Friday, July 28, 2006

Enticement, Deception, and the Daily American Idol of Trading

I opened a trading magazine last night, and here was the copy to an advertisement encouraging retail traders to enter the foreign exchange markets:

"Just because you've got a nice, solid, grown-up stock portfolio doesn't mean you can't have any fun. Why not add currency trading into the mix...It's fast, exciting, open 24 hours a day--and there are no commissions...But best of all, it's easy to get started. All you need is $250 to open an account."

Now reread the above copy and just substitute the words "casino gambling" for "currency trading". You get the picture.

What is even sadder is that, after traders have run through their several hundred dollar trading stake (no doubt aided by the 3-pip wide spreads that accompany "free" trading), many of them contact me as a trading psychologist. They (incredibly) harbor hopes that they will parlay hundreds of dollars into many thousands and they're seeing those dreams dashed before their eyes.

So I end up playing Simon Fuller and telling them that they don't actually have a good voice and can't possibly be America's next Idol.

Deception abounds. How about this line of copy from a commercial website ostensibly devoted to the teaching of traders:

"Due in part to its size, Forex is less volatile than other markets. Lower volatility equals lower risk. For example, the S&P 500 Index trading range is between 4% and 5% daily, while the daily volatility range in the Euro is around 1%."

WTF?? Forex is *less* volatile than the S&P 500 Index?? Even ignoring the fact that currency traders typically trade with more leverage than equity traders, since when has the S&P 500 Index sported trading ranges between 4 and 5% daily?? That would be the equivalent of 50-60 ES points every single day!!

In this case, I actually wrote to the firm and reported research that showed that Forex was *not* less volatile than equities (actually, it has a more leptokurtic distribution of price changes, with lots of small ones and a smaller number of phenomenally large ones) and was not a superior trending vehicle (the conditional probability of the next period following the direction of the previous one was no better than 50/50 and actually somewhat worse).

I received no reply to my research. To this day, the advertorial copy hasn't been changed.

So there it is. One company markets currency trading as a casino, the other as a safe haven with non-volatile trending.

Either way, I get the emails describing dashed hopes and expectations.