“The market that never sleeps”… “the most heavily traded market in the world” - it all sounds so exciting. Forex must be getting really popular with all the commercials running on CNBC during the trading day and all the infomercials at night. Maybe foreign exchange trading is a great opportunity for individual investors, but I doubt it. For good reason, currency trading has been largely offlimits to individual retail investors. Now, with the advent of the Internet and broadband connectivity, the world is literally at your fingertips. The various trading platform companies will try tempting you with pitches that say no commissions, highly lenient margin trading, profit potential in bullish or bearish markets, and low account minimums. Of course, the downsides are not quite as fun to talk about.

HEDGEfolios is only focused on equities, but that isn’t why I am negative on trading forex. I am all for diversification and using multiple asset classes to achieve that goal. However - diversification only works if you do not lose money in the process of buying the alternate investment class. My concerns about forex trading are based upon the unbelievable complexity and the very low probability that one individual can compete with the pros that are out there. It’s not good enough to be great with technical analysis or have a great trading platform. You really need to be an expert in geopolitics and political risk, economic conditions and growth rates in each country, relative inflation and interest rates, foreign trade figures, foreign bond yields, international monetary policies, foreign central bank decisionmaking, and a host of other macro factors. It’s way too tough for any one person and you are competing with teams of professionals with extremely sophisticated technology that are moving multi-million dollar trades in seconds.

Warren Buffett via Berkshire lost about $1 billion in 2005 on a bad bet against the US dollar. Even George “The Man who Broke the Bank of England” Soros has lost a few gazillion pips every once in a while. But they are supported by tremendous resources, staff and experience - they will live to fight another day. I wonder whether most forex traders on the various trading platforms will be as fortunate!?! After the tech bubble burst, we heard a lot of sob stories from daytraders that lost their family fortune and family life sitting in front of the computer all day. Forex trading will likely provide its own tragedies and I really would prefer not to hear them.

Fraud risks abound and here is a warning by the Commodity Futures Trading Commission (CFTC), the federal agency that regulates forex trading in the United States. To be honest, I don’t think this info is going to stop the real money loss in this area because that will likely come from legal trading. And before I get barraged with emails telling me success stories of the forex multi-millionaires, I recognize that some people can actually make money doing this. I am happy for them.

If you are so convinced that you need to diversify with forex exposure, you have a few other options rather than trading currency pairs. You can purchase the Rydex or Powershares currency ETFs which also concern me but not quite as much due to the fact that they are professionally structured. However, my preferred method is to evaluate an actively managed fund by experts like Axel Merk. It may not be as exciting as trading yourself, but I think it has a better chance of making money while diversifying your portfolio.