The Sales Pitch

Foreign exchange (or FX/forex) trading has become rather popular in recent years. It is promoted in a never-ending stream of videos on Tiktok, for some reason always filmed next to a Lamborghini or in a private plane. Many of these social media gurus claim that FX trading is a rather easy way to make millions of euros. In exchange for just a few thousand euros, you will be able to live their lavish lifestyle.

Many of these gurus promise returns of ca. 2% per week. Ask yourself the question: if these people are making 2% per week trading forex, why would they spend all their time creating a course, creating a website, creating a marketing funnel with paid ads, taping videos, instead of living the good life on their yacht? Why would they teach me the same techniques they are using, when this will unavoidably reduce their profit, because we will all be executing the same strategy and thus crowding the market?

The Sales Pitch Vs. Reality

If the answer to this question is not clear enough to you, consider the following mathematical example. The most profitable hedge fund in the entire history of the world, the Medallion fund, achieved a return of ca. 66% per year over 32 years. A return of 2% per week equates to 180% per year. With this annual return, an investment of €100,000 would result in €511bn in just 15 years. Then why are these FX gurus not at the top of the Forbes rich list, laughing at mere peasants like Elon Musk and Jeff Bezos, who toiled away building a company instead of just trading FX? The idea that these gurus would invest so much time and effort into selling this course to you for a few thousand euros obviously does not add up.

If their investment strategy was so amazing, these gurus would be much better off attracting additional investment capital than selling courses. If you can show an annual return of 180% per year, vastly outperforming any alternative investment, surely you can attract some investment capital? Pension funds, family offices and wealthy individuals would be queueing to invest. Instead of turning €100,000 into €511bn, you could turn a few million in investment capital into several trillions in personal wealth, catapulting you to a level of wealth many nations can only dream of.

Reality

The reality is grimmer than the lofty goal of generating 2% return per week. Instead of the advertised return, the majority of Forex day traders fail and leave the market within six months to a year (DraKoln, 2008; Hayley & Marsh, 2016). According to a study by the French financial markets regulator (AMF, 2014), the clients of the surveyed intermediaries lost on average over €10k per client, with 89% of all clients losing money.

When considering any investment, including FX trading, it is essential to understand the concept of expected value. The expected value of an investment represents the weighted average of all potential outcomes: the potential gains or losses multiplied by the probability of each outcome occurring. In the case of FX trading, the expected value of a single trade is theoretically zero. The FX market is a zero-sum market: somebody wins, somebody loses. The chance of a profitable trade is 50%; the chance of a losing trade is 50%. The aggregate assets of all market participants remains the same (S. Moeeni & K. Tayebi, 2019).

Note that this is fundamentally different from stocks or bonds, where the aggregate assets of all market participants are expected to increase over any time horizon. Stocks, bonds, real estate and private equity are positive-sum markets.

The Risk Of Fraud

Not all FX advocates are frauds. However, as explained above, anyone selling you an investment scheme with a guaranteed return of 2% per week is disingenuous at best, and most likely a complete fraud. For some reason, FX trading attracts a lot of shady characters. Trying to sum up all FX-related scams of the past decade is impossible, but here are a few: Black Diamond Capital Solutions, Grinta Invest, XtraderFX, and the list goes on.

FX trading isn’t generally profitable, but selling FX bots and courses certainly is. Most courses sell for several thousands of dollars. The promise of a life of luxury and status symbols attracts a lot of willing victims customers. Consider a course priced at €5000. You only need to sell 200 of these to make a million euros. Selling 200 of these courses is much easier than making €1m actually trading FX, which is why so many people sell FX courses (at the risk of getting sued for fraud). One wonders how many FX gurus got their start by buying an FX course as a naïve individual, realized they had been fleeced, after which they decided to sell courses instead. And thus, the perfidious cycle of fraudulent behavior continues.

Conclusion

In short, FX trading is a waste of time. You are likely to lose significant amounts of money by trading against professionals who have superior tools compared to you. Not to mention, you will invest significant amounts of time and effort into a hobby which will likely be a loss-making endeavor – time which would be better invested in your income-earning job or business. If this isn’t bad enough, you are more likely than not going to be scammed in the process.

I am not saying it is 100% impossible to make money in FX trading. Minor pricing inefficiencies can occur, typically for a short amount of time. However, taking advantage of these pricing inefficiencies might be a realistic target for a hedge fund or for the FX desk of a bulge bracket bank, but not for a lone novice investor. The chance that the guru who is speaking to you about FX trading is a fraud, is many times higher than the chance that this guru outperforms the S&P 500 with his trading strategy. Your time is best spent elsewhere. It is better to invest in asset classes which have an inherently positive expected return: equities, bonds, or alternative assets such as real estate and (listed) private equity.