Late-night infomercials and Internet ads are like sirens, calling would-be trading wizards with this alluring pitch: "You, too, could make a fortune trading currencies!"
There's little doubt that there's money being made in this market. Just ask legendary investor George Soros, who "broke the bank of England."
Yet currencies are hard to track by even the most seasoned traders and it's not for the average investor. And you're no George Soros, although you'll surely end up breaking something — your own bank account. Even institutionscan get scammed.
Called "Forex," short for "foreign exchange," this form of trading requires guessing on whether a currency or basket of them rises or falls. There are more scams out there than regulators can keep up with and some schemes even ensnare experienced institutional investors.
A $4 trillion market, Forex is dominated by big banks and institutions, who trade around the clock based on constantly changing streams of information. There's a reason why the big boys play this game. It's volatile, turns on a dime and is not predictable.
Currency swings often have nothing to do with the day's headlines and could be manipulated by big traders. No matter what the FOREX ads say, you will have no advantage over the biggest players. None whatsoever.
Still, if you feel that you need to bet on currency movements, use only a small amount of your net worth (under 5 percent) and look at some of the funds available. The Merk Hard Currency fund mixes in gold with a basket of non-U.S. currencies. It's basically a bet on the dollar falling.
If you're bullish on the dollar, you might consider the Rydex Strengthening Dollar 2X fund, which will produce gains if the buck gets stronger against other currencies.
Hedging against a specific currency is another matter. I would employ this strategy if you are making a large business or personal transaction in another country. You would want to protect your investment from currency fluctuations. For this, you would need to buy a specific forward contract. I would employ the services of a broker or registered investment adviser who has experience doing this. Don't do it on your own.
For those of you still compelled to take the plunge into currencies, here are some warnings. Always do your homework before you invest:
- Check out the FOREX company first. You can obtain information about any firm or individual registered with the Commodity Futures Trading Commission, including any actions taken against a registrant.
- Also check the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website. You can also find out if someone is registered by calling the NFA at 1-800-676-4632.
- Ignore promises that sound too good to be true. Most of them are frauds. Hang up on unsolicited phone calls offering investments, especially those from strangers.
- Don't sign a check or transfer any funds until you fully understand what you're investing in and how you can lose money.
