Only regulated entities, such as banks, broker-dealers or Futures Commission Merchants
(FCMs) and affiliates of regulated entities may enter into off-exchange forex trades
with retail customers. You should ask your broker or firm how they are
regulated and check with that regulator to verify registration status and background.
Your relationship with your firm is governed by your forex account agreement.
Don’t establish an account without reading and understanding it.
Retail, off-exchange forex trades are not guaranteed by a clearing organization.
You will be required to deposit an amount of money – a “security deposit” or “margin” deposit,
as a good faith deposit put on hold at your dealer to cover losses. This must occur before you
can buy or sell an off-exchange forex contract. A relatively small amount of money can enable
you to hold a forex position worth many times the account value. This is known as leverage.
Since leverage allows you to control a much larger amount of currency that the amount of
money you have on deposit, it magnifies the percentage amount of your profits and losses. The
dollar amount of profits and losses is not influenced by leverage – the profit or loss is the same
whether the leverage is 100:1, 25:1 or 1:1. A margin call is an involuntary liquidation of your
positions if the account equity falls below the amount of margin set aside by your dealer. Other
firms may charge you for losses that accrue that are greater than the amount on deposit. You
should check your agreement with your firm to see if the agreement limits your losses.
Some practical next steps would be to attend/view a webinar, try an online forex simulation, or
ask your broker for a workbook to see if you understand the way a trade should be set up and
calculated and how to maintain a trade log. To learn more, or to get started, contact your broker.
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