Brian Dolan, the financial strategist, says most traders in currency markets have no idea what they are doing.
When the bet is on currencies, gut feelings are not enough
With no job, mounting debts and a mortgage to pay off, one down-on-his-luck American took the biggest gamble of his life by trading cash he could ill afford to lose on the currency markets.
Already in a financial mire, the former mortgage broker withdrew US$50,000 (Dh183,427) from his retirement plan by taking out a 401(k) tax-free loan in 2008. He then used the capital to buy and sell currencies on the trading platform Forex.com - an extremely risky venture where only 25 per cent of traders make money, according to market analysts.
After losing cash during his first month of buying and selling currencies, the inexperienced US-based trader watched a video seminar in which Brian Dolan, the chief currency strategist for Forex.com, predicted a slump in the value of the euro against the US dollar.
Spurred on by the forecast, the trader invested heavily in the dollar in mid-2008 - a move that netted him a cool $2 million during the next four months as the euro nose-dived while the dollar soared.
"He paid off his mortgage and all his debts," Mr Dolan says, recounting the tale during a recent currency trade roundtable in Dubai. "He did lose money in subsequent months, but still has an account balance of $1 million," the currency market veteran, who was in Dubai to promote Forex.com, adds without revealing the trader's identity.
But of all the housewives and part-time traders with day jobs hoping to emulate this success, few manage to break even, let alone make money from currency markets.
The reason, Mr Dolan says, is that most new traders in the foreign exchange currency market have little or no idea what they are doing. "Just because you've got the keys to an F1 car doesn't mean you know how to drive it, much less compete in a Grand Prix," he says.
The concept of currency trading sounds simple enough: an individual buys and sells currencies much like they would stocks or shares in a company. All transactions involve two currencies, with traders hoping one appreciates against the other.
A common trade may involve buying US dollars at $1 each and selling euros that are worth €0.693 against the American currency; if the dollar increases in value against the euro, then the dollar will be worth more than the purchasing price that the trader originally paid.
There are, however, several factors that influence a currency's value, such as economic stability, oil price, employment, natural disasters and domestic or international conflicts, among many others. With so many outside influences, predicting how a currency will perform even in the short term is extremely difficult, Mr Dolan says.
"This is not something people should do on a whim and it's not something you can just jump into and expect to make money," says Mr Dolan, who provides Forex.com clients market and currency trend analysis through webinar, his weekly market call.
The former Credit Suisse and American Express analyst says developing a trading discipline is essential to successful currency trading. He says someone working full time who wants to trade outside office hours should adopt a "multi-day" strategy, allowing them to monitor the market irregularly throughout the day.
For example, a trader who has bought US dollars at $1.45 against the euro may be hoping the US currency reaches $1.47 within three days. Having a multi-trade strategy gives them time to achieve this goal, as opposed to a short-term approach in which the trader hopes for instant gains.
"As long as people adopt a trading style that fits their own circumstances, they have a better chance of trading success," he says. "It's when you have a day job and want to trade and you constantly look at your mobile, but then you're in a meeting with someone and the market has moved against you. You have picked a style that doesn't fit your circumstances."
Felix Sim, the managing director of Apache Advisors, a Dubai-based business strategist and consultancy firm, had little experience and no real strategy when he started trading currencies from Singapore eight years ago. At the time, the currency market was liquid and volatile, creating greater risks but potentially higher returns for successful traders.
Inspired by the potential gains, Mr Sim invested an undisclosed amount in Forex.com after consulting friends who were already trading. "I spoke with friends and picked up a few good books about technical analysis," he says.
Mr Sim started small, buying US dollars against the yen in his first trade, and gradually increased his investment as he gained market experience. He then traded for a few years and made a modest return, before closing his Forex.com account when offered a job with a hedge fund in Singapore. "It [currency trading] actually helped get me a job," he says. "Being able to trade enables you to learn the process and understand the markets more."
The Singaporean now runs his own company in Dubai, having launched Apache Advisors three years ago. While convinced his Forex.com experience set him on the path to becoming his own boss, Mr Sim insists few can make a living from currency trading.
"The currency markets are 24-hour, seven days a week, so if you want to trade currency you can't be at work all day checking the markets," he warns. "I'm not sure people have the discipline; it's all about staying in the game and consistency and to be consistent, you have to study the markets."
Similarly, Mr Dolan understands the risks associated with currency trading, where speculators who lose money 60 per cent of the time and win the remaining 40 per cent are actually considered successful. But even with the odds stacked against them, Mr Dolan says Forex.com has some 50,000 members globally, including 2,000 to 3,000 in the Middle East.
The currency strategist's advice for current or potential new traders is to buy Canadian and Australian dollars or Norwegian kroners, which have appreciated because of high oil prices. He also believes the US dollar and British pound, both of which have weakened amid the global financial downturn, remain popular along with the yen, which has depreciated following the recent tsunami and nuclear crisis.
Trading novices in the Middle East should, Mr Dolan says, stick to currencies that have appreciated steadily such as the euro, which increased in value against the US dollar and yen this month.
But he warns that although the euro may be in relatively good shape, several market and global issues could suddenly force down its value.
As for Gulf currencies, Mr Dolan believes they should remain pegged to the US dollar for the foreseeable future. "As long as your revenues primarily come in dollars, you are stuck with the dollar whether you like it or not and de-pegging right now doesn't make sense," he says.
Suggestions that the GCC will eventually establish a single currency are well received by Mr Dolan, who considers the region an optimal currency zone with "free mobility, a common language and mostly common cultures".
But whether Gulf-based expatriates who exchange currencies when transferring cash to an overseas account can benefit from a single currency is difficult to predict.
"It would depend on how that currency fared and if you are tied to the dollar, then you're talking about how that currency fares," Mr Dolan says. "For Europeans, sending money back, that value is all dependent on the value of the euro and how that's doing, as well as how the dollar fares."