Online trading – The perfect con?

Not so long ago, trading in Foreign Exchange, stocks, bonds, futures and shares was the somewhat sacred preserve of the broker on the floor of the bourse. Thanks to the internet, and some pretty nifty software, just about anyone can now trade these items from his own home – or employer’s – computer.

How Does it Work?

The prospective home-trader will probably reply to one of the many browser ads that proliferate on the web, having been seduced by the idea of the possibility of making some easy money.

Within hours a member of the sales team will call the applicant, offering an assortment of bonuses and training courses should the applicant sign up and deposit a specified amount of US dollars into the company’s account. The minimum deposit can vary between $100 and $10 000. This deposit is almost always made via a third party such as PayPal or Skrill.

Once the deposit has cleared, and the necessary software downloaded, the armchair-broker is able to trade whatever is on offer via his selected brokerage. Some may select to do some practice trading on a dummy platform to help get their financial “eye” in, but most will go direct to the virtual floor.

Now that he has become a member of the trading world, the new trader will be deluged with invites to free training sessions and webinars from a variety of concerns, most of which he will attend in the hope of picking up some useful tricks-of-the-trade. None of these concerns are philanthropists at heart, despite their assurances that they are trying to help the small trader get ahead. They will all eventually try to sell one or other of their products to the trainee.

Having done the necessary studies, and feeling confident of his abilities, the new trader will set up a trade and initiate it. Generally he will win one or two trades and then start losing. Most will lose their deposits, attend a few more training sessions, study a book or two on the subject, redeposit, try again, lose – and give up. Some will not give up, but turn the search for the “perfect strategy” into a, very expensive, lifelong quest. The lucky few will win consistently, and find the promised path to easy money.

So, Where’s the Catch?

The catch lies in the mathematics of the system.

In an attempt to prove their bona fides, and re-assure the novice trader that they are on his side, most of the training concerns will state that 5% of traders will be successful, and live off the losses of the other 95%.

In a masterful attempt at double-think, they will go on to assure the novice that they will help him to approach matters in the manner of the happy 5%. It is interesting to note that these are roughly the same chances of winning possible at a casino. (The trainers are all quick to assert that the difference between gambling and trading is that one deals with possibilities, and the other with probabilities.)

And here lies the rub.

The forex market alone is purported to have turn-over of about USD 5 trillion a day. Using the 95%-5% theory, one could postulate that a mere $ 0.115 billion is going into winning trades and the rest – $ 22.885 billion is being deducted from somebody-somewhere’s account. These figures are far from exact, but give some idea of the daily losses incurred by the huge body of small traders around the globe. Every time someone loses his deposit, it is swallowed up into the giant, hungry maw of the world market, enlarging it for the benefit of the 5%.

There is no overt con in place. Anybody can make money through online trading – if they are very lucky and have the right psychological make-up. Nothing is offered that is not possible. No false promises are made. Warnings about the dangers of trading are conscientiously issued – in a similar fashion to the unread risk-to-health messages on cigarette packets.

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The con lies in the fact that the small person will lose and, probably, lose again – he has to in order to keep the markets afloat. But, most seem to do so, if not willingly, at least philosophically. An attitude of, “Well, it was an expensive lesson, but trading is not for me,” seems to prevail among the more accepting of the beaten. For the less philosophic there are always more courses to take, webinars to attend, trading strategies to buy, and deposits to make…

And the system scores again.

In the pursuit of the ever elusive “easy buck,” the small trader puts increasing numbers of them into the pocket of the professional. And, for every small trader who goes bust and leaves the game, there are another hundred waiting to take his place.