Scamming the Scammers

Scamming the Scammers

Greetings from Acapulco! It's a beautiful Sunday afternoon; the birds are chirping as a tourist goes parasailing effortlessly above the beautiful blue bay. I'm enjoying the view from our terrace, sorting through email when I came across something that sounded a sour note on an otherwise perfect day…

Question of the Week

Q) Mr. Ponsi, I am very interested in the Forex market. I have some money that I would like to put into an active account but I can't get my demo account to make any money. I started with an automated trading company that shall remain nameless (E.P.) first. It was supposed to win more than lose. I didn't find that to be true. Then I read some stuff about financial calendars, they listed the times of the news conference but by the time I got to place my trade I had missed the spike. I really don't feel comfortable sinking my money in an account when I can't seem to make play money in the demo account. Can you help me?

Ed Ponsi) Yes, I can help you – don't do it! If you're not comfortable putting money into an account, then there is a good reason for that discomfort. In your case, the reason seems to be that you haven't learned how to trade yet – and that's the best reason imaginable to stay out of the currency market or any trading market. Don't rely on automated systems or signal services, they almost always promise more than they deliver. Instead, learn how to make the right trading decisions on your own, you'll find that it is much more rewarding.

Automated trading systems like the one you mentioned tend to be more hype than substance. Because Forex is relatively new to the retail trading public, scammers who make unrealistic promises are becoming a constant nuisance. Here's a good rule of thumb, and it doesn't matter if you're trading stocks, futures, options, or Forex – If anyone promises outlandish returns, don't believe it; it's probably a scam. For example, the website you mentioned claims returns of nearly 500% in 2005, nearly 700% in 2006, and nearly 1000% in 2007. Just based on these so-called returns, this website has scam written all over it.

A quick glance at the disclaimer page yields yet another huge red flag, waving in the breeze: "No independent party has audited the hypothetical performance contained at this website". The word "hypothetical" should set alarms ringing, because this means that those supposedly lofty returns from the years 2005, 2006, and 2007 never actually occurred – they are "hypothetical" returns. This means that the system currently in use would have yielded those results back during those years, if it had been used. But it wasn't used, because if it had been, the returns would be "actual" instead of "hypothetical". What the operators of the website are doing is predicting the past. Now, watch me predict the past with astonishing accuracy: I hereby predict that the New York Giants won last year's Super Bowl. I predict that it rained last Tuesday. I predict that the movie "Batman: The Dark Knight" will have a record breaking opening weekend. I can even give you last week's winning lottery number!

If you were to grade me on my predictions of things that have already happened, you'd have to say that I'm very accurate. You'd also have to admit that the information is useless, unless you have somehow acquired the use of a time machine. Hypothetical returns are the backbone of any trading scam, so search every page of the website, especially the disclaimer, for that word. The website's operators are hoping that you will be so excited by your desire to receive big money without effort that you will be negligent in the performance of your due diligence.

Here is another red flag, in the form of a quote from the website's homepage, "Also you can be absolute newbie to use our system - you don't have to know ANYTHING about trading and you don't have to have ANY experience." Two things stand out here; first, the promise of easy money with little or no effort. Ask any real trader and he or she will tell you that trading is not an easy job, but the public can be easily led to believe that it's all very simple, and that no real effort is required. Even though deep down we should know that this is a false promise, much like fictional FBI agent Fox Mulder of the X Files, we want to believe, and this is what makes the scam so effective. Scams of this nature are meant to appeal to the public's sense of greed. The promise of easy money is a hallmark of all scams, not just in the world of trading.

Another thing that caught my eye was the poor use of the English language in the phrase, "you can be absolute newbie". As a rule, I delete all spam without opening it, but sometimes I do read the email subject headline. I don't know about you, but I am inundated with spam that is written in poor English, and I assume that most of those who spam, scam. I am not saying that poor usage of the English language necessarily makes one a scam artist, but it does seem that many scam artists do not have a good handle on the language, so consider it a warning sign when combined with the other red flags mentioned above.

Summary

Ralph Kramden. Homer Simpson. George Costanza. One of the staples of television entertainment is the lovable loser, the person who always seems to be hatching some crazy get-rich-quick scheme. The result is always the same; every episode ends with the scheme blowing up in our protagonist's face. While we may find it entertaining to watch these fictional personalities in action, we don't want to BE that person. It has been said that when opportunity knocks, it is often disguised as hard work. Well, when a scam comes knocking, it is often disguised as easy money. Real trading is hard work, but it can be enormously rewarding if you are willing to do what it takes to learn the business.

Why do I find these scams so irritating? Because innocent people who have a legitimate interest in learning how to trade are being taken advantage of, and because it sullies the reputation of the good guys that are out there. I hope this exercise has been helpful. Let's be careful out there!

Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

Doctor Evil Would Be Proud

Doctor Evil Would Be Proud

With an official inflation rate of 2,200,000% (2.2 million percent), Zimbabwe's central bank has now introduced the $100 billion dollar bill. I can just hear Mike Myers as Dr. Evil shouting "One Hundred Billion Dollars!" Unfortunately, Zimbabwe has its own, real life version of Dr. Evil, as we will see in a minute. Inflation is so high in Zimbabwe that the supply of money just can't keep up with the cost of goods. For example, while it may sound appealing to have a net worth of $100 billion dollars, in Zimbabwe this amount is not enough to purchase a single loaf of bread! The new Zimbabwe $100 billion dollar bill is roughly equal in value to one U.S. dollar.

The Zimbabwean central bank, the Reserve Bank of Zimbabwe (RBZ), has mismanaged this hyper-inflation and has ignored advice from the International Monetary fund (IMF), instead choosing to print money as if it were toilet tissue (which went for $417 per sheet, not per roll, in March of 2006, according to a New York Times article). As more money is added to the supply, the value of each individual unit of currency falls, until the currency becomes worthless. Sound familiar? This is happening right now on a much smaller scale in the U.S., leading former Presidential candidate Steve Forbes to refer to current U.S. monetary policy as "Zimbabwe economics".

What is the solution? Well, inflation can be caused by too much money chasing too few goods, and one possible solution would be to increase the number and amount of goods produced. The other, more obvious solution would be to decrease (or at least stabilize) the supply of money. Unfortunately, this is easier said than done. This is especially true when your leader is President Robert Mugabe, who has ruled the country for 28 years and was recently condemned by the international community for waging a campaign of violence against his political opponents. Mugabe's main opponent, opposition leader Morgan Tsvangirai, withdrew from last month's election after alleging his supporters were being targeted in a state-sponsored campaign of violence. Mugabe is now threatening to loot businesses owned by foreigners, especially from the U.K., blaming them for his country's economic woes.

The Mugabe regime's economic mismanagement has already led to a 10-year recession (source: International Monetary Fund) and an unemployment rate of nearly 80%, and will undoubtedly cause more pain and suffering to millions of Zimbabweans for years to come. A just-published study by Long Island University researchers measuring economic opportunity and quality of life in over 100 countries shows Zimbabwe coming in dead last. Iceland was number one, Canada was second, and the U.S. came in 11th. For the full list and an explanation of the criteria, please visit:

http://www.cwpost.liu.edu/cwis/cwp/pr/press/2008/117.html

And to those among my fellow Americans who smugly believe that it can't happen here? Well, it can – in fact, it already has happened here. Continental currency was a paper currency issued by the Continental Congress, after the Revolutionary War began in 1775. With no solid backing and being easily counterfeited via printing press, the continentals quickly lost their value, giving voice to the phrase "not worth a continental". It was eventually replaced by the silver dollar at the rate of 1 silver dollar per 1000 continental dollars. Finally, in 1792, the Mint Act was passed, and the dollar was pegged to silver and gold, putting an end to this nonsense for good.

Or so it seemed. The so-called "gold standard" effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed the private ownership of gold. Without a gold standard, governments can print as much money as they want, destroying wealth through inflation. Here is a great quote from a man who was, at least at one time, clearly in favor of a gold standard:

"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

Alan Greenspan, 1966

Any enormous increase in prices threatens to impoverish the agricultural and working class of that country. Because inflation wreaks such havoc on the quality of life in any given country, major central banks like the ECB (European Central Bank) have made the containment of rising prices their primary mission. Federal Reserve Chairman Ben Bernanke said last week that U.S. inflation "is too high" and reiterated that the Fed's aim is to achieve price stability, but so far it's been all talk and no action. Only time will tell if we will see some serious movement on this front.

Awesome Aussie

The Australian Dollar continues its march to parity,plus your questions on Pivot Points, in this week's newsletter.

CLICK HERE TO READ THE FULL ARTICLE

Ed Ponsi at the L.A. Traders Expo

Hey Everybody,

Here are three short videos from the Los Angeles Traders' Expo:

Dollar Intervention?
Author and currency trader Ed Ponsi doesn't expect to see concerted central bank
intervention to support the struggling US dollar.

Commodity Currencies
Author Ed Ponsi updates his bullish outlook on the Australian dollar from both a
fundamental and technical perspective.

Euro/Yen?
Though the carry trade has been dormant for quite a while current traders, like Ed
Ponsi, are watching the EuroYen

It's a Mad, Mad, Mad, Mad Forex World

In a market that is driven by news such as the Forex, it's important to stay on top of current events. Thursday was a wild, wild day in the currency markets, featuring the simultaneous release of two hugely important market moving events - the monthly non-farm payroll report, and a speech by the head of the European Central Bank (ECB), Mr. Jean Claude Trichet. How do the pros deal with a wild day like this one? Read on and find out.

CLICK HERE TO READ THE FULL ARTICLE

Video from ForexTV

Topics: The ECB and Fed rate decisions, future targets for Euro, British Pound, and Japanese Yen, and more. This appearance on ForexTV includes a strategy for trading currencies that uses the S&P 500 as a leading indicator.

CLICK HERE TO VIEW for the Youtube link to view this recent 9-minute television appearance. With host Remi Hoki

At My Signal, Unleash Hell

From sea to shining, sea, U.S. politicians continue to bash traders and blame them for high energy prices. A variety of bills have been introduced that are designed to limit the amount of money that hedge funds can invest in energy, reduce foreign trading and even put an end to energy speculation altogether. Do these politicians have even a basic understanding of how the futures market operates? "No, they're clueless - at least most of them," said former U.S. Commodities Futures Trade Commission chief economist Gerald Gay in a recent Fortune magazine article about oil speculators.

Here's a thought - instead of discouraging speculation, which is a necessary ingredient to provide liquidity in any market, why not instead encourage those speculators to sell and drive prices lower? If you give traders a good enough reason or reasons to sell, they'll do it. Instead of trying to eliminate speculation, why not use it as a weapon to drive prices lower?

Here's what I mean. Remember the movie "Gladiator"? In it, Russell Crowe plays the general Maximus, who gives the order, "At my signal, unleash hell," thus initiating a series of actions that drive the enemy into disarray, retreat, and defeat. Imagine a day in the not too distant future, when the following series of synchronized events are unleashed on unsuspecting commodity traders:

11:00 am: Ben Bernanke and the Federal Open Market Committee shock the markets with a surprise 50-basis point rate hike, sending the U.S. Dollar rocketing higher, and causing oil prices to plunge.

11:01 am: The U.S. Department of Energy announces that it is suspending its policy of adding supply to the Strategic Petroleum Reserve, and will in fact release some of the oil from the SPR into the open market. The drop in the price of oil accelerates as panicked traders begin to cover long positions.

11:02 am: Saudi Arabia announces that it will add 800,000 barrels per day of supply to the market in addition to the 200,000 bpd increase that was announced last week. Sensing a rout, traders sell short energy contracts by the fistful, driving the price of oil to its worst one-day loss in history.

Can you imagine the market reaction that would ensue from this orchestrated series of events? Within three minutes, traders would panic and bail out of their positions, creating an avalanche of selling that would collapse oil prices. While it certainly wouldn't be easy to choreograph these specific events, I'm sure that with a little creativity and a lot of motivation and cooperation, a similar series of surprises can be arranged. If speculators truly are driving energy prices higher – and it's debatable whether they are - then they have the ability to drive them lower as well. Let's give them a reason to do so.