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Investing: Foreign Exchange Trading

Finance Article Index Page

A Quick Peek into the Forex Market

by Igal K., of

The Forex Trading market is generally regarded as an unregulated market, although the operations of major dealers--such as commercial banks in money centers--are regulated under the banking laws.

The conduct and operation of retail Forex brokerages are not regulated under any laws or regulations specific to the Forex market. In fact, many of such establishments in the United States do not even report to the Internal Revenue Service (IRS).

When trading in the Forex market, you may notice the currency futures and options that are traded on exchanges such as Chicago Mercantile Exchange (CME) are regulated in the same way other exchange-traded derivatives are regulated.

When learning how to trade forex you must first learn the futures and options nuances. Let's grab just a corner of this nuance "tablecloth."

The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85). The final digit is referred to as a point or a pip. If USD/CAD were quoted with a bid of 134.85 and an ask of 134.90, the five-pip spread is the cost of trading this position. From the very start, the trader must recover the five-pip cost from his profits. To do so, s/he must make a favorable move in his/her position--just to break even!

Many of the instruments utilized in How to Trade Forex --such as forwards and futures, options, spread betting, contracts for difference, and the spot market--will appear similar to those used in the equity markets.

Since the instruments on the Forex often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.


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