‘Learn to trade Forex like a pro’, they say. Is it all too good to be true?

12 Mar

A four-day course on forex spread-betting for beginners is one of several ventures purporting to endow amateur investors with the skill to take on institutional traders.

Opes Academy’s self-described “private fund owner and city trader”, Paul Bentley, told the motley group of recruits the sales team had scraped together for Saturday’s presentation that spread-betting was not a form of gambling (though technically being classified as gambling is what exempts it from capital gains tax).

It was, rather a series of calculated risks where you tried to maximise gains despite an uncertain outcome; an explanation strangely similar to the Oxford dictionary’s second definition of gambling.

Spread-betting has earned its moniker by virtue of the fact that winnings are proportionate to the distance a stock must move before investors reap the rewards: say, £1 for every basis point. Like in a betting shop, the smaller the probability of the outcome, – or the slimmer the odds, – the higher the reward.

However, the margin ‘stake’ you put down when placing a bet can be lost at the same rate. That is, unless you have set a ‘stop losses’ limit below which your chosen security cannot fall, before the broker automatically stops the trade and cuts your losses. Although you can lose more than your initial stake if you bet on an underlying moving in the wrong direction, the yield on your position can be three times the value of your initial investment.

The popularity of spread-betting, and its status as an over-the-counter (OTC) contract means that host exchanges sometimes go beyond the facilities offered by traditional exchanges, providing guaranteed stop-loss agreements. This was a facility that Opes Academy invoked as a privilege allowed by its partner exchange.

For a mere £2,500, the course offers four days of technical training which teaches you a Forex trading system incorporating four key indicators: relative strength index; moving average – exponential; Fibonacci retracement and extensions; and stochastic. While these principles form a sound grounding in trading theory, I was dubious about the group’s ability to master them over two one-and-a-half days’ teaching sessions – and two half-days’ of practical work, placing trades under supervision in the classroom.

An exponential moving average in price is widely recognised (see Prof. Sornette on the Log-Periodic Power Law) as an indication that investor sentiment has become the predominant driver of price movement. The Fibonacci number sequences widely found in naturally-occurring patterns of expansion are also used as a barometer of investor sentiment (see investopedia definition, and official site’s description of founding principles of Elliott Wave Theory.) Another facet of the course is learning to identify false signals, manipulation by market makers through iceberg trades or dark pools.

Stochastic calculations are used to project possible outcomes within a system, according to the probability of chains of events. Monte Carlo methods are stochastic techniques – meaning they are based on the use of random numbers and probability statistics to model derivatives pricing and value at risk. The method involves running multiple trial runs, called simulations, using randomly generated sequences of outcomes.

Though technical instruction was reserved for those who subscribed to the course, Bentley offered his audience some casual throwaway gems of advice. First, to “Wait for the ripples” from major institutions’ block currency trades and capitalise on the resulting price movement. “Amateurs want to dive in,” he said. “In fact, you will walk away from more trades than you take.”

He cautioned that prices on average fall five times quicker than they rise, so to watch out for when a price chart hits a ceiling, i.e. the level at which on previous occasions, the trend has started to reverse. This precipitated the traders’ maxim, “Bulls go up the stairs, bears jump out the window.”

Another popular preoccupation he warned against was ‘impact news’, like press releases about newly pegged central bank interest rates, or the US non-farm payroll figures announced on the first Friday of every month. Traders’ immediate reactions and attempts to pre-empt market movements trigger high volatility, with unpredictable outcomes. For this reason he advised to stay clear of trading an hour before, and the hour after, impact news releases. Bentley assured us that he personally spends two hour in the pub on non-farm Friday, so as to resist the temptation to speculate.

Bentley conveyed the impression of being an experienced and knowledgeable trader – though still young, at under 35. The problem with the ‘system’ that Opes Academy indoctrinates its credulous subscribers with is that, by only investing one percent of your portfolio at a time, in a maximum of three open trades, it could take some time to make back the cost of the £2,500 course fee if you make a lot of early mistakes. This is even accounting for the £10,000 opening account you are allocated to trade. Opes Academy take 30% of whatever profit you make, leaving you with 70%. After the quarterly assessment of your capital gain, the total in your fund returns to £10,00.

And you are only supposed to place a trade if it is certain the circumstances meet the stipulated criteria. In fact if you break the system’s rules at any point, the Opes Academy team, who continually monitoring all trades placed with their account, will suspend your account.

Bentley explains, “If you break the rules of risk management, we pull your account. You are not liable for any losses, provided you follow the rules. We monitor you constantly with a traffic light system – green, amber and red, depending on your percentage losses… If you are consistently losing money, we won’t suspend your account immediately but we will have strong words with you.”

My burning question, sitting through the initial hour-and-a-bit-long sales pitch, was ‘But how do you make money out of this?” Evidently the elephant in the room, the subterranean bombshell, was the course price, which was not revealed until the last five minutes. A concerted effort was made to persuade us that this was almost a philanthropic exercise, that they were teaching us a ‘life skill’; that our social network would broaden, as we students engaged in avid discussions on trading technique over Skype.

I did some sketch calculations to ascertain how likely you were to make back your £2,500 investment under this system. Let’s say you had other time commitments, and in each quarter were only able to place around one trade a week, but all were successful. The first three yielded a 3% return, then one 2% trade, a 3% trade, a 2% trade, 3%, 2%, a couple of minor 1% yielding positions, then another 3 and 2% yields. You would end up with£13,184.59. Minus the £600 you lost through four bad trades – which figure, based on Bentley’s screen capture of his own trading history for a month, is optimistic: the net gain is £2,584.

Boom. In your first quarter of trading, you have made back your initial investment and more. All thanks to the magical mathematical combination of compound interest on a large sum of capital. There are many companies out there trying to capitalise on the growing trend of casual traders, non-professional investors who want to ride the stock market to augment their existing capital: Forex Trade School, Amplify Trade School, Agora Trading, one-day event Alpha Trading Floor, to name just a few.

IG in a 2013 report stated that 0.18% of the UK population engaged in spread betting, higher than the numbers in France (0.04%) and Germany (0.06%); though still some way behind Singapore where 0.55% of the population actively participate. It is still an elitist pursuit, but with access widening through beginner trading courses, what are the odds that these percentages will start to compound?

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