MAGIC BOXES

I had lunch with a friend of mine a couple of weeks back, John.  I say lunch, it was a pie and a pint, but welcome for all that.  Anyway, John started telling me about this software programme that automated foreign exchange trading.  John, being a bit of a punter, thought he'd give it a go and signed up.  He opened an account with a respected spread betting company, funded it and loaded up the programme.

"It's magic," he said.  "Don't have to do anything.  The programme works on a particular currency pair over a specified time frame, analyses loads of data and then decides when to trade.  It automatically sets profit limits and stop losses."  He went on in full praise, "I've been running it for about 10 days and it's made me about £250.  It just creams off a few pips, not big money, but each trade seems to make between £15 and £35."

Now I don't know about you, but I don't like the idea of handing over control of my finances to a black box where I have no real control over what it's doing.  The value of a currency can either go up or go down - it rarely stays the same for long.  You can win either way, but you can also lose either way.  So, to state the blindingly obvious, you need more winners than losers AND your winners should have a higher monetary value than your losers.   If this all sounds a bit confusing the Retirement Revenue website had a decent article on the subject the last time I looked and their free eBook also has a chapter on spread betting.  It's not rocket science, but it's worth a look.

Anyway, I saw John in the pub again yesterday.  He wasn't quite so happy.  His programme had continued to make a few pounds on most trades, but then a couple of nights ago it lost the best part of £1,000 on one disastrous trade.  He was so emotionally devastated by this that he shut the programme down straight away.

You see, many of these programmes operate by setting the profit target quite close to the original trade price and therefore just take a few pounds per trade.  But, they have a stop loss that is miles away 'to give the trade some breathing room'.  Trouble is, if the trade goes badly against you and hits the stop loss, you are seriously out of pocket.  In John's case, his 'system' had made 17 successful trades at an average of £24 per trade for a profit of £408.  However, he had one, just one, loosing trade that cost him the best part of £1,000.

I reckon that if you want to trade currencies, or shares or oil or frilly knickers, you have to have a basic understanding of the market, whether that's the Foreign Exchange market, the Stock Exchange or Petticoat Lane.  If someone offers you a 'magic box' with an 80% success rate - think on.