THE BIG PICTURE Major North American stock indexes are trading at about where they were in 1999. Long-term government bonds offer a yield of around 3%. The real estate markets that haven’t blown up yet are looking far too overheated for comfort.
Is there anything left that offers some real upside to the average investor? Suppose you could easily earn hundreds of dollars a day, possibly even thousands, trading foreign currencies online at home. Foreign exchange—forex—is the world’s largest and most liquid market, with a global daily trading volume of about $4 trillion (U.S.). Yet all you need to get started is a computer, some cash and access to the Internet.
You’d at least be tempted, right?
Online forex trading is one of the last promising frontiers for day traders, the proverbial folks in bathrobes who sit glued to computer screens in their homes for hours at a stretch. The trouble is that forex trading isn’t just risky—the provincial securities laws that govern it have major gaps. Worse, regulators warn that forex is still populated by out-and-out scams.
The attraction is obvious: quick and fat profits. Many day traders gave up on online stock trading after North American exchanges completed the switch to decimalized pricing in 2001. Price increments and profit margins shrank to fractions of a penny a share. But online forex dealers allow even individual investors to use a lot of leverage, which can greatly magnify profits from even tiny shifts in exchange rates. Until recently in the United States, leverage of 100-to-1 was common, meaning that you can buy a $10,000 currency contract by putting down only $100. If you buy the U.S. dollar at parity with the Canadian dollar and the greenback gains one cent, that’s a 100% profit. Lately, the leverage has been moderated in Canada and the U.S. In Canada, trading between Canadian and U.S. dollars has been leveraged around 25-to-1 or 30-to 1.
Of course, leverage can also work in reverse. “You can make a lot of money quickly and you can lose a lot of money quickly,” says Edward Kholodenko, president and CEO of Questrade Inc., Canada’s largest discount brokerage firm—largest, that is, after the ones run by the Big Five banks.
Despite that risk, forex has other powerful attractions: You don’t have to follow hundreds of stocks. There are a limited number of solid currencies, and most traders concentrate on the seven largest—including the greenback, the yen and the euro. Commissions are low—$7 a trade is common. Some dealers, like Questrade, waive commissions altogether, and profit from the wafer-thin spread between the bid and ask quotations of buyers and sellers.
Besides being huge and highly liquid, currency markets are something you can trade online 24 hours a day, six days a week. That figure of $4 trillion (U.S.) for daily volume, which is widely quoted, is a bit misleading, however. Because of the use of leverage and derivatives such as futures and options, only a minuscule fraction of that amount actually changes hands.
Still, it can all look awfully easy to a novice—sometimes too easy. Many traders believe in technical analysis and in the efficient markets hypothesis, which holds that all publicly available information about a currency is reflected in its market price—the exchange rate. That means you don’t have to spend hours analyzing fundamentals such as trade balances and international capital flows. Just look at trends in exchange rates themselves on your computer screen.
The Big Five banks haven’t jumped into the retail forex game: None of them offers online accounts targeted at day traders. (The banks are, however, active in foreign exchange: They have their own currency trading teams with vast amounts of capital and sophisticated technology at their disposal.)
Questrade began offering online forex trading in 2005. It gives individuals access to about 40 pairs of currencies. Kholodenko says the business has grown substantially from year to year. “Forex clients make up about 10% of our client base,” he says. “It’s not something that we’re trying to go out and sell. We see a demand for it.” He says forex definitely isn’t for the prudent long-term investor. “You have to have an appetite for risk. It’s not, you know, something that a grandmother should be investing in.”