Currencies

Currencies: Daytraders' new thing?: Backers are calling it 'the fastest growing market in the world'
 

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Several days each week, Paul Lynch spends a few hours in front of his home computer, daytrading over the Internet. No, the 22-year old doesn't move in and out of volatile technology stocks like the notorious daytraders of the late 1990s did. Mr. Lynch, who lives in Guelph, Ont., and runs his own advertising firm, trades currencies.

"You're switching, say, U.S. dollars to euros for a number of hours. And then you're buying the U.S. dollars back again," he said. Since December, he has made a 50% gain on his original investment. Not bad, considering the Toronto Stock Exchange composite index is up just 8% this year.

Many other small investors are getting the same idea. Once the sole domain of institutional players and ultra-sophisticated investors, currency spot trading has become accessible to just about anyone with a computer and an Internet connection.

Businesses have begun offering courses and hand-holding services to retail investors who are not familiar with currency spot trading. For example, New Jersey-based GAIN Capital Group launched FOREX.com in January. Through the Web site, investors can open a "mini-account" for as little as US$250.

"We give away free demos to potential clients so that they can try out trading and see how it works," said Mark Galant, chief executive of GAIN Capital. "We're up to 1,000 demos a week now."

Similarly, New York-based Forex Capital Markets claims 35,000 retail clients and touts online currency trading as "the fastest growing market in the world."

Equity daytrading of the 1990s created similar hype, which fizzled out when the dot-com meltdown in 2000 left many investors facing ugly losses. Is currency daytrading doomed to the same boom-and-bust pattern?

By most estimates, more than US$1-trillion worth of currencies trades hands each day, making the world's foreign exchange market many times larger than the equity market.

The reason why this massive asset class has suddenly attracted the attention of retail investors has to do with the recent volatility of the world's major currencies.

In particular, the U.S. dollar has plummeted against the euro and Canadian dollar during the past 12 months. Daytraders love volatility because it gives them an opportunity to make big bucks in a short period of time.

"There is less volatility in the stock market now, and therefore less opportunity. In contrast, there has been much greater volatility in currencies," aid Dirk Morris, chief investment officer of currency at Putnam Investments.

"Our currency products aren't offered to retail clients. But I certainly see it when talking to retail brokers that there is a growing demand from the retail end of the business to get into currency trading."

Currency trading allows investors to trade with much more money than they actually bring to the table. Refco Canada, a brokerage firm, allows retail investors to trade up to 100-times their initial capital.

In other words, with just $1,000 of your own money, you can buy up to $100,000 worth of currencies on the spot market. This degree of leverage allows you to magnify your gains (and losses) 100-fold. For example, if the currency you're betting on rises 1% in a day, you can make $1,000 -- or 100% of your initial investment.

Of course, you can lose money just as fast if your bet is wrong. This is why the trend toward currency daytrading has some observers concerned that retail investors may be setting themselves up for a drubbing.

"To truly know your risk in something like this is a fairly complicated thing. The information one gets as a consumer today gives you no idea of what that risk is," said Ron Dembo, founding chairman of Algorithmics Inc., a Toronto-based risk management software firm.

Professional traders employed by big banks have been trading currencies successfully for many years. However, in most cases they are backed by colleagues stationed in offices around the world and have access to all the research tools they need.

"I've been doing it for 20 years and there are plenty of times when I lose money. And the amount of quantitative tools and research that we believe we need to consistently make money is enormous," said Mr. Morris.

Nonsense, argue retail investors and the companies that train them. They believe currency trading is simpler than trading equities. Instead of weighing the pros and cons of thousands of different stocks, investors need only look at six or so different currencies.

They also point out that the fees and commissions associated with currency transactions are much lower than with stocks. The market operates 24 hours a day and there is never any liquidity barrier to moving in and out of a particular currency because the market is so large.

Finally, they argue currency trading is safe. Since you can use stop-loss orders to automatically exit your position if the market is moving against you, your losses are limited.

The trick, they say, is to get the right education, which usually involves a brief course. "The more sophisticated professional investors tend to do better than the new clients, who have never tried this before. That's because there is a learning curve," said Mr. Galant.

Mr. Lynch learned about currency trading at a five-day seminar in Cancun. He then fine-tuned his knowledge last year with an online course (price:US$677) offered through Vancouver-based FOREX Academy.

"I'm pretty confident right now. The course teaches you to check a number of different indicators. When all those indicators are aligned and saying the same thing, that's the point when you enter the trade. About 60% of the time you get a positive trade," he said.

Will retail investors like Mr. Lynch profit from currency trading when the U.S. dollar grows less volatile or reverses direction and climbs against the euro? The pros are doubtful. The currency daytrading trend could just fade away