Currency Trading: is Currency Trading Right for you?

So you’ve read all about the Forex Trading Market, gathered your risk capital, and are now looking for a good place to start trading. Good for you!

But before you go jumping into that great, untamed sea that is currency trading, you should take a minute to double check your information. Although the Forex Market is a place to make astounding profits, there are also some inherent dangers involved that you may not be aware of. "Sharks in the water", so to speak.

Please take a moment to look over this article before you seriously consider whether the Forex Market is the right place for your hard earned dollars. At the very least, consider this article to be a "better safe than sorry" measure.

We’re going to discuss two of the biggest sharks in Currency Trading - volatility in the market, and the possibility of fraud.

High Tide in the Forex Ocean

The Forex Market is a completely unregulated market where thousands of brokers, bankers, and traders spend their days digging up good deals on foreign currency.

Because of this, the market is subject to strong trends and wild swings. Investors can break the bank or lose their shirts from minute to minute. Also, once opened, the Forex Market runs 24 hours a day. It doesn’t shut down at the end of the trading day like the NYSE does. All of this can make for whirlwind trading sessions that can last for a few short minutes, or go on for 12 solid hours.

Anyone hoping to survive and even prosper in the world of currency trading had better have a firm grip on the facts before they start spending their hard earned cash. And here is one of the most important facts to consider:

You stand to lose a substantial amount of cash trading currency on the Forex Market.

By far, currency trading is the easiest way to lose a lot of cash in a hurry. Even worse, by trading on leverage, you could lose much, much more than you originally invested.

Trading on leverage means you put a small amount of cash (say, $5,000) to put a "hold" or deposit down on a larger amount of cash (like $50,000 or even $100,000). When the market swings, you gain or lose profit based on the larger amount of money.

It is important to talk to your agent or brokerage about this before you invest any money. A major complaint against clearing houses and investment companies in the past has been that leverage was not always properly explained to potential investors.

Spotting a Shark in Sheep’s Clothing

The Commodity Futures Trading Commission (CFTC) recently issued a warning to anyone interested in Forex trading in regards to so-called "Forex Frauds". Fraud represents the other hazardous aspect of currency trading.

Due to the wide open nature of the Forex Market, it has become increasingly difficult to track down trading scams. Many of these companies are based internationally, setting up in countries outside of the United States or Canada where Forex Clearing Houses are regulated.

Thanks to the Commodity Futures Modernization Act of 2000, the CFTC was given the ability to investigate and close down companies that were using the Forex Markets to scam the general public out of money, either through fraudulent trades (not placing the trades as promised) or by mishandling them (trading differently or for different amounts of money than they reported to the investor).

The law also gave them the ability to prosecute firms and companies that are registered with the CFTC as legitimate traders if they show signs that fraudulent activity takes place.

Even still, they offered up this warning in a recent media advisory:

"The United States Commodity Futures Trading Commission (CFTC), the federal agency that regulates commodity futures and options markets in the United States, warns consumers to take special care to protect themselves from the various kinds of frauds being perpetrated in today's financial markets, including those involving so-called foreign currency trading."

According to the CFTC, there has been a "sharp spike" in the amount of foreign currency frauds. Fraudulent companies make bold statements about how much money you’ll make or other too-good-to-be-true statements. These advertisements most often show up in newspapers, radio, and especially as spam e-mail.

The CFTC says that these scams are particularly directed at ethnic minorities and the elderly, often to take advantage of inexperience in the trading world. These scams can show up as infomercials directed at specific minorities, most often Russian, Chinese, or Indian immigrant communities.

They usually promise highly lucrative careers as stock brokers and Forex Traders, but in reality force the person to use their own savings as start up capital and try to get them to recruit their families and friends.

If you are a member of any of these high risk groups, you need to be extra careful when entering the Forex waters.

Protecting Yourself

If you’re concerned about Forex and currency trading scams, there are a couple things you can do to protect yourself. We’ve compiled a bit of a list of things to do to avoid fraudulent currency trading schemes. Much of this information comes straight from the CFTC.

First, the CFTC says you should avoid any company that hits you up for your cash with promises of huge financial windfalls. According to the CFTC, no company may make that claim due to the volatility of the Forex Market. They may think they can get you a big profit on your money, but nobody can guarantee it. Promising you otherwise is simply misleading.

Second, the CFTC says that any company that uses high-pressure tactics to try and get you to send money immediately (via overnight express, etc.) is probably trying to steal your money. Be especially wary of companies that demand internet wire transfers, because once the money is sent there may be no way to get it back.

Third, the CFTC says that anyone who calls YOU asking for investments is most likely involved in a scam to get you to part with your cash. Unsolicited calls from clearing houses or investment firms should be avoided at all costs. Many times these companies are from international firms, and if they don’t fall under the protection of the CFTC than there may be no way to reclaim your money once they have it.

Now, here are some things for you to do before you consider investing with a company.

First, contact the CFTC. You can write to them, phone them, or even check their web site. They have a special CFTC Forex Fraud web site you can look at that can help you see if you may be the target of a scheme or not.

Another thing you can do is contact the National Futures Association (NFA). The NFA will be able to tell you whether or not the company in question is registered as a member in good standing.

The CFTC also suggests that you contact other authorities near you, such as your area’s securities commissioner or the Attorney General’s Consumer Protection Bureau.

They also suggest you learn as much as you can about fees and commissions paid on trades, as well as their basic fee schedules. If you can’t get the names of people or companies who trade with them, at least try to get a past history of their trades, both successes and failures.

The CFTC offers this last bit of advice for a potential investor:

When in doubt, don’t invest. Be 100 per cent sure. There’s always another company out there to trade with, so if you have any reservations at all, it’s better to be safe than sorry.

Questions concerning this advisory may be addressed to the CFTC's Office of Public Affairs at (202) 418-5080.

Commodity Futures Trading Commission, Three LaFayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581

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Is Currency trading right for you?