Bad bet for beginners

By Susan Edmunds

Hugo Phillips says novices can fail to realise quite how much they are buying. Photo / Doug Sherring
Hugo Phillips says novices can fail to realise quite how much they are buying. Photo / Doug Sherring

Online platforms have made currency trading as easy as playing pokie machines, advisers say, but some don't realise the risk that comes with the large sums of money they can use to trade.

Because traders only have to come up with 1 to 3 per cent of each foreign currency trade, they can make - and lose - money very quickly.

Ten thousand dollars of foreign currency can be bought for $100 and the rest is "borrowed" from the brokerage.

But because the deposit is such a small percentage of the total amount traded, small changes in the exchange rate make a big difference to a trader's bank balance.

With a $100 deposit on NZ$10,000 of US dollars, if the currency moves one cent, or 100pts, from 0.79 to 0.80, you make $100. But if it moves against you, you are wiped out.

Many invest much bigger amounts. With $10,000 down on a $1 million trade, a move of one cent could lose the whole thing.

Brokers are not left with a debt for the borrowed amount but some get hooked on the buzz of big returns, and keep making bigger and bigger punts.

Kevin Morgan, a senior client adviser in foreign exchange at OM Financial, says: "The biggest mistake people make is that they over-leverage. Very few people would buy a $1 million house with $10,000 deposit. But in currency you can do that."

Aucklander Hugo Phillips, who trades fulltime, says novice traders don't realise how exposed they are.

He says people need to understand how much they are signing up for and what they can potentially lose. "There's nothing to stop you buying a huge amount without knowing."

Morgan says online platforms have almost created a "pokie machine" mentality. Some would make trades in the space of a few minutes. "You keep playing until you've won enough to satisfy you, or you've run out."

Andrew May, sales trader at CMC markets, says novice investors are sometimes caught out by not using a stop-loss exit strategy, which provides a backstop if a trader is making a loss. "Considering most of the volatility we witness in the overnight session drives currencies against the kiwi it is imperative to be protected. Traders can lose potentially more than they invest without close monitoring of their positions or the utilisation of exit strategies."

Morgan said: "It's not as easy as it looks. Don't run before you can walk."

- Herald on Sunday

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