Day traders find new outlet in foreign exchange wagers

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I am posting this article from last year because this is the actual article I read back in July 2005 that first exposed me to the unknown world of Forex and actually drove me to the bookstore within an hour to find out more.  It was originally published in the Wall Street Journal and I'm happy to have found it.  

By Craig Karmin and Michael R. Sesit, The Wall Street Journal

At an hour past midnight, when he gets home after working as a disc
jockey for a New York City classic-rock station, Marc Coppola checks
the market and starts trading.

Having lost $750,000 trading stocks after the technology-stock bubble
burst in 2000, his appetite for shares is greatly diminished. Instead,
he is joining thousands of other individual investors by betting on the
global currency markets.

Mr. Coppola, brother of actor Nicolas Cage and nephew of movie director
Francis Ford Coppola, earlier this year pocketed about $1,400 on a
$60,000 bet that the euro would rise against the dollar. In March, he
reversed course, betting $40,000 that the euro would fall. Once it
slipped to $1.30 from $1.31, he cashed in half of his investment, then
soon after closed out the rest.

"I got scared out of the trade," Mr. Coppola says regretfully. "I
should have said, 'the euro is going lower' and rode it down to the
$1.20 area."

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Welcome to the latest day-trading playground: the $1.9 trillion-a-day
foreign-exchange market. Foreign-exchange traders can use any of a
number of shops to set up online-trading accounts that — like the
currency market itself — operate around the clock. Some of the most
popular include Gain Capital Group and Forex Capital Markets, or FXCM,
in the U.S., and Denmark's Saxo Bank.

China's announcement last week that it was revaluing the yuan and
linking it to a basket of currencies further excited the house-bound
currency traders. FXCM, for instance, saw daily trading volume spike to
its highest ever at more than $12 billion Thursday as individual
investors wagered correctly — that the yen would surge on the news.
While the market awaits China's next move, more and more individuals
may be tempted to place their bets.

Foreign-exchange veterans warn that the risks are huge. Traders can
leverage their positions to place bets valued at as much as 200 times
the money they put up. If a bet goes wrong, they can lose by a
corresponding amount.

Foreign-exchange trading holds a certain unique appeal. The 24-hour
market means that traders can participate whenever they want, not just
between 9:30 a.m. and 4 p.m. Eastern time, as with the U.S. stock
market where "after hours" trading is still just a small segment. Since
transaction costs are lower, currencies also are cheaper to trade than
stocks. And trading is simpler since six currency pairs — dollar
versus euro, for instance, or yen versus dollar — account for nearly
90 percent of all trading volume, compared with thousands of stocks.
Unlike stocks or bonds, there can never be a foreign-exchange bear
market: Currencies are valued relative to one another, so some
currencies have to be going up while some go down.

Perhaps most appealing of all, while stocks and bonds were gyrating up
and down in recent years, most major currencies rallied steadily
against the dollar between 2002 to 2004. The euro surged more than 50
percent during that period.

Still, the dollar's surprising rebound this year caught most
professional currency managers off guard, causing them to lose a lot of
money. But it doesn't require huge surprises for day traders to sustain
losses.

"I had a bad streak," says Matthew Smith, a 23-year-old personal
trainer in Colorado Springs, Colo., who lost more than half of the
$10,000 he had in an online account while trading 17 currencies. Now
that he focuses on the British pound versus the dollar, he thinks he
can make it all back. "I'm hoping to do (currency trading) as my most
significant source of income," Mr. Smith says.

Professionals don't think that is such a good idea. Kevin Morrison,
head of the U.S. foreign-exchange desk for Citigroup Private Bank, says
many of his clients trade currencies. But he advises that this trading
come from the 10 percent of overall capital that investors put aside
for riskier bets. "This is not a core asset," he says.

Even people running the trading shops warn clients against trying to
time the market. "If 15 percent of day traders are profitable," says
Drew Niv, chief executive of FXCM, "I'd be surprised."

And despite the Commodity Futures Modernization Act of 2000, regulating
the foreign-exchange industry remains spotty and scams have been
commonplace as "bucket-shop" hustlers seek to separate investors from
their money. The government regulates individual trading firms but not
the currency market itself. In pending cases, the Commodity Futures
Trading Commission is charging 31 people and entities at six separate
"boiler room" foreign-exchange operations that collected more than $25
million from customers but then allegedly misappropriated much of the
money.

For decades, currency trading was reserved for only the biggest banks
and companies. But Europeans and Asians — more used to crossing
geographical borders and thus more attuned to currency fluctuations –
began actively swapping currencies years ago. More recently, American
investors such as Mr. Coppola have been piling in amid the dollar's
well-publicized movements.

So far, currency trading has been good to Mr. Coppola, the father of
two girls who also does some acting. He closed out last year with an 80
percent gain, he says.

His trading platform is Gain Capital. The Bedminster, N.J., firm
initially catered to small money managers. But in a sign of how popular
currency trading at home has become, Gain's individual-client business
surpassed its institutional business late last year. Individuals now
account for more than half of the firm's trading volume, which in the
past nine months has soared 55 percent to more than $70 billion a month.

Mark Galant, Gain's chief executive and founder, says the firm's
clients run the gamut from teachers, police officers, doctors and
lawyers to former professional athletes and rock stars. "There are
certainly a lot of George Soros wannabes," notes Mr. Galant, referring
to the financier renowned for making $1 billion on the fall of the
British pound in 1992.

FXCM, based in Manhattan, also has seen its business surge in
popularity. Of its 70,000 customers, the firm estimates nearly half of
them signed up this year. Customers need a minimum of $2,000 to open an
account and can borrow up to 100 times the value of the account, though
Mr. Niv says 15 to 20 times leverage is more typical. FXCM's revenue in
2003 was $65 million, and jumped to $153 million last year. Mr. Niv
projects around $300 million for 2005 revenue.

As Mr. Niv sees it, foreign-exchange trading is less risky than
investing in stocks because currencies tend to move in multiyear
cycles, making it easier to spot a trend. "You're trading oil tankers
here," he says, "not speed boats."

Yet many of his clients like to race. Vitaly Trushkov, a 24-year-old
engineer in Ferndale, Wash., opened a $3,000 account, borrowed three
time that much, and saw a 25 percent gain in two months of trading.
"I'd call myself a short-term trader," he says of his winnings.

Still, Mr. Trushkov seems ready to make a deeper commitment to currency
trading. "I'm probably going to do this full time," he says. "That way
I'll have time at home with my wife and daughter."

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