Making Money With Foreign Exchange Futures?

Last Updated Dec 16, 2009 7:53 PM EST

I got a telephone call not too long ago from yet another stranger offering to make me rich. This time, the method de jour was Foreign exchange futures, commonly called the Forex market.

The pitch from Nobel Trading Group claimed they had a proprietary trading model that had delivered at least a 200 percent annual return for the last three years. They boasted of success in the Forex market, in which participants are able to buy, sell, exchange and speculate on currencies. Betting against the dollar, for example, has apparently been quite successful over the past couple of years.

So I bit on this one and requested that the caller send me more information. They emailed me some documents that I would categorize as DRIP (data rich information poor). The data showed pages and pages of trades that looked pretty impressive.

Noble Trading Group followed up with a call again claiming 200 percent returns. I thought I'd see if they would put it in writing. To my surprise, they sent me the following email:
My team of traders and their ability to identify trends in the Forex Market have posted profits over 200% annually for the past three years. Their trading system is proven and gives us the ability to pair currencies with a success rate that is just shy of 70%. We set very small profit targets and on a daily basis we are able to pick up 1/2 to 1%. The dollar will continue to lose value as our economy improves because of inflation. It is much easier to pair a weakening currency with one that is more stable, so we expect our success rate with this trend to continue for at least the next 24 months. When the dollar does turn around, we have the ability to change the oscillators within the system and we should be profitable in its up-trend as well.
That fishy smell
After receiving the email, I called and spoke to a Director at Noble Trading Group. I quickly disclosed that it was unlikely that I was going to become a client of their $5,000 a year subscription of signals to play in the Forex market, but did think it would make a good column. He was more than happy to talk to me.

He confirmed, as implied by the email, that this was indeed a conservative strategy. I then asked him to reconcile his statement with his web site that stated:

FOREX TRADING INVOLVES SUBSTANTIAL RISK OF LOSS. THE HIGH DEGREE OF LEVERAGE INVOLVED IN FOREX TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU.

According to this Director, this statement was only to protect the firm and their strategy really is conservative.

Another thing that didn't quite smell right was the fact that they were even soliciting. I pointed out to Noble that a 200 percent annual return for the three years they claimed, would translate to a 2,700 percent return over three years. With such astronomically high returns, why wouldn't Noble have people beating down their doors to get in? The Noble director claimed current clients didn't want to tell others.

A zero sum game
Before ending the call, I asked if Noble Trading Group considered the Forex market a zero sum game?. After all, if some money is on one side of the future's options, there must be an equal amount on the other side. Thus, in order to make money, one must outsmart others. Of course, the broker always wins, just like the Las Vegas Casino. And, of course, Noble did not agree.

Fishy smell turns rotten
Still, the pages of returns sent to me by Noble looked pretty impressive. So I kept reading until I got to the last page. The footnote at the bottom stated these were "hypothetical returns" and "GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT." Don't you just hate those annoying little footnotes? As is usually the case, the devil is in the details.

My advice
Forex markets are risky and leveraging risky markets is downright dangerous. The only success that is guaranteed in taking this approach is in transferring wealth to brokers. It's a no-brainer these days to say the dollar has taken a beating. But to bet you are smarter than the futures market is a worse bet than playing the tables in Vegas with whatever strategy you've picked up off the internet.

The next time someone pitches an investment with both high returns and low risk, don't bite without reading the fine print and every footnote. I'm guessing that Noble Trading Group broke no law, which in itself is pretty sad.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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