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The Strength of Forex, Ponzi Schemes … or a Brand-New Way to Invest

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People are drawn to forex for the same reasons as they are drawn to Ponzi schemes — they seek high return. However, there is a big difference between Ponzi and forex. All the evidence suggests that it IS possible to obtain outsized returns from forex trading and do it consistently with full transparency and liquidity of a checking account.

There may be a snowballing trend of allocation of funds, particularly retail funds, to forex trading. Basic infrastructure is in place to change the rules of the game completely. Take Zulutrade service — thousands of competing trading system vendors deliver their signals to zulutrade server for independent verification. Zulutrade processes the trades, calculates performance data and displays the results in an easy to understand format. Anybody with as little as $100 may become a customer of somebody who is one of the best-performing traders GLOBALLY … and he/she can do it literally with a few clicks. And he/she can fire any trader with another few clicks 24/7 …

Risk-adjusted returns may be just outstanding, investment fully transparent and very liquid … Probably some years down the road, even the most common people with little or no understanding about forex market will open forex trading accounts. The best-performing trading signal suppliers stand to reap huge benefits. In fact, during the next decade they may become bigger earners than top operators on Wall Street.  Today on zulutrade some of the most popular systems garner about a thousand customers (probably 1/3 of them live accounts) … top traders receive probably $30-40k per month. Given the merits, I can imagine that for some number of customers grows to millions in just a matter of a few years … some of the traders will make hundreds of millions a year.

The big difference from forex and ponzi schemes is that forex is a sustainable way to deliver outsized returns to investors. It’s hard to imagine where are the limits and how far this can go. Forex is by far the biggest markets and as such is can accomodate by far the biggest size of trades without moving the market.

Forex is like no other market. It’s the biggest, very liquid, unregulated, accessible to everybody. My observation is that recently forex market start to look like random walk. There’s really no dominating market maker, fundametal analysis can hardly be applied for trading forex, trends are usually at various lengths punctuated by many false breakout on the way … Almost by any parameter forex is by far the hardest market to trade profitably …  S&P index and oil futures are probably the next most difficult markets, but those do not come close to forex.

Nevertherless, forex seems to attract the most money … For retail investors there are virtually no entry barriers, forex trading story is fairly easy to grasp, there are plenty of promotes of all kind etc. Risk/return ratios are better in other market, like stocks and commodities, but —  just like in the world of physical goods — it is not always the best products what attracts the most customers. The equation seems to be that at the moment forex wins …

My relatives have experience spanning three generations of occasionally investing in what I tag as ponzi schemes … Even against my strong advice not to do so. What’s more, now the third-generation representative is very successful in convincing other people around her to invest in the same scheme … she claims that this month she’ll get “initial investment back” in form of monthly interest payments while the principal amount remains “invested” … The siren call is the high monthly return and a vision of stopping working and live of the monthly interest — just as hers “friend and hers boyfriend are doing — living very comfortably from their investment returns”. Well, she admits that one such “investment” went wrong …

Today I believe I did a good job. I explained that it is a much better proposition to move her money to forex account to be autotraded through zulutrade rather than keep it where it is now. I explained that hers current investment operator in the best case scenario does something what she can do herself through zulutrade or at worst he is a ponzi scheme operator who may disappear with all the money at any moment. She was a very receptive learner and arranges formatilities to open a live trading account.

We set up a demo account and added two trading systems to the account. Retrospectively, such a combination would have delivered about 300% annual return with very low drawdowns. A real life return equal to one half or even one third of the aforesaid hypothetical return would be splendid for her (and, I guess, to everybody) , but the next best thing after the high return prospect is full transparency and control of hers account … particularly, if compared to the current solution of handing the money over to somebody who may turn out to be a snake oil trader rather than a competent forex trader …

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Written by A.S.

August 6, 2009 at 4:33 pm

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