Currency exchange trading

currency exchange trading The dollar carved out new rebound highs versus the yen and euro, among some other currencies, though traded lower in some cases, most notably the pound, which rallied strongly following perkier than expected UK inflation data. USD-JPY continued to . Read More ▶ The dollar carved out new rebound highs during the Asia session. USD-JPY continued to lead the way as markets react to a sense of reduced risks stemming from North Korea and Hurricane Irma, with the former having refrained from further missile . Read More ▶ currency exchange trading A unit of the digital currency is now worth over $4,000, extending its record breaking run. More. Current Exchange Rates.

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All Rights Reserved. Terms under which this service is provided to you. Privacy Policy. . Top 7 Questions About Currency Trading Answered. Although forex is the largest financial market in the world, it is relatively unfamiliar terrain for retail traders. Until the popularization of internet trading a few years ago, FX was primarily the domain of large financial institutions, multinational corporations and secretive hedge funds. But times have changed, and individual investors are hungry for information on this fascinating market.

Whether you are an FX novice or just need a refresher course on the basics of currency trading, read on to find the answers to the most frequently asked questions about the forex market. How does the forex market differ from other markets? Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements.

Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake. At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges .) However, this arrangement works exceedingly well in practice because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute.

Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm. The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EURUSD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks.

There are also no limits on the size of your position (as there are in futures) so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX in fact, European economic data, such as German employment figures, are often leaked days before they are officially released. Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price.

Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world. Where is the commission in forex trading? Investors who trade stocks, futures or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it as per the customer's instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument. (For further reading, see our Brokers And Online Trading tutorial.) The FX market does not have commissions.

Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission instead, they make their money through the bid-ask spread. In FX, the investor cannot attempt to buy on the bid or sell at the offer like in exchange-based markets. On the other hand, once the price clears the cost of the spread, there are no additional fees or commissions.

Every single penny gain is pure profit to the investor. Nevertheless, the fact that traders must always overcome the bidask spread makes scalping much more difficult in FX. (To learn more, see Scalping Small Quick Profits Can Add Up .) Pip stands for "percentage in point" and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000.

The change in that fourth decimal point is called 1 pip and is typically equal to 1100 th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth approximately US$0.01 so, in the USDJPY pair, the quotation is only taken out to two decimal points (i. e. to 1100 th of yen, as opposed to 11000 th with other major currencies). What are you really selling or buying in the currency market? The short answer is "nothing". The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place.

All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader's account. The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume.

Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day. Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EURUSD, she would, in essence, have exchanged euros for dollars and would now be "short" euros and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing?

You would be exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" one computer. The store would be "long" $1,000 but now "short" one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.

Which currencies are traded in the forex market? Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the seven most liquid currency pairs in the world, which are the four "majors" EURUSD (eurodollar) USDJPY (dollarJapanese yen) GBPUSD (British pounddollar) USDCHF (dollarSwiss franc) AUDUSD (Australian dollardollar) USDCAD (dollarCanadian dollar) NZDUSD (New Zealand dollardollar) These currency pairs, along with their various combinations (such as EURJPY, GBPJPY and EURGBP), account for more than 95% of all speculative trading in FX. Given the small number of trading instruments - only 18 pairs and crosses are actively traded - the FX market is far more concentrated than the stock market. (To read more, check out Popular Forex Currencies .) What is a currency carry trade? Carry is the most popular trade in the currency market, practiced by both the largest hedge funds and the smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest rate attached to it. These short-term interest rates are set by the central banks of these countries the Federal Reserve in the U. S., the Bank of Japan in Japan and the Bank of England in the U. K. The idea behind the carry is quite straightforward.

The trader goes long the currency with a high interest rate and finances that purchase with a currency with a low interest rate. For example, in 2005, one of the best pairings was the NZDJPY cross. The New Zealand economy, spurred by huge commodity demand from China and a hot housing market, saw its rates rise to 7.25% and stay there, while Japanese rates remained at 0%. A trader going long the NZDJPY could have harvested 725 basis points in yield alone. On a 101 leverage basis, the carry trade in NZDJPY could have produced a 72.5% annual return from interest rate differentials, without any contribution from capital appreciation. Now you can understand why the carry trade is so popular! But before you rush out and buy the next high-yield pair, be aware that when the carry trade is unwound, the declines can be rapid and severe.

This process is known as carry trade liquidation and occurs when the majority of speculators decide that the carry trade may not have future potential. With every trader seeking to exit his or her position at once, bids disappear and the profits from interest rate differentials are not nearly enough to offset the capital losses. Anticipation is the key to success the best time to position in the carry is at the beginning of the rate-tightening cycle, allowing the trader to ride the move as interest rate differentials increase. (To learn more about this type of trade, see Currency Carry Trades 101 .

) Every discipline has its own jargon, and the currency market is no different. Here are some terms to know that will make you sound like a seasoned currency trader Foreign Currency Trading. Beware of Foreign Currency Trading Frauds. The advertisements seem too good to pass up. They tout high returns coupled with low risks from investments in foreign currency (forex) contracts. Sometimes they even offer lucrative employment opportunities in forex trading.

Do these deals sound too good to be true? Unfortunately, they are, and investors need to be on guard against these scams. They may look like a new sophisticated form of investment opportunity, but in reality they are the same old trapЂ”financial fraud in fancy garb. Forex trading can be legitimate for governments and large institutional investors concerned about fluctuations in international exchange rates, and it can even be appropriate for some individual investors.

But the average investor should be wary when it comes to forex offers. The Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA) warn that off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud. What are forex contracts? Forex contracts involve the right to buy or sell a certain amount of a foreign currency at a fixed price in U. S. dollars. Profits or losses accrue as the exchange rate of that currency fluctuates on the open market.

It is extremely rare that individual traders actually see the foreign currency. Instead, they typically close out their buy or sell commitments and calculate net gains or losses based on price changes in that currency relative to the dollar over time. Forex markets are among the most active markets in the world in terms of dollar volume. The participants include large banks, multinational corporations, governments, and speculators.

Individual traders comprise a very small part of this market. Because of the volatility in the price of foreign currency, losses can accrue very rapidly, wiping out an investorЂ™s down payment in short order. How do the scams work? Forex scams attract customers with sophisticated-sounding offers placed in newspaper advertisements, radio promotions, or on Internet sites. Promoters often lure investors with the concept of leverage the right to ЂњcontrolЂќ a large amount of foreign currency with an initial payment representing only a fraction of the total cost. Coupled with predictions about supposedly inevitable increases in currency prices, these contracts are said to offer huge returns over a short time, with little or no downside risk.

In a typical case, investors may be assured of reaping tens of thousands of dollars in just a few weeks or months, with an initial investment of only $5,000. Often, the investorЂ™s money is never actually placed in the market through a legitimate dealer, but simply divertedЂ”stolenЂ” for the personal benefit of the con artists. What are regulators doing?

The CFTC is the Federal agency with the primary responsibility for overseeing the commodities markets, including foreign currency trading. Many state securities regulators also have the right under their state laws to take action against illegal commodities investments. Sometimes the CFTC and the states work together on cases. Examples include In 2005, the CFTC and the Commissioner of Corporations of the State of California sued National Investment Consultants, Inc., and others in U. S. District Court for the Northern District of California for engaging in a forex scam involving approximately $2 million in customer funds. In 2006, the Court ordered restitution and fines amounting to $3.4 million.

Also in 2005, the CFTC and the Texas State Securities Board (TSSB) engaged in a cooperative enforcement effort against Premium Income Corp. (PIC) and its principals. The CFTC and Securities and Exchange Commission (SEC) filed an action in U. S. District Court for the Northern District of Texas and the TSSB filed an administrative action charging PIC and its principals with engaging in an illegal $11 million forex operation. To date, the federal court has found three corporate defendants liable to pay restitution of $12 million and each was assessed a fine of $37 million.

The State of Texas also has obtained cease and desist orders along with various criminal indictments and convictions. PICЂ™s president is currently incarcerated on charges stemming from his forex scam. In 2004, Gregory Blake Baldwin of Utah pleaded guilty to fraud after his firm, Sunstar Funding, accepted $228,500 from 33 investors for placement into the foreign currency market. The investorsЂ™ money was not placed in the foreign currency market but was used to pay some past investors and for personal expenses of Baldwin. In 2003, the CFTC and the State of Oregon Department of Consumer and Business Services sued Orion International, Inc.

, and its principals in U. S. District Court for the District of Oregon for fraudulently soliciting over $40 million to participate in a purported forex fund. Orion, and its president Russell Cline, misappropriated virtually all the customer funds. In 2006, the Court entered fines and restitution orders against the defendants totaling almost $150 million.

Cline is currently incarcerated on charges stemming from his forex scam. In 2002, the CFTC, the SEC and the State of Utah filed an action against a company known as Ђњ4NExchangeЂќ for violations of state and Federal laws as the firmЂ™s principals illegally offered foreign currency contracts through an alleged Ponzi scheme that cost investors nearly $15 million. What are the warning signs of fraud? If you are solicited by a company that claims to trade foreign currencies and asks you to invest funds, you should be very careful. Watch out for the following warning signs 1. Be wary of promises that sound too good to be true ЂњYou can make six figure profits within a year forex investments are very low risk You can double your money.

Ђќ Get-rich-quick schemes, including those involving foreign currency trading, tend to be frauds. 2. Be skeptical about unsolicited phone calls offering investments, especially those from out-of-state salespersons or companies that are unfamiliar. 3. Be especially cautious if you have acquired a large sum of cash recently and are looking for an investment vehicle. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators.

Getting your money back once it is gone can be difficult or impossible. 4. Be wary of high-pressure efforts to convince you to send or transfer cash immediately to the firm, via overnight delivery or the Internet. 5. Be smart about the money you do put at risk. Even when purchased through the most reputable dealer, forex investments are extremely risky. If you are tempted to invest, make sure you understand these products and above all, only invest what you can afford to lose.

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