Trading Forex: What Investors Need to Know - National Futures

What Investors Need to Know Trading Forex © 2010 National Futures Association All Rights Reserved. No part of this publication may be reproduced, stored, or transmitted by any means,including electronic, mechanical, photocopying, recording, or otherwise, without written permission from National Futures Association.The publication is designed to provide accurate and authoritative information in regard to the subject matter covered.While great care was taken in the preparation of this book, National Futures Association disclaims any legal responsibility for any errors or omissions and disclaims any liability for losses or damages incurred through the use of the information in the book. If legal advice, financial advice, or other expert assistance is required, the services of a competent professional person should be sought. National Futures Association is a congressionally authorized self-regulatory organization of the United States futures industry. Its mission is to provide innovative regulatory programs and services that

protect investors and ensure market integrity. NFA has prepared this booklet as part of its continuing public education efforts to provide information to potential investors. The booklet presents an overview of the retail off-exchange foreign currency market and provides other important information that investors need to know before they invest in the off-exchange foreign currency market. PUBLISHER National Futures Association 300 S. Riverside Plaza Suite 1800 Chicago, IL 60606 800-621-3570• 312-781-1410• www.nfa.futures.org DESIGN Lenz Design • Chicago, Illinois • www.lenzdesign.com COVERILLUSTRATION Philip Nicholson • Varberg, Sweden • www.illustrations.se Retail participation in off-exchange foreign currency (forex) markets has increased dramatically in the past few years. If you are a retail investor considering participating in this market, you need to fully understand the market and some of its unique features. Like many other investments, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all investors. In fact, you could lose all of your initial investment and may be liable for additional losses. Therefore, you need to understand the risks associated with this product. You should also understand the language of the forex markets before trading in those markets. The glossary in the back of this booklet defines some of the most commonly used terms. This booklet does not suggest that you should or should not participate in the retail off- exchange foreign currency market. You should make that decision after consulting with your financial advisor and considering your own financial situation and objectives. In that regard, you may find this booklet helpful as one component of the due diligence process that investors are encouraged to undertake before making any investment decisions about the off-exchange foreign currency market. Finally, the discussion in this booklet assumes you are funding your forex account with US dollars.The principles in this booklet apply to all currencies,however. Introduction 3 What are foreign currency exchange rates? Foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency. For example,if you go to England on vacation,you will have to pay for your hotel, meals, admissions fees,souvenirs,and other expenses in British pounds. Since your money is all in US dollars,you will have to use (sell) some of your dollars to buy British pounds. Assume you go to your bank before you leave and buy $1,000 worth of British pounds. If you get 565.83 British pounds (£565.83) for your $1,000, each dollar is worth .56583 British...

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