Teeka Tiwari

How to Avoid Getting Screwed Trading Currencies

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I'm sure you're familiar with the barrage of currencies commercials, promising quick riches and 100-to-1 leverage ratios.

Think it's too good to be true?

Actually, what they are pitching is partially true.

A Case for Currencies

Trading currencies can be enormously profitable. The leverage offered is outrageous and, more so than any other financial product, currencies have strong tendencies to trend.

But -- like any giant opportunity -- plenty of pitfalls lie between you and your pot of gold at the end of the currency rainbow.

Although the foreign-exchange (forex, or simply FX) market wasn't necessarily designed for individual investors, its allure is hard to ignore.

So if you're looking to trade currencies, I'll show you how to go into it with your eyes (and not your wallet) wide open.

Where to Trade This World of Wealth

When you're ready to trade currencies, where do you start?

The first decision you have to make is whether to trade with a forex broker or directly on a regulated exchange like the Chicago Mercantile Exchange (CME). (See 10 Things to Know Before Choosing a Forex Dealer.)

What's the difference between the two?

Trading the forex is conducted by a collection of "over the counter" (OTC) dealers made up of brokers and big banks that trade amongst themselves. It's all done electronically and over the phone. (On a related note, the CME has recently announced an initiative to be able to clear OTC forex products by year-end.)

This is the market that you see advertised on those big, splashy forex ads on CNBC and all over the pages of financial Web sites.

These forex brokers typically offer very robust trading tools, excellent online user interfaces that you use to enter your trades, and they typically run the trades commission-free.