Retail investors fail to understand FX

Retail traders fail to understand trading in foreign exchange and leveraged markets, according to Wealth Within’s Dale Gillham, as a trading company is fined $20 million.

Last week, Forex Capital Trading was ordered to pay $20 million by the Federal Court for systemic unconscionable behaviour and sole director, Shlomo Yoshai, was ordered to pay $400,000 and disqualified for managing corporations for eight years.

Trading in these type of markets had increased substantially by retail clients since the COVID-19 pandemic and there had been an influx of advertising targeting these clients.

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Gillham said, while these products were marketed as being ‘commission-free’, clients had two major misunderstandings of how the system worked.

“What most retail clients fail to understand is that when they trade with a broker who is a market maker, they decide on the spread between the bid and ask price. Typically, this spread is much larger than a broker who mirrors the underlying asset. What this means is that the profits you could make amount to a lot less and your losses are much larger when trading with a market maker,” he said.

“Another fact that retail clients fail to understand about these products is that the money deposited into client trading accounts often becomes part of the broker’s revenue due to the client’s lack of knowledge and experience when trading these markets.

“Imagine a business model where you could predict in advance how much profit you could make based on the amount of money deposited into client accounts.”

He praised the Australian Securities and Investments Commission (ASIC) for its investigation into Forex CT but said the onus lay on traders and investors to do their research.

“While I applaud ASIC and the courts for their continued efforts in shutting down the bad apples in our industry, the responsibility firmly lies with each and every trader to do their research and be suitably experienced, and skilled before attempting to trade these high risk markets,” he said.

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