looks or attitudes of a potential fraudster as a first step in protecting yourself. It could be anyone around you, previously known or unknown. The only common trait among all of them is that they possess a tremendous and compelling power to convince other people to believe in them.
Some of these fraudsters may not have always been so. There are instances where highly trusted and esteemed individuals in the accounting or legal business, financial brokers, and even medical doctors have succumbed to temptation and renounced their ethics to make quick money through an investment scam, and, of course, to benefit from their formerly accepted and transparent social position.
In other instances, some of the legitimate investment programs failed because of bad management or unpredictable events, and the directors ended up mishandling or losing their investors' funds. Whether planned or not, the results of an investment scam are the same; you, as the client, will lose your hard-earned money.
HOW THE FRAUDS WORK
Fraudsters will try to imitate the marketing pitch of perfectly legal investment companies. Therefore, the method they might use to contact their potential victims is not always an indication of a scam. Getting in touch with customers directly by phone and mailing lists or indirectly through advertising and the Internet are some of the methods employed by many legitimate businesses to identify and select people who may be potential investors and might be interested in their financial products and services. Investigate carefully and independently their approach and understand how these swindlers might benefit from either of the above marketing schemes.
Direct Personal Contact through Telephone and Mailing Lists
Swindlers will usually contact hundreds of potential investors, either by telephone or by mail, after getting specifically targeted mailing lists from other sources, such as subscriptions to investment-related publications and financial forums. The swindlers will say enough to catch your interest so you will write or call for more information, but little enough so they can remain under the radar of the authorities.
Indirect Contact through Advertising and the Internet
Regulatory agencies usually monitor all advertising in major publications. However, this does not stop swindlers from using this type of media to set up their bait-and-switch system, offering amazingly attractive profits aiming to catch investors unaware in a short-term move. Some others will choose smaller publications where there is less risk of being caught by a regulator.
One aspect of this is the forex broker demo bait and switch, which I describe in more detail in Chapter 16.
As a result of its increased expansion and potential, the Internet has attracted those fraudsters too, and they use it to implement the same old scams, formerly conducted through normal mail or phone, but now through e-mail, subscriptions lists, and flashy Web sites that are advertised in strategic places such as social media, forums, and investment-related sites.
Using Your Own Professional, Social, or Even Familiar Circles
One of the easiest and most effectively used methods is the referral scheme, where the first investors receive large profits on time and so will be eager to recommend the forex program to their family members, friends, and colleagues. Most often those profits are paid from the investors' own funds (as there is no forex trading backing up the investment) or from the investments of other victims.
The power of referral from one investor to another is so strong that the fraudsters will not need to find any new victims. The investors will come to them, and what is even better, they will already be convinced of the authenticity, profitability, and trustworthiness of the fake forex investment program. This method is really more related to pyramid schemes. Most of us are familiar with the biggest of them all, the one that originated in New York in the 1990s (or possibly earlier). Ultimately, the man behind that one ended up in prison for the rest of his life. Bernie Madoff prided himself on his social ties and built his business on referrals. In the end, the business came crashing down, and everyone lost money.
I am not saying don't invest; you really don't have a choice. Well, I guess you have two choices: sit on the sidelines and let inflation wipe out any real value of your savings; or get off the sidelines, use good money management and diversification, and take the appropriate risk to reward. You will lose money, and you will make money, but obviously your goal is to make more than you lose. To do that, you will have to take some calculated risks. Most of the time, referrals are a good way to find investment opportunities so long as you do some due diligence.
The "Facade": Looking Good Enough to Build a Reputation
Some fraudsters will try to look really professional and reputable by renting luxurious offices in the high-class financial areas of the city. Some will go so far as to have enough personnel to give the impression of being an important and busy company. They will even require you to ask for an appointment and keep you waiting for a while, building up your interest with an apparent nonchalance in getting your account under their belt.
Those scammers might also participate in several public associations and give the image of the perfect citizen; meanwhile the only purpose for all the scenery is to get a solid grasp on your account.
Buttons They Push and Weaknesses They Exploit
As stated earlier, greed is the main element that will attract plenty of potential victims to the fraudster's evil plan. Fraudsters can promise you anything as big as it can be, but in the end they do not have the intention to fulfill those promises. All they want is your hard-earned money, and they want it as soon as possible.
Here is a list of the key elements that are signs of a potential investment scam:
Creating expectations for huge profits. This really is not so difficult. Remember, past performance is not an indication of future performance. Contemplate your potential investment with the dollars that you are willing to lose and that you can afford to lose. You never know what will happen in the markets, especially the forex market. The forex market can be drastically affected by any major news event from around the globe.
Some money management firms will offer profits big enough so they can catch your interest, but not so excessive that you might become suspicious. These unscrupulous people may suggest that the investment has a greater potential and will gauge your reactions to follow on with the scamming scheme. Bear in mind that if the returns on a given investment seem too good to be true, you might be the prey of one of these swindlers.
Omitting the mention of the risks involved. The last thing a scammer wants you to think about is that you might eventually lose your money. The emphasis will always be set on "low risk" and "guaranteed" returns so that you might believe there is no risk at all. If you insist and ask about the potential risks, fraudsters could eventually admit there are some but assure you that they are very small and that the profits will be much higher. In general, fraudsters will try to change the subject quickly or even show impatience and try to turn you down so you won't insist on the issue.
Creating a sense of urgency and exclusivity. Limited offers, limited time—fraudsters are always in a rush and will urge you to invest "right now" because you might miss the opportunity. You may be told about a very special offer, only for the select few. The real reason behind this is that the fraudsters do not want you to think about their offers in depth, as you might become suspicious and decide to check further or turn the offer down. They are also in a rush because they might already be planning to leave the place very soon.
Building trust. Scammers will center their efforts on conveying total confidence about the returns of the investment they want you to get in, the solidity of the proposal, and the almost no-risk situation so that you trust them enough to lend them your funds easily and quickly. The message they intend to pass is that the opportunity they are offering you is practically a favor; they might even suggest that if you are not interested, they will bring the offer to someone else, trying to appear detached from the fact that it is your money they want to pocket. Of course, this attitude is aimed at getting the potential investor to react by expressing his or her interest, and voilá—the mystification is almost done! Swindlers are real masters at manipulating and controlling the conversation, and so there is little chance for the investor to ask them embarrassing questions.
Another typical example is how they can build confidence by word of mouth of initial investors who are paid large profits and become inadvertently "recruited" to spread the word to their friends or relatives. This is mostly seen in the high-yield investment program–type schemes. After a period during which consistent profits are paid out on time (from the new deposits of the most recent victims), older investors become bold and start investing larger sums of money, and new investors are attracted to the scheme because of the excellent reputation the swindler has built by recycling new payments into fake profits. In the end, after pocketing enough of the monies, the swindler will leave the scene.
Excerpted from THE FOREX EDGE by JAMES DICKS. Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Part 1 The Forex Market and Alternatives
Chapter 1 The Forex Market and Fraud 3
Chapter 2 You versus Them 19
Chapter 3 Forex Options 41
Chapter 4 Contracts for Difference 101 65
Chapter 5 Spread Betting 79
Chapter 6 Forwards and Swaps 93
Chapter 7 Trading as a Business 105
Part 2 Regulation in the Forex
Chapter 8 Commodity Futures Modernization Act 117
Chapter 9 The Farm Bill 123
Chapter 10 Dodd-Frank Wall Street Reform and Consumer Protection Act 127
Chapter 11 Regulatory Action in the Forex 133
Part 3 Forex Broker Schemes
Chapter 12 Back-Office Software Scams 149
Chapter 13 Slow Servers and Errors 153
Chapter 14 Slippage and Stop Hunting 159
Chapter 15 Forex Broker Margin Scams 169
Chapter 16 The Demo Bait and Switch 175
Chapter 17 The Broker B-Book 181
Chapter 18 Dealing Desk or Not 185
Part 4 How to Trade and Where to Trade
Chapter 19 Trading Strategies to Beat the Broker 193
Chapter 20 Which Brokers to Trade With and Why 199
Part 5 Forex Trading Strategies
Chapter 21 The Simple S/R Price Action Strategy 207
Chapter 22 The Contrarian BB Strategy 221
Chapter 23 Hedging Strategies 249
Chapter 24 Forex Options Strategies 271
Part 6 Forex Automated Trading
Chapter 25 Forex Automation 317
Chapter 26 Forex Robot Reviews 323
Chapter 27 Back-Testing 331
Chapter 28 EA Demo versus Live 343