Things to watch out for when trading forex or stocks or anything else

I decided to write this post after reading so much of the anger in some of those trading forums, after some traders lose a significant portion of their wealth on the markets. Here are some methods that I SUSPECT, but cannot PROVE, what some brokers and some vendors use to earn your money.

FOREX

1) Offer you way too much leverage than you need. Some brokers off 200x leverage for forex and allow you to set up an account for $100? While a low minimum deposit is always welcome, the high leverage is not. Beginning traders do not necessarily have the emotional maturity to resist the temptation to lever up when they start losing money, even though its their responsibility to control their risk levels. While we all know that high leverage is bad, consider this example:

The bid-ask spread for EUR/USD can be as low as 0.9 pip. Sounds good right? On a $10,000 trade you only pay $0.90 in spreads. What if you lever up 200x? The commission now totals $180 or 1.8% of your original account. 50 trades! That's all it takes to wipe out your account. It is not surprising that brokers might want to give you as much leverage as possible, especially when competition is lowering the listed spreads.

If these brokers want to earn money off their clients in the long run, they should gradually adjust a trader's limits upwards as time goes by. Only the good ones can survive long enough to use such high leverage and keep their accounts intact. These people will provide higher value/commissions in the long run.

2) Use misleading advertisements such as trading the EUR/USD is easy. True, but not true. Trading in itself is easy these days. You just need to know how to use a computer and the internet. However, making money from trading itself is getting tougher.

3) Using dealing desks to cream you, posting quotes to triggering your stop losses. I personally don't think that this is a big deal, because they cannot really do this on a large scale against all their clients, unless they start sending customized quotes to each client. Doing that is outright illegal.

STOCKS

[4, 5 and 7 are supposed to be outright illegal, and do not apply to the US, I heard]

4) Stop issuing stock reports, but instead send email alerts to clients. Email alerts strictly do not count as investment advice in some countries. This allows the brokers' traders to trade on what they recommend in those email alerts and you might just end up buying from them excess inventory.

5) Push the price of a stock up, trigger the technicals and sell to the rest of the crowd coming in. Suspected such before in the smaller caps.

6) Call their friends and associates to buy or dump a stock before they issue a stock call. Then call the institutional clients to buy/sell their stock after that. This in turn creates the impression that they are good. Wrong. Their sales force is good.

7) Clean up the IPO company's financial statements to boost profits in exchange for higher valuation. Typically they become the angel investors of the company, pump in money for the company to buy more equipment to ramp up production. They entice their customers to buy the new produce in return for better credit terms. Revenue and accounting profits go up. Accounts receivables go up, but cash flow stagnates.

VENDORS IN GENERAL

8) Try to sell you some system that makes 90% or 100% return and promise to make you a millionaire in record time. I have tried for two years but have not managed to find any such system thus far. The best trending or reversal system that I have only has a 55% success rate on 10 assets on average and you need to have studied enough about A.I. to code it. 90% return? Forget it. That's 9 profitable days out of 10.

9) Pay money to attend a course. Money making strategies with the exact steps to take and the parameters to choose cannot be bought off the shelf. Imagine paying $500 in return for $1,000,000 the following 2 to 3 years? Can you purchase future wealth?

Some of these trainers really do not trade on their own account. I have heard of an insurance agent who moonlights as a forex trainer. How he gained his trading expertise I have no idea.

However, demand for such courses is not surprising. There are many people who either do not have a college education in any area or had no formal training in finance. They might think that paying a few thousand dollars for a two week course might help. Yes, they will learn a lot about the financial markets, but they may not make money.

Conclusion

At the end of the day, I am not really slamming the industry or anything. What I am suggesting is that making money from the markets is not easy. As they always say, buyer's beware. If trading is easy, hedge funds do not need to hire truckloads of Phds to do their work.

[Don't sue me if you are a broker or vendor. I am merely trying to tell traders and consumers to be more discerning in their purchasing decisions. Some of these points do not apply in different legal jurisdictions. I am not claiming that any of the practices below are unfair or actually happening. What I am saying is that the practices below might be occuring and might not be favorable to the trader.]

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The objective of Finance4Traders is to help traders get started by bringing them unbiased research and ideas. Since late 2005, I have been developing trading strategies on a personal basis. Not all of these models are suitable for me, but other investors or traders might find them useful. After all, people have different investment/trading goals and habits. Thus, Finance4Traders becomes a convenient platform to disseminate my work...(Read more about Finance4Traders)