Forex Regulation Is Weak

The forex market has no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.

Before trading forex, you will have to open a trading account with a forex dealer. There are no rules about how a dealer charges a customer for the services the dealer provides or that limit how much the dealer can charge. Be certain to check with several dealers and compare their charges as well as their services.

Many retail forex transactions have a settlement date when the currencies are due to be delivered. If you want to keep your position open beyond the settlement date, you must roll the position over to the next settlement date.

Some dealers roll open positions over automatically.  Others may require you to request the rollover. Some dealers will charge a rollover fee based upon the interest rate differential between the two currencies in the pair.

The only funds that should ever be used to speculate in foreign currency trading... or any type of highly speculative investment... are funds that represent risk capital.  Unless you can afford to lose this money... don't speculate.

Most dealers will require a certain amount of money in your account for each transaction. This security deposit, sometimes called margin, is a percentage of the transaction value and may be different for different currencies.

A security deposit acts as a performance bond and is not a down payment or partial payment for the transaction.

The higher the leverage, the more likely you are to lose your entire investment if exchange rates go down when you expect them to go up or go up when you expect them to go down.

Leverage of 100:1 means you will lose your security deposit when the currency loses or gains 1% of its value.  You will lose more than your security deposit if the currency loses or gains more than 1% of its value.

If you want to keep the position open, you may have to deposit additional funds to maintain a 1% security deposit.

Check the Account Agreement with your dealer to see if it limits your losses. Some dealers guarantee you will not lose more than you invest, which includes both the initial deposit and any subsequent deposits to keep the position open. Other dealers may charge you for losses that are greater than your investment.

Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and may not receive a priority in bankruptcy.

Even customer funds deposited by a dealer in an FDIC-insured bank account may not be protected if the dealer goes bankrupt.

If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.

Stay away from opportunities that sound too good to be true. In general, get-rich-quick schemes tend to be frauds. For example, avoid any forex company that predicts or guarantees large profits. If a company says they will double or triple your money in one month or will guarantee a monthly return... walk away.

Check the background of everyone you will be dealing with. If you cannot satisfy yourself that the persons are completely legitimate and above-board, the wisest course of action is to avoid trading through those companies.

A good place to start checking the background of a forex firm or individual is NFA’s Background Affiliation Status Information Center, or BASIC. It’s available through NFA’s Web site and contains the registration and disciplinary records for individuals and companies involved in the futures industry.

Although some forex companies and brokers are not required to be registered with NFA, BASIC is a good place to start to determine if a broker or company has any past industry experience.