I recall, way back in 2002 when Contracts for Difference (CFDs) or ‘spread betting’ first hit Australia, where the CFD provider portrayed this product as the answer to every trader’s prayers. The same emotive marketing was used when promoting Options, Warrants and Futures in prior decades. The flavour of the month later became Eminis and now it’s Forex (FX).
Regardless of the product, the headlines all espoused how anyone could make huge profits, sometimes 100’s of per cent returns, with very little capital or time to achieve it.
In 2005 through to 2007, as the bull market rolled towards the GFC, it seemed everyone wanted to trade CFDs, after all, bull markets have a tendency to hide a lack of knowledge and ignorance towards risk. Of course, there are huge benefits to using leverage, however, the scary part was that people who had never traded a share before were jumping into this leveraged product.
If you were one of the smart ones that didn’t get caught up in the hype and rush to trade CFDs with no or very little knowledge, perhaps you know someone who did. Either way, remember that what we learn from history is important in determining our success in the future. Sadly, the streets are littered with those who failed to learn from mistakes of the past and as such, they are doomed to repeat them.
History has shown that in a boom part of the economic cycle, the availability of credit becomes loose and new products enter or take centre stage in the market. The marketing used is convincing to those looking to find their piece of gold. In talking with people, I found that many had missed the run in the share market and had seen friends or family profit, so they wanted to find a way to make a quick buck.
However, as this crazy cycle repeats, most people have their heads so far in the hype for the chance to make great riches from trading that they miss what is actually going on.
I am hearing daily from would-be traders who are trying their luck trading Forex after just a few days in training, which is really scary. So. I recorded a couple of ‘Talking Wealth’ podcasts on the subject to make people aware of the risks. It takes years and even decades to accumulate wealth and yet it can vanish in highly leveraged markets overnight.
These people have been sold an illusion. Fancy marketing gave the perception that a lot of money can be made trading FX in a short period of time with little training, however, the reality is the opposite. Each person I spoke with shared that their trading had been inconsistent, they were losing money and didn’t know how to correct it, which is the reason they called.
While undertaking the training, these people were encouraged to set up an online account with a broker. In most cases, the broker is either running the training or they are paying the educator for bringing them new clients. If you’re thinking that you signed up to receive independent education, think again. Brokers are there to make money from our transactions and while we all need them to be able to trade, it’s really important that you are aware of the role they play because their expertise is broking, not education.
One lady said she was confused about the pricing on the broker websites. She couldn’t understand why prices differed from one broker’s site to another. This told me she hadn’t understood one of the fundamental risks with trading FX, the broker is a market maker.
I find that many people use time and money as an excuse to not learn how to trade and manage their risk properly by first gaining the knowledge, skills and experience in slower moving markets until they can trade successfully, before attempting to trade leveraged products. Without a good education, you are likely to spend more time and money trying to ride a race horse while failing to ever gallop across the finish line.
This brings me to Three Golden Keys to successful trading. Whilst I could share more, I believe these are important lessons you will benefit from the most.
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