The FX Hustle described, or “kids, do not try this at home”

To all my aspiring, smart, pip-hungry newbie forex traders out there:  READ THIS ARTICLE posted in the Financial Times this week.  It describes a point by point IPO offering by GAIN Capital, or forex.com, a prominent market maker in the world of forex brokers, and just how they make money from the thousands, the tens of thousands of new investor/traders that are entering the forex trading world month after month.  There are two very important points to take away from this article.  First, GAIN Capital is a dealing desk broker, meaning, they take the other side of their clients’ trades, creating a very obvious conflict of interest.  Compare to an ECN (electronic communication network) which is like an interbank broker, simply matching up trades immediately with other banks on their network.  Most profitable traders that I know prefer ECNs to dealing desk brokers because they just do not trust a broker that is basically trading against you.  The second and maybe the most important takeaway from this article is this:  “Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods…”  and “…If we are unable to maintain or increase our customer retention rates or  generate a substantial number of new customers in a cost-effective manner, our  business, financial condition and results of operations and cash flows would  likely be adversely affected. For the year ended December 31, 2008, we incurred  sales and marketing expenses of $29.3 million.”  So, these brokers, all brokers, are willing to spend $30 million dollars on sales and advertising in order to get the newbie retail customers, the ones who are likely to jump into the market and under capitalize while over leveraging their trading accounts, and then quickly and quietly over trade and lose their entire account in a matter of months.  This is why we see so many advertisements for “Low spreads, $50 to open an account, START TRADING NOW”.  They depend on these type of newbie traders for their bread and butter.  This is precisely why it is so important to start your trading account with at least $5,000, but $10,000 is much better.  Otherwise the volatility in this market will eat your account alive.  Do not be a broker’s delight, do not over leverage, give yourself the advantage by allowing plenty of room for the volatility to work IN YOUR FAVOR.  The brokers will hate you, and you will love it.  Cheers.