One day in the early 1970’s as an economist with a major global bank in New York, I was called to the executive vice president’s office to discuss the movements of the German mark/U.S. dollar exchange rate.
“We want to take a position that would generate some profit,” he said.
“How big?” I asked.
“Three hundred million,” he replied.
“How long?” I croaked.
“Three months” he answered.
Basically the bank wanted me to forecast the movement of the mark/dollar exchange rate over the next three months. I subsequently recommended the bank buy $300 million in marks to be sold as soon as the rate reached my predicted higher level.
My crystal balling was based on a methodology I developed for such situations. It required a comprehensive analysis of all economic factors along with extensive probability calculations. I called it my SWAG&P program because it was in reality a Scientific Wild Assed Guess followed by a Prayer. The bank made $12 million. I didn’t get a bonus, but I did keep my job.
I relate this story because thousands of “little guy” retail investors are now playing the currency game enticed by small brokerage firms with online programs, training classes and “mini accounts” ($1 minimum) for the incipient trader. On the surface there are many attractions to this market; open 24 hours a day, a daily volume of some $4 trillion, high volatility, essentially unregulated trading.
Leverage of up to 50-to-1 is possible (recently cut from 100-to-1 by regulators) which means a $1,000 stake allows a $50,000 position. If the rate moves in the investors favor, the gain is $500 for every 1 percent change. If the rate moves against the investor, the brokerage firm will usually close the position when the initial $1,000 is gone (2 percent movement).
This asymmetrical risk pendulum (potential upside profit greater than downside loss) could theoretically result in profits over time. But betting on directional movement is still a SWAG&P program. With 50-to-1 leverage, the initial investment could be lost in a few days of rate movement. Out of thousands of small investors now trading currencies, less than a third are making money. But if you want to have some fun make sure you control your bets and stop trading when your initial stake is gone.
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Write to Gerryk3001@yahoo.com.