As a public service announcement, I would like to shine some light on the latest fad in "get rich quick" schemes, the "Forex" market. Since the collapse of the housing bubble last year and its shake-up of the equity markets, a significant number of traders have shifted into currency exchange as the best way to take big risks for a potentially big reward. In the building where I work, a very talented computer programmer has dedicated himself to writing a computer program that will buy and sell currencies with the objective of getting rich as soon as possible.
While I do follow the relationship between the Canadian and American dollars, I had never really ventured into these currency exchange markets to do any research. I have since learned that there is quite a large population of people who speculate on currency pairs and make "bets". These are not importers or exporters who exchange currency to engage in international commerce, they are just making bets. As this gentleman at work explained to me how his brokerage account is set up, I became skeptical in very short order. He was talking about how you can make these highly leveraged bets at $200 for every dollar you actually physically own, and then make these "cascading" trades, and with "stop-loss" orders you can make enormous gains without taking any real risk. My response was that it is ostensibly like playing "musical chairs", and when the music stops playing and you don't have a place to sit down, that's all she wrote.
I don't want to discourage him; I am just trying to inject some logic and reality into his persistent optimism. He is convinced that he will get rich by doing what he's doing, but his skill is as a programmer and he does not have any grasp of mathematical economics. I tried explaining to him how if really bad news hits the market and there is a sudden drop in value, the price of the currency can "jump" the stop loss, and in that instance because you are leveraged at 200 to 1 you can lose your entire account. Then other "experts" take a graph and show how you can make abnormal profits, but they fail to mention that the window they are showing you is just a 1 in 100 situation and the other 99 times the market will behave differently. The smart play is to go for the slow and steady profits, and when you try to go for too much too fast you are playing a dangerous game.
For fun, I asked him to give me a data set of the last 2500 day end close prices of the American dollar in British Pounds (that is his prefered currency pair). I did a simple probability analysis. If the price went up in the past 24 hours, what is the probability that it will go up in the next 24 hours? Or more plainly put; if for the last the last 10 years each morning, each time the US dollar increased in value relative to the British Pound yesterday, I bet $1 that it would go up today. How much money would I have made in a decade? A whopping $6. If you want to fit a 3rd order polynomial to intraday trend data and ride waves, then perhaps it might be possible to figure out a winning system. There is just so much unpredictability in this particular market that unless you study what makes the currencies go up and down, you will drive yourself nuts!
This co-worker is a person of faith and the other day he was telling me how he believed that everything happened for a reason and that there were no coincidences. I said "like you embarking on a mission to conquer Forex and shortly thereafter a graduate in Mathematical Economics is transferred to your job site? Especially when we mathematicians are such a rare breed, but thankfully we do occur in nature." Then I remembered that scene in Braveheart where the crazy Irish guy saves Wallace's life and I said to my colleague "are you sure the almighty didn't send me to watch your back?"
You may notice that no place in this post do I actually say how to get rich by playing Forex markets (other than fitting higher order polynomial trend lines to data sets, which you can do in a few easy clicks in Excel without having to use Newton’s Interpolatory Divided Difference formula). Because as stated above, it is too high risk, and for every investor who turns $1000 into a million dollars in Forex, I will show you a thousand who lost everything. But win or lose, your broker will make money. Just invest in the stock market. Oh oh, I hope Peter Mansbridge doesn't hear me say that...how insensitive of me to encourage investing in a recession...talk about your most overblown contrived controversies of all time...
I am also curious how many hits I get from Google searches intended to make the "searchee" rich.