Foreign Exchange Trading part 1
You’ve made the decision that you want to trade FX for fun and profit. What happens? Usually you will sign up with one of the FX trading services that have sprung up to facilitate the retail trader. This service becomes your counterparty. It is important you understand their financial strength to ensure your FX contracts will all settle properly and you will not be left with the loss of your money.
You open an account with them and deposit some money so you can begin trading. When your deposit settles, you are ready to go. What actually happens to your money when you make a trade? Let’s use a JPY/USD trade as an example.
Your trading service has accounts with one or more banks or brokers. Say you sold $100 to buy ¥11,463. Your service takes $100 from your account and sends it to the broker your service bought the JPY from. The broker deposits the $100 in their account. The broker takes ¥11,463 from their account at a bank in Japan and marks on their deposits it in the account of your service. Your service makes an entry on their books that you have access to ¥11,463.
All these transactions are just entries in the accounts of these parties. The Japanese Yen never leaves Japan. The US Dollars never leave the US. All FX trades settle the currency in the home country of that currency. Even when Central Banks trade currency with each other, the FX reserves are just accounting entries on the books of the Bank for International Settlements in Basil Switzerland.
» Foreign Exchange Trading - Part 1 from Investablog
Grow Your Funds is starting a series of articles for anyone interested in getting into Foreign Exchange Trading. You’ve made the decision that you want to trade FX for fun and profit. What happens?... [Read More]
Tracked on: January 22, 2006 3:32 PM | Permalink to Trackback