I don't know about you, but I am a beginner when it comes to currency trading. The potential to make money trading currencies seems great, but if you've never done it before, there are probably some things you should know.
First, I was surprised to learn that foreign exchange (FX) trading does not take place on a regulated exchange like the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDQ) or the Chicago Board of Options Exchange (CBOE) that we are all familiar with. Instead, currencies are traded based on credit agreements between the parties.
"Hmm," you say: "What if I have a problem with a transaction? Who can I turn to for help?" And those are certainly, very good questions. There must be some mechanism that individual investors can rely on, and there is. Reputable U.S. retail dealers in foreign exchange belong to the National Futures Association (NFA). As NFA members, the dealers are required to agree to binding arbitration in the event of a dispute. And now, with new legislation passed in 2008, the U.S. Commodities Futures Trading Commission (CFTC) has jurisdiction to enforce rules. So, if you make sure to trade through an NFA member firm, you'll have some recourse if you run into a problem.
Before the internet, foreign exchange was primarily traded by financial institutions, large companies and sophisticated investors. Multi-national corporations still comprise a large part of the market as they move funds between currencies to cover payroll, and buy raw materials and services globally.
Today, the foreign exchange market is one of the most liquid markets in the world and many individual investors are finding profitable opportunities. Trades are made 24 hours a day, from Sunday at 5 p.m. Eastern Standard Time through to 4 p.m. Eastern Standard time on Friday.
I've looked at foreign exchange quotes and I wasn't quite sure what I was looking at. I found out that foreign exchange prices are generally quoted to the fourth decimal point (1 euro=$1.4291). The exception is the Japanese Yen which is quoted to the second decimal point (1 dollar=84.99 yen). All trades are settled on a net basis, and most retail brokers will automatically translate any foreign currency profit or loss resulting from trades into the denomination of your account. So, if you're like me and have a U.S. dollar account, you're going to see dollar profits or losses applied to your account.
And here's something else you need to know: Currencies trade in pairs. Trades consist of the simultaneous purchase of one currency with the sale of another. It's a lot different than trading stock because you have to think about both sides of the transaction in relation to each other.