FX: A cautionary tale

As the pound plummets and foreign exchange dealing is actively promoted as an alternative method of investment, the manner in which I opened my first spread betting account bears repeating here.

In fact, I didn’t open the account, a friend did it for me.

It was early 1999 and the dotcom boom was in full swing. I had been buying and selling equities (rather than investing) for around 12 months when Dave, a good friend I had known for years, suggested that opening a spread betting account was an excellent way of supplementing the already handsome profits to be made from trading shares.

I was apprehensive, but Dave assured me that by inserting a stop-loss level, spread bettors could automatically limit any losses to ensure they knew the full extent of their potential liability before they entered the market. I understood how spread betting worked and was comfortable enough with the methods of either going long or short, but I still took some persuading. After all, it wasn’t called ‘betting’ for nothing.

Have you ever seen a poor bookie? Me neither.

Nevertheless, a couple of weeks later following a lunchtime beer, I was persuaded to pop around to Dave’s house where he said he would convince me of spread betting’s value.  So off we went.

We ‘practised’ a few dummy trades, all of which were profitable. ‘As soon as I open an account,’ I thought, ‘that’ll come to a crashing end’.

“What more do you need to see?” asked Dave.
“Nothing,” I replied, only semi-reluctantly. The process appeared straight forward enough.
“Ok. Give me your credit card and we’ll get cracking,” said Dave, rather too eagerly.       

I handed him my card, but said that before we started, I needed to visit the bathroom. The lunchtime beer was having an impact.

“Go on then,” said Dave, “you know where it is. I’ll open your account.”

A few minutes later, I reappeared. My friend of more than a decade was beaming.

“You’re up and running,” he said, adding, “Oh and you’ve just won £360.” It remains the most valuable trip to the bathroom I’ve ever made.

In the space of a couple of minutes, the spread betting account had been opened and a position taken on one share, the value of which had risen sufficiently for me to pocket a tax-free £360. I was astonished. Dave showed me how the trade had been executed.

“Let’s have another go,” I suggested. I was now the eager one. Given that I’d made £360 in around four minutes, I calculated that if I remained at Dave’s house for a couple of hours, I’d be ten grand up.

The rest of the afternoon was nowhere near as successful as the opening punt, but I left Dave’s house with more than £600 in my spread betting account.

‘What a marvellous way to spend an afternoon,’ I mused on the way home, thinking I had stumbled  upon investment nirvana. Except it wasn’t investment, it was betting and I had spent the equivalent of a fortunate few hours at the races.

Nevertheless, this didn’t dissuade me from becoming more heavily involved in spread betting over the next few months, a period during which I enjoyed an incredible run: at one point, I was more than £25,000 in profit, my biggest individual trade netting more than £11,000 in little over an hour.

By now, of course, I felt as though I could walk on water. Except I couldn’t.  

After an unusually profitable run, during which I made no more than a handful of loss-making trades, my luck suddenly began to change. Still I failed to recognise that I was betting, not investing. Within three months, the £25,000 had disappeared, plus a further £8,000 had gone up in smoke.

It proved a painful lesson, although one from which I did learn.

Last weekend, I saw a clutch of newspaper articles, magazine and online advertisements extolling the virtues of foreign exchange trading, several suggesting that as sterling weakened, it would be possible for forex newcomers to capitalise on the currency’s slide.

‘Not for me,’ I thought. ‘Not in a million years.’

I’ll leave my annual bet to a punt on the Grand National, not on whether the euro will continue to appreciate against sterling. 

posted on 25 February 2013 17:36 byPJS