Forex Trading Advice

Written by Patricia Tunstall
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Forex, or FX, stands for the foreign exchange market. This is a 24-hour market in which currencies are traded in cash, which is known as a spot market. There is no central, standard trading center, such as a stock exchange. Instead, trade is conducted "over-the-counter" via an international network of dealers.

Characterized by high liquidity and almost instantaneous transactions, forex has mushroomed into a $1.5 trillion a day marketplace. This extraordinary volume dwarfs others: $50 billion daily for equities, and $30 billion daily for the futures market. This forum involves great risk, so naturally, significant losses are possible. The draw, however, is the potential for great profits.

Is Forex Trading For You?

Until recently, the forex market was confined to larger traders: major, international commercial and investment banks; international corporations; international money brokers; currency traders. When the United States went off the gold standard in 1971, investors immediately recognized new opportunities for making profits. Every year, more companies start up that cater to smaller institutions and investors so they may participate in spot forex trading.

Disclaimers from these companies make clear that forex trading is for the financially sophisticated investor. A prime factor to take into account before participating in the spot market is your temperament. A risk-wary customer is not suitable for this marketplace. You should consider not only your experience in the investment world, but your objectives, and your capacity to absorb financial losses. Certainly, you should never invest any amount of money you cannot afford to lose.

Commodity Futures Modernization Act of 2000

The Commodity Futures Trading Commission (CFTC) is an entity of the federal government that has jurisdiction over registered and unregistered firms offering foreign currency futures to the general ("retail") public. The Commodity Futures Modernization Act of 2000 (CFMA) makes this authority clear. This federal law became necessary because of the increasing solicitation of the general public to participate in currency trading.

The Commission not only regulates firms engaged in the spot forex market, but also issues clarifications of the legal responsibilities of brokers who make offers to the general public. Recognizing that off-exchange trading is a new investment area for an inexperienced public, the Commission publishes consumer alerts. The Commission has recently warned the general public about various scams and frauds, usually offered via television, radio, and newspaper ads, and on the Internet.

Forex Trading Advice: Be Informed

Any legitimate firm offering services to participants in spot forex trading warns of the risks involved. Legal, ethical firms are registered with the CFTC with some such designation as, commodity pool operator (CPO), or commodity trading advisor (CTA). The CFTC warns consumers to scrutinize the background of the firm and the firm's traders.

The federal Commission advises consumers--before they make purchases in the volatile forex market--to contact the Commission on its website. Before you entrust your funds to any firm, investigate to see if the firm is registered with the National Futures Association (NFA). This is the message from the CFTC: a smart consumer is an informed consumer.


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