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Online Currency Trading Explained -- and Warned Against

If you're looking to get rich quick, the upsurge of online currency trading Web sites like and do look tempting. They promise that you can "profit in both rising and falling markets," benefit from "400-to-1 leverage" and win big in this "24-hour" market.

Online Currency Trading

You may be better of trying your hand in Las Vegas than dabbling in online currency trading, experts say.

How good of a bet is online currency trading, really? According to the experts, not very.

What is Online Currency Trading?

Currency trading is done using the Foreign Exchange market, which is also known as the "Forex" or the "FX" market. The Forex is the largest financial market in the world, with close to $2 trillion traded daily. (This, the trading Web sites point out, is 30 times larger than the volume of all other U.S. equity markets, combined.)

Speculators trading on the Foreign Exchange market simultaneously buy one currency (such as the dollar, euro, or yen) and sell another. The currencies are traded in pairs, such as the euro and the US dollar, and more than 85 percent of trades involve a handful of currencies known as "the Majors." (This includes the U.S. Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.)

currency values

Tiny fluctuations between currency values can create huge profits -- or losses -- on the Forex. (Even Warren Buffet lost nearly $1 billion on currency trading!)

Only about 5 percent of the Forex market's daily turnover is due to companies and governments buying and selling products in foreign currencies, or converting profits made in foreign countries into domestic currency. That means that the other 95 percent is from speculation.

The Forex is, indeed, a 24-hour market, with trading beginning in Sydney, Australia and moving around the globe to Tokyo, London and New York.

What Makes Online Currency Trading Risky?

The Forex market gives traders 100-to-1 leverage (and some Web sites say up to 400-to-1), which means if you put up $1,000 you get a $100,000 position. While this means you can potentially make great profits from even small shifts between currency values, it also means you can lose big time.

In fact, even Warren Buffet, one of the richest people in the world, lost close to $1 billion on the Forex market in 2005 because he bet the dollar would drop, according to Money Magazine.

The consensus among experts? Even though online currency trading looks tempting, resist the urge. It's nothing more than gambling, and safer investment options, like foreign stock and bond funds, are out there.

Recommended Reading

Mutual Funds: The Basics (That Most People Still Don't Know)

Roth IRA: If You Don't Have One, Here's Why You Should Seriously Consider One


Money Magazine, "Behind the Buzz.," March 2007, p. 26

Global Forex Trading

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