What is FOREX?
The Foreign Exchange, also referred to as the “FOREX” or “Forex” or “FX” or “Spot FX”
market is the largest financial market in the world, with a volume over $1.95 trillion a
day. If you compare that to the $25 billion a day volume that the New York Stock
Exchange trades, you see how giant the Foreign Exchange really is. It’s actually more
than three times the total amount of the stocks and futures markets combined!
What is traded on the Foreign Exchange?
The answer is money. Forex trading is the
simultaneous buying of one currency and selling of another. Currencies are traded
through a broker or dealer and are traded in pairs; for example the Euro dollar and the
US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
This kind of trading is often very confusing to people because they are not buying
anything physical. Think of buying a currency as buying a share in a particular country.
When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese
economy, as the price of the currency is a direct reflection of what the market thinks
about the current and future health of the country’s economy.

In general, the exchange rate of a currency versus other currencies is a reflection
of the condition of that country’s economy compared to the other countries’
economies.

Unlike other financial markets like the New York Stock Exchange, the Forex spot market
has neither a physical location nor a central exchange. The Forex market is considered
an Over-the-Counter (OTC) or ‘Interbank’ market, due to the fact that the entire market
is run electronically, within a network of banks, continuously over a 24-hour period.
Until the late 1990’s, only the “big guys” could play this game. The initial requirement
was that you could trade only if you had about ten to fifty million bucks to start. Forex
was originally intended to be used by bankers and large institutions and not by us “little
guys”. However, because of the rise of the Internet, online Forex trading firms are now
able to offer trading accounts to ‘retail’ traders like us.
All you need to get started is a computer, a high-speed Internet connection, and the
information contained within this site. BabyPips.com was created to introduce beginning
traders to all the essential aspects of foreign exchange in a fun and easy-to-understand
manner

What is a Spot Market?
A spot market is any market that deals in the current price of a financial instrument.

Which Currencies Are Traded?
Any currency backed by an existing nation can be traded at the larger brokers. The
most popular currencies along with their symbols are show below:

Symbol Country Currency
USD United States Dollar
EUR Euro members Euro
JPY Japan Yen
GBP Great Britain Pound
CHF Switzerland Franc
CAD Canada Dollar
AUD Australia Dollar

Forex currency symbols are always three letters, where the first two letters identify the
name of the country and the third letter identifies the name of that country’s currency.

When Can Currencies Be Traded?
The spot FX market is unique to any other market in the world. It’s like a Super Wal-
Mart where the market is open 24-hours a day. Somewhere around the world, a
financial center is open for business, and banks and other institutions exchange
currencies, every hour of the day and night with generally only minor gaps on the
weekend.

The foreign exchange markets follows the sun around the world, so you can trade late
at night if you’re a vampire or in the morning if you’re an early bird. Keep in the mind
though, the early bird doesn’t nec essarily get the worm in this market. You might get the
worm but a bigger nastier falcon can sneak up and eat you too.

Time Zone New York GMT
Tokyo Open 7:00 pm 0:00
Tokyo Close 4:00 am 9:00
London Open 3:00 am 8:00
London Close 12:00 pm 17:00
New York Open 8:00 am 13:00
New York Close 5:00 pm 22:00

The Forex market (OTC)
The Forex OTC market is by far the biggest and most popular financial market in the
world, traded globally by a large number of individuals and organizations. In the OTC
market, participants determine who they want to trade with depending on trading
conditions, attractiveness of prices and reputation of the trading counterparty.

The chart below shows global foreign exchange activity. It represents the results of a
study conducted in 1998 by the Bank for International Settlements (BIS). In comparison,
while the total daily trading volume worldwide was estimated at about US$1.5 trillion,
only about 12 billion dollars was estimated for currency futures - less than a tenth of one
percent!

From the chart below, it is evident that the UK provides the greatest portion of
worldwide forex activity. This is despite the fact that the British Pound is only the fourth
most widely traded foreign currency in the world.

Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons
why so many people are choosing this market:

No commissions.
No clearing fees, no exchange fees, no government fees, no
brokerage fees. Brokers are compensated for its services through the bid-ask
spread.

No middlemen.
Spot currency trading away with the middlemen and allows
clients to interact directly with the market responsible for the pricing on a
particular currency pair.

No fixed lot size.
In the futures markets, lot or contract sizes are determined by
the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot
Forex, you determine the lot size. This allows traders to participate with accounts
as small as $300.

Low transaction cost.
The retail transaction cost (the bid/ask spread) is typically
less than 0.1 percent under normal market conditions. At larger dealers, the
spread could be as low as .07 perc ent. This will be explained later.

A 24-hour market.
There is no waiting for the opening bell. From Sunday
evening to Friday afternoon EST, the Forex market never sleeps. This is very
desirable for those who want to trade on a part-time basis, because you can
choose when you want to trade–morning, noon or night.

No one can corner the market.
The forex market is so huge and has so many
participants that no single entity, not even a central bank, can control the market
price for an extended period of time. Even interventions by mighty central banks
are becoming increasingly ineffective and short-lived. Central banks are
becoming less and less inclined to intervene to manipulate market prices.

Leverage.
In Forex trading, a small margin deposit can control a much larger
total contract value. Leverage gives the trader the ability to make extraordinary
profits and at the same time keep risk capital to a minimum. For example, Forex
brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit
would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with
$500 dollars, one could trade with $100,000 dollars and so on. But leverage is a
double-edged sword. Without proper risk management, this high degree of
leverage can lead to large losses as well as gains.

High Liquidity.
Because the Forex Market is so humongous, it is also extremely
liquid. This means that with a click of a mouse, under normal market conditions,
you can instantaneously buy and sell at will. You are never “stuck” in a trade.
You can even set your online trading platform to automatically close your position
at your desired profit level (limit order), and/or close a trade if a trade is going
against you (stop loss order).

Free “Demo” Accounts, News, Charts, and Analysis.
Most online Forex brokers offer free ‘Demo’ accounts to practice trading, along with breaking Forex
news and charting services. These are very valuable resources for “poor” traders
who would like to hone their trading skills with ‘virtual’ money before opening a
live trading account.

‘Mini’ Trading:
You would think that getting started as a currency trader would
cost a lot of money. The fact is, it doesn’t. Online Forex brokers offer “mini”
trading accounts with a minimum account deposit of $300. This makes Forex
much more accessible to the average individual who doesn’t have a lot of start-
up trading capital.

What Tools Do I Need to Start Trading Forex?
A computer with a high-speed Internet connection and all the information on this site is
all that is needed to begin trading currencies.

What Does It Cost to Trade Forex?
An online currency trading (a “mini-account”) may be opened for as little as $300. Do
not laugh – mini-accounts are good way to get your feet wet without taking a bath. In
Forex, you select how much of any particular currency you wish to buy or sell. For a
mini account, we’d recommend at least $5,000 to start, and we explain why in our
School of Pipsology (shameless plug).