forex

CURRENCY trading isn't just for money center banks, multinational corporations and hedge funds anymore.

Online traders with a hankering for high-risk speculation have embraced the vast and volatile forex market, as the global foreign exchange market is called.

Getting started is a snap. Investors can open an account over the Internet with a deposit of just a few hundred dollars. Downloading a trading platform takes minutes. Then they can start wagering in real time on which currencies are headed up or down. Because trading occurs in Tokyo, London, New York and other world financial centers, it's possible to speculate day and night from Sunday afternoon to Friday afternoon Eastern Standard Time.

But watch out. The leverage on a standard trade is a breathtaking 100 to 1. That means a customer who puts up $1,000 controls 100 times that, or $100,000. Trading primarily with borrowed money magnifies even minuscule moves of one currency against another into sudden big gains or huge losses. A 100 percent gain on a position, or a total wipe out, can take place in a few minutes.

For example, a one-cent change in how many dollars it takes to buy a euro - say, to $1.22 from $1.21 - amounts to an actual price shift of less than 1 percent. But in a spot forex trade, when 100-to-1 leverage is used, the same slim move is multiplied a hundredfold. So there's a $1 increase for each $1 staked by traders on the euro's climb, and an equivalent drop for those expecting the dollar to go higher.

Of course, profits and losses are not realized until a position is closed out. But investors who leverage themselves to the hilt in pursuit of quick outsize returns often find that they are rapidly burning up the capital in their accounts when a few trades go sour.

Firms provide mechanisms to dial down the leverage to, say, 10 to 1, reducing exposure to risk. But leverage still makes this one of the most hazardous markets for the average investor.

"Currencies should be and are becoming an integral part of a well-diversified portfolio," said Marla Miller, chief operating officer of the MG Financial Group, one of the first firms to offer foreign exchange trading for individual investors. "However, they are appropriate only for investors who can assume the risk of losing everything."

Currency trading isn't merely risky. It's also complex, from the rudiments of trading techniques to understanding the supply-and-demand factors that lie behind the constant shifts in relative currency values.

To follow the fundamentals of the forex market, it helps to be a maven of global macroeconomics and a fiend for geopolitics. Investors who are trading the dollar in relationship to the euro would be wise to parse every nuance of the comments of Alan Greenspan, the Federal Reserve Board chairman, about interest rate policy, as well as the deliberations of the European Central Bank and the words of its president, Jean-Claude Trichet.

Big-picture issues can preoccupy the currency markets. Today, the questions include these: How much has the euro been wounded by decisive votes in France and the Netherlands rejecting the European Union's proposed constitution? Will China effectively revalue the yuan, and by how much? And would such action by China set off a cataclysmic decline in the dollar?

Technical traders, who ignore such fundamental issues, instead take positions by analyzing chart patterns with arcane mathematical tools like Fibonacci retracements and Ichimoku clouds. Such traders have adapted readily to the foreign exchange market because currencies tend to move in long-term trends.

The interest of many technical traders was galvanized by the three-year climb of the euro against the dollar, from around 85 cents at the start of 2002 to just above $1.35 at the end of 2004 - a climb of around 60 percent. In this highly geared market, a $1,000 position at the start, leveraged at 100 to 1, would have become $50,000 in three years.

This year, of course, the dollar has changed course, rallying sharply against most major currencies, including the British pound and the Japanese yen but especially against the swooning euro. (Early last week, the euro fell to just above $1.20; it approached $1.23 on Friday.) Traders are divided over whether the dollar's rebound is simply a respite in a more prolonged drop or the start of a major reversal.

Even the seasoned online equity trader who wants to give the forex market a whirl faces a steep learning curve. And then there is the risk factor. "Don't call it investing - this is speculation, and people should only be putting up risk capital they can afford to lose," said Marc Prosser, chief marketing officer at Forex Capital Markets or FXCM, a firm that offers online trading.

Refco, the big futures broker, bought 35 percent of FXCM in early 2003 and licensed its trading platform. In April, Refco announced its intention to go public. Refco and FXCM are based in New York.

Currency trading by individual investors is not new. In 1972, the Chicago Mercantile Exchange introduced currency futures contracts, though spot trading by individual investors was not common until the late 90's.

Several developments over the last few years have spurred the market's growth, Mr. Prosser said. The passage of the Commodity Futures Modernization Act in 2000 by Congress "has cleaned up the industry," he said, although investors still need to be wary.

The end of the dot-com boom and the collapse of the Nasdaq index five years ago sent day traders looking for new opportunities. In the forex market, there is no such thing as a bear market, because it is possible to make money trading currencies by buying contracts or selling them short; up and down moves are equally playable.

Frequent financial headlines about currency market developments, meanwhile, have caught the attention of traders. "When the euro topped 1.30 to the dollar, that's when we saw a huge surge of interest," Mr. Prosser said.

His firm has more than 55,000 individual accounts. The minimum balance is $300, though he said the largest single account is "in eight figures." The average account size is between $5,000 and $10,000.

"I think we've only scratched the surface, and we're where online trading in equities was in 1996 before it took off," said Mark Galant, the chief executive of GAIN Capital, based in Bedminster, N.J. GAIN caters to individual investors through its Forex.com division.

MOST firms offer a demonstration account as a free, no-risk way to test-drive the spot forex market for up to a month. The demonstrations simulate trading and include charting software, proprietary news feeds and a cornucopia of analysts' advice on strategies. Some also include risk-management tools like stop orders that can be set off when a currency contract hits a designated point; this feature is especially helpful if that point is reached while the trader is asleep.

The demos also come with a fictitious bundle of cash, from $25,000 to $100,000 depending on the firm, to bankroll up to a month of test trading.

Despite the sky-high leverage that makes forex trading risky, regulation of the industry is limited. Trading desks worldwide deal in an over-the-counter market linked by computers and the Internet. Transactions are completed largely on trust and consummated with an electronic handshake. Daily turnover is estimated at $2 trillion, 20 times the value of equities traded on the world's stock exchanges. No international body regulates this global commerce.

In the United States, there is some regulation, but it is indirect. The National Futures Association, a self-regulatory organization, and the federal government's watchdog, the Commodity Futures Trading Commission, regulate retail forex firms but not the market itself. The market has long been plagued by swindlers preying on the gullible, and corralling them has absorbed a big share of the enforcement resources of the N.F.A. and C.F.T.C.

That places an extra due-diligence burden on would-be traders to investigate thoroughly the background, capitalization and enforcement record of a company before they hand over any money. An essential starting point is the Web site of the National Futures Association, www.nfa.futures.org. The association offers a concise brochure on what investors should know about off-exchange forex trading. It is available at www.nfa.futures.org/investor/forex.asp.

"The best way to improve the industry is to ensure that the customers are educated about the risks and the marketplace," said Ms. Miller of MG Financial. "An educated customer will not work with the shady characters."