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Format Forex Trading: Learn the Basics of Foreign Currency Investing

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Hands holding british pound coin and small money pouch

The currency markets are some of the most dynamic and high-volume in the world. More than $5 trillion trades hands every day, and currency markets are open 24 hours a day, five days a week, starting Sunday afternoon and running through Friday afternoon.

Here’s what you should know about trading forex, how to invest in the currency markets and whether it’s right for you.

What is forex trading?

Forex, short for foreign exchange, is the trading of currencies, and it takes place in the over-the-counter market or in negotiated transactions between counterparties, such as central banks. In the over-the-counter market, no exchange is involved, and a buyer and seller agree to a purchase price. Currency also can be traded through regulated futures and options markets.

In forex, traders use one currency to buy another, agreeing to an exchange rate for the currency pair. Like any other traders, forex traders are looking to sell the base currency later at a profit, exchanging it back to the counter currency or into another currency that looks attractively priced.

Forex brokers typically allow traders to highly leverage their equity, and it’s not unusual to see leverage of 50 times up to even 400 times the account’s equity. For example, at 100:1 leverage, a trader can buy $100,000 of currency with just $1,000 in equity. So a 1% upswing in the price doubles the trader’s equity. Of course, a 1% downswing wipes out the trader’s equity. However, many brokers limit leverage to 50:1, allowing customers to buy up to 50 times their equity.

In the United States, the currency market is regulated by the Commodity Futures Trading Commission (CFTC), an independent government agency, and the National Futures Association (NFA), a self-regulating industry group. But they regulate the futures and derivatives markets, not the spot market, where much of the trading in forex takes place. The spot market remains unregulated.

Foreign exchange markets explained

Currency trades are always grouped into pairs. For example, a typical trade might be EUR/USD, which is the pair for the euro and U.S. dollar. In this example, the euro is called the base currency, while the dollar is the counter currency. Currency quotes go out to four decimal places, and the first currency is priced in terms of the second currency. For example, the quote for EUR/USD might be 1.1503. This quote means that it costs $1.1503 to purchase one euro.

The standard unit in a forex quote is a pip, an acronym for percentage in point. Because forex brokers quote currencies to four decimal places, it’s convenient to have a term for this fourth digit, and that’s the pip. This is true except for transactions involving Japanese yen, where it’s the second digit past the decimal.

Currency trades are typically placed in lots that are sized as follows:

  • A micro lot: a trade for 1,000 units of the base currency
  • A mini lot: a trade for 10,000 units of the base currency
  • A standard lot: a trade for 100,000 units of the base currency

Brokers will specify the minimum lot size that they will allow you to trade. The minimum often is a micro lot, though some brokers have no minimum size.

The most common way to trade forex is to buy the base currency with counter currency. But more advanced traders often use derivatives such as futures and options to gain exposure:

  • Options give you the right, but not the obligation, to purchase a currency at a specified price by a certain date in the future. You can sell the option before it expires.
  • A futures contract obligates the buyer to purchase the currency if the contract is held to expiration, but it can be sold up until that point to avoid that obligation.

What are some major currency pairs?

There are seven major currency pairs, and the U.S. dollar is on one side of each one. These seven pairs comprise about 85% of all trading volume. In fact, the dollar participates in about nine of every 10 trades that takes place. The major pairs include:

  • EUR/USD: the euro against the dollar
  • USD/JPY: the dollar against the Japanese yen
  • USD/CHF: the dollar against the Swiss franc
  • USD/CAD: the dollar against the Canadian dollar
  • GBP/USD: the British pound against the dollar
  • AUD/USD: the Australian dollar against the dollar
  • NZD/USD: the New Zealand dollar against the dollar

Besides major currency pairs, there are also minor pairs and the exotics — currencies from emerging markets — both of which have a much lower volume of trading.

To measure the strength of the dollar, traders look at the U.S. Dollar Index, a weighted basket of currencies. It’s a quick gauge of the dollar against the currencies of some major trade partners, primarily the E.U., the U.K., Japan and Canada. Sweden and Switzerland are also part of the the basket. When the index rises, the dollar is stronger, meaning it buys more foreign currency.

How to trade forex

The big brokers that dominate stock and bond trading are not always present in the forex markets — though a couple are — but more specialized brokers fill the gap. Whether you go with a traditional or specialized broker, it’s easy to set up an account and start trading quickly, and the process is similar to establishing a stock brokerage account.

If you’re looking for a forex broker, you’ll want to consider the following characteristics:

  • Leverage: How much margin will the broker allow you?
  • Commissions and fees: How does the broker get paid — through a markup on the forex spread or via a straight fee?
  • Minimums: What’s the minimum account size, and what’s the minimum trade size?
  • Currency pairs: How many pairs does the broker offer?
  • Spreads: How wide are the broker’s spreads? The narrower, the better.

In particular, you should pay attention to a broker’s spreads and how they may affect your trading costs. Wider bid-ask spreads can increase your costs, and many brokers will factor your trading fees via a larger spread instead of charging a fixed fee as in stock trading.

For example, let’s say you want to buy 10,000 euros using the EUR/USD currency pair and you pull up a quote on your broker’s site. The bid for euros is 1.1797, while the ask is 1.1799. Sometimes this quote is abbreviated as 1.1797/99, with only the latter two digits quoted. To buy the base currency (euros here), it will cost you 1.1799 units of the counter currency (dollars here).

In this case, since you’re buying 10,000 units, you simply can move the decimal four places to the right, and the total transaction costs $11,799.

Sometimes brokers even quote spreads lower than a pip, breaking down the spreads into one-tenth of a pip. That’s even better for traders whose trading fee is a spread markup since it potentially narrows their costs further.

There are other ways to play forex without going into the forex markets directly. There are specialized exchange-traded funds (ETFs) that allow you to gain exposure to the major currencies and some of the minor ones. Mutual funds also offer currency exposure.

But investors shouldn’t forget that they may already have currency exposure, albeit indirectly, through their stock investments. Major multinational companies derive a huge portion of their revenues from outside the U.S., so their profits usually are already exposed to forex and can move higher when the dollar weakens and vice versa.

What are the risks?

Like any kind of trading, forex comes with its own specific risks. Here are some of the major risks for forex traders and what each means:

  • Leverage risk: Just like in other kinds of trading, leverage in forex can magnify the movement of a currency. That means gains can become increased, but so can losses. With leverage of 100:1, a 1% swing in the currency can double your profit — or your loss. Because of the common use of leverage in forex, it’s important to manage your position size and risk so you can live to trade another day.
  • Political risk: Currencies move for many reasons, but one of the most important is the actions that governments take. A move that is perceived as negative for growth can cause a currency’s value to plummet, as businesses and consumers need the currency less. The U.K.’s 2016 decision to explore leaving the European Union — also known as Brexit — was perceived as highly negative, and the value of sterling dropped in subsequent months. Markets are constantly looking for unstable situations and will discount currencies accordingly.
  • Interest rate risk: All else equal, higher interest rates generally cause a currency to increase in value and vice versa. So when a country’s central bank changes interest rates — especially unexpectedly — or an economy heats up, it can affect how the currency trades. Economies that are growing faster will tend to have higher interest rates, and traders are watching for the relative change in rates in the target countries, not just the absolute level of interest rates.
  • Devaluation risk: A country’s central bank can decide overnight if it wants to devalue its currency, making it worth less vis-a-vis other currencies. A country might devalue its currency slowly over time or in one swoop, and it might do so in order to increase its exports or to reduce the real cost of interest payments on its debt.
  • Exchange rate risk: The forex market can move for fundamental reasons (such as a country devaluing its currency) or for technical reasons (not enough buyers or sellers in the market at a given time). Whatever the cause, traders have to bear the risk that exchange rates will fluctuate, even if the cause is not always clear.

Is forex trading right for you?

Trading forex is not for everyone. With 24-hour markets and the presence of massive players in the market — who can shift trading in the market at their command — it can be tough to be a forex trader.

Also out in the forex market are the following players, each with its own agenda:

  • Central banks: Central banks, such as the Federal Reserve in the United States, can affect the forex markets both directly and indirectly. Their goal is to create economic growth and price stability in their country. Indirectly, central banks set short-term interest rates, which can have follow-on effects in exchange rates. Directly, central banks also can use their domestic currency to buy and sell foreign currencies.
  • Governments: Governments often seek to manage how their currency trades and can intervene directly in the market by buying or selling currencies, perhaps intending to keep the currency strong or weak. They also can devalue their currency.
  • Banks: Banks are among the largest traders in forex markets. They may trade forex among each other, trade to make a profit for their own account or facilitate transactions on behalf of their corporate customers.
  • Professional speculators and traders: These players may include hedge funds and other investment managers, all of whom are trading to make a profit. These traders may take a position in a currency to hedge an investment’s exposure to a specific currency.
  • Companies: Huge multinational companies use forex markets to offset exposure to specific currencies. For example, if a company builds products in one country and sells them to another or many others, then it’s exposed to currency risks. The company might want to offset some of this exposure, especially if there are expectations that currencies will move and affect the company’s profitability.
  • Individuals: Individuals are a relatively small portion of the forex markets, and they’re trading to make a profit for their own account.

Against this backdrop and multitrillion-dollar daily volume, individual traders should carefully calculate whether they want to trade forex. Competitors are huge and can move the market — and, importantly, have motives other than making money. So they take actions that can be completely antithetical to profit, especially yours. These players also are well-informed and know the macroeconomic landscape or at least have access to well-placed advisors who do.

So these elements all can make it difficult for individuals to succeed in the forex market. Traders need to follow and understand the macroeconomic news and reports, and with the markets trading 24 hours a day, new developments can happen at almost any time. Of course, these skills are on top of having the trading expertise to make a go of it.

Bottom line

Some traders can do quite well at trading forex, but currency is not a buy-and-hold kind of asset for long-term investment. Rather, it’s a trader’s game, with active moves in and out of the market, and you really have to stay committed to the practice.

That’s why many individual investors leave forex to the professionals and stick to tried-and-true investing in the stock market. (Here’s how to get started investing in stocks, which have a solid track record.)

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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Ally Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re looking for an online discount broker with no minimum investment requirement, Ally Invest may be perfect for you. Ally Invest is an ideal choice not just because you don’t need a fortune to open an account, but also because commission fees for trades are well below many competitors — especially for active traders who can earn discounts.

While Ally Invest is missing some common tools for investment research and their mobile app isn’t as feature-rich as some competitors, their full-featured online platform makes up for what the mobile app lacks. And, there’s a wide range of account options with Ally Invest, so you’re covered whether you want a taxable account, a retirement account, or an account for your kids.

Ally Invest
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The Bottom Line: Ally Invest is an affordable discount broker with a wide range of investments to choose from.

  • Commissions are just $4.95 or $3.95 if you’re an active trader.
  • There’s no minimum deposit required for a self-directed trading account, and no minimum account balance requirement.
  • Ally Invest offers tons of investment options, including stocks, bonds, mutual funds, options, futures and forex.

Who should consider Ally Invest

If you’re looking for an affordable investment account, Ally Invest should be at the top of your list. You’ll have many choices for different types of accounts with Ally Invest, including traditional and Roth IRA, IRAs for the self-employed, taxable investment accounts, 529 Plan, and more. And, you won’t have to make a minimum deposit to open your account — it’s free.

Once you’ve got your account open, Ally Invest makes trading affordable for most investments. Commissions for stock trades are among the lowest of any online discount broker, and Ally Invest offers more than 100 commission-free ETFs. If you’re looking to buy Mutual funds though, you’ll pay a transaction fee, whereas some competitors offer ample fee-free options.

Ally Invest’s online trading platform is easy to use, and their research tools are good. While you won’t find earnings transcripts, SEC filings, earnings press releases or audio calls, you can still dig into technical data using free screeners and other tools powered by Recognia.

If you don’t want to manage all the investments on your own, you can opt for a managed account. This is Ally’s robo-advisor option — but you’ll need a minimum of $2,500 if you’d prefer this hands-off approach rather than a self-directed trading account.

Ally Invest fees and features

Current promotions

New Ally Invest accounts accounts receive 90 days of commission-free trades, up to $500 in value, regardless of deposit amount. Cash bonuses are available for new accounts starting at $50 for if you deposit or transfer at least $10,000.

Stock trading fees
  • $4.95 per trade
  • $3.95 per trade (30+ trades per quarter or daily balance of $100,000 or more)
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Ease of use
Mobile appiOS, Android , Windows phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest

Ally Invest has plenty of strengths to help it stand out from the competition, including the following:

  • Low commissions: You pay just a $4.95 commission with Ally Invest, which is one of the lowest commissions charged by discount brokers and well below the $6.95 charged by competitors including E-Trade and TD Ameritrade. Plus, if you make more than 30 trades per quarter or have a daily balance of $100,000 or more, your commission is even lower — it drops to just $3.95.
  • No minimum deposit required: While competitors such as E-Trade require a $500 minimum deposit to open an account, Ally doesn’t have any minimum initial deposit requirement. You can also earn a cash bonus for opening an Ally Invest account if you deposit or transfer just $10,000, compared with a $25,000 minimum to earn a cash bonus with E-Trade or $20,000 with Merrill Edge.
  • Powerful tools and intuitive trading platform: Ally Invest’s online site offers you powerful tools to screen investments. Its trading platform is intuitive and provides the features necessary to be an informed investor. This includes a dashboard you can customize to your preferred view, as well as real-time streaming quotes and up-to-date data.
  • Responsive online and phone customer service: You can contact Ally Invest via phone 24/7. There’s also an online chat feature, where you can get answers within seconds from helpful customer service agents. Email support is available as well.

Drawbacks of Ally Invest

Ally Invest also has some downsides to consider:

  • Mutual fund transaction fees: Ally Invest charges a $9.95 transaction fee per trade for no-load Mutual funds. But many competitors offer options without any transaction fees, including E-Trade, which offers more than 4,400 fee-free funds.
  • A mobile app with minimal features: While you can do the basics with Ally Invest’s mobile app, it offers far fewer features and investment tools than competitor apps such as TD Ameritrade Mobile.
  • No physical branches: Ally Invest is an online-only company. There are no physical branches, unlike for competitors such as Merrill Edge, or E-Trade which has more than 30 branches spread across the country.

Is Ally Invest safe?

Ally Invest is a trusted online brokerage with more than $4.7 billion in assets under management. It’s a member of the FDIC and SIPC, so you can rest assured that the cash in your accounts is safe. And since the company has passed its FINRA broker check, you can count on the fact it’s in full compliance with regulations.

Since Ally Invest is online-only, it’s important to review Ally’s data protection policies. The good news is Ally promises that they use “multiple levels of security” to keep your info safe. This includes 128-bit SSL encryption for any exchange of data from your browser and Ally’s servers if your personal information is being transmitted. The downside, however, is that Ally’s privacy policy does permit Ally to share your information with third-parties. While this is a common policy, it’s still disappointing.

Of course, once you invest your money, there’s always a risk of losses. Research what you’re investing in carefully and diversify your portfolio to minimize risks you’re taking.

Bottom line

Thanks to the fact it has no minimum deposit requirement, Ally Invest is a great choice if you’re looking to get started investing and you don’t have a ton of money. Affordable commissions and commission-free ETFs also give you a diverse offering of low-cost or no-cost investment options. But if you’d prefer to buy Mutual funds without paying transaction fees or want a physical branch to visit, alternatives such as E-Trade or Merrill Edge may be a better choice to meet your needs.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here

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Ally Invest Managed Portfolios Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Ally Invest Managed Portfolios is a robo-advisor option from a trusted online-only financial institution.

It can make managing your money simple: Just answer a few basic questions about your goals and risk tolerance and your funds are invested for you. However, while fees are competitive, they aren’t the lowest among other robo-advisors’ offerings.

If you don’t mind the lack of bonus for opening the account, and you want to take a hands-off approach to building wealth, Ally Invest may be a good option.

Ally Invest Managed Portfolios
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The Bottom Line: Ally Invest Managed Portfolios is a decent robo-advisor that’s competitive with other managed portfolios online. But its lack of tax-loss harvesting, and fees that slightly exceed competitors may prompt you to look elsewhere if you’re not already an Ally customer.

  • The minimum deposit to invest in Ally Invest Managed Portfolios is $100
  • 0.00% management fee, no matter how high your account balance
  • Customer service is available 24/7, but there are no local branches to visit

Who should consider Ally Invest Managed Portfolios?

If you’re looking for a robo-advisor that allows you to build a diversified portfolio without a lot of advanced knowledge about investing, Ally Invest Managed Portfolios has you covered.

You’ll answer a few questions about your age; timeline for investing and risk tolerance; and whether you’re investing for retirement, wealth-building or a big purchase. Then, Ally Invest comes back with a recommended portfolio you can accept or tweak.

You can open a joint, custodial or Individual taxable account with Ally Invest Managed Portfolios, or can opt for a Traditional IRA, Roth IRA or Rollover IRA. Unfortunately, unlike with Ally Invest’s self-directed accounts, there’s no promotion or bonus for transferring funds into a managed portfolio. And, you’ll need quite a bit of money to get started — more than many competitors in the robo-advisor industry require.

Still, if you don’t mind the lack of brick-and-mortar locations and marginally higher fees, Ally Invest is a worthy competitor to consider when looking for help managing your money.

Ally Invest Managed Portfolios fees and features

Amount minimum to open account
  • $100
Management fees
  • 0.00%
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Current promotions

None currently

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account (ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Ally managed portfolios cover 3 asset classes and 9 major market segments
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android, Windows Phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest Managed Portfolios

Ally Invest Managed Portfolios has some significant advantages worth considering:

  • Investing in a diversified portfolio is easy. You’ll answer basic questions about your investment goals and Ally Invest will suggest a portfolio with an appropriate mix of U.S. and foreign bonds, international and U.S. stocks, and cash. You can also tweak the suggestions Ally Invest Managed Portfolios makes, so you take on more or less risk based on your comfort level.
  • Ally requires a low minimum deposit of just $100 to open a managed portfolio account. While some of Ally’s competitors (such as Betterment) don’t have a minimum deposit requirement at all, $100 still falls on the very low side of the scale and makes this account extremely accessible to new investors.
  • Ally Invest Managed Portfolios offers automatic portfolio rebalancing. This helps to ensure you remain invested in the right mix of assets if certain investments under- or over-perform.
  • Customer service. Ally Invest offers phone, Email, and chat support. Customer service agents are available 24/7 with little or no wait. Agents will do their best to provide answers, although it may take a little time if your questions are technical since you may need to be transferred to an investment advisor.

Drawbacks of Ally Invest Managed Portfolios

You’ll also want to consider the potential downsides of choosing Ally Invest Managed Portfolios.

  • Ally Invest Managed Portfolios charges fees that are slightly higher than several competitors. You’ll pay .30% for Ally’s robo-advisor service, compared with .25% for Betterment’s digital account or for Wealthfront.
  • Ally Invest Managed Portfolios currently does not offer tax loss harvesting, which involves selling investments at a loss to offset taxable gains (although they do offer tax advantaged portfolios which add municipal bonds to Ally’s core portfolios). Competitors such as Betterment do offer this feature. However, Ally representatives indicate tax loss harvesting is expected to be rolled out in 2019 and investors with managed portfolios will be able to transition their accounts into a portfolio with tax loss harvesting.
  • No physical branches. If you’d prefer to go into a branch for local customer support, you’ll need to look elsewhere, such as E-Trade, which has more than 30 branches across the country.
  • Mobile apps aren’t very advanced. While Ally Invest allows you to use mobile apps on iPhone and Android phones to access basic account information, the offered apps aren’t as feature-rich as competitors such as Betterment.

Is Ally Invest Managed Portfolios safe?

Whenever you invest your money, there’s a risk you may lose some or all of it. This is no different with Ally Invest Managed Portfolios. The assets your robo-advisor invests you in could decline in value and your portfolio could lose money.

But Ally Invest is as safe as any trusted online brokerage, and there’s little risk of losing assets if the investment firm goes bankrupt. Ally Invest is in compliance with regulatory requirements according to FINRA’s Broker Check tool. Ally Invest is also a member of the FDIC and SIPC, both of which ensure cash in bank and brokerage accounts respectively.

Final thoughts

Ally Invest Managed Portfolios is a viable choice for investors looking for an easy, hands-off way to invest — especially with its low $100 minimum deposit requirement. Ally also promises to offer a broad range of socially-responsible portfolios, which should interest investors who want to consider more than just financial returns. But the lack of a promotional offer, higher management fees, and the fact tax loss harvesting isn’t currently offered makes Ally a less-than-ideal option for investors looking for the most affordable way to build a diversified portfolio. If you want a lower-cost option that does offer tax-loss harvesting, consider robo-advisors such as Betterment or Wealthfront.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here