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The Skinny on Forex

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What is FOREX?

The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail
forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the
world, with a volume of about $2 trillion a day. If you compare that to the $25
billion a day volume that the New York Stock Exchange trades, you can easily see
how enormous the Foreign Exchange really is. It actually equates to more than
three times the total amount of the stocks and futures markets combined! Forex
rocks!

What is traded on the Foreign Exchange?

The simple answer is money. Forex trading is the simultaneous buying of one
currency and the 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).

Because you're not buying anything physical, this kind of trading can be confusing.
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 Japanese 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 with! 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 novice or beginner 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?

The most popular currencies along with their symbols are shown below:

Symbol Country Currency Nickname

USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
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.

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When Can Currencies Be Traded?

The spot FX market is unique within the world markets. It’s like a Super Wal-Mart
where the market is open 24-hours a day. At any time, 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 follow 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 mind though, the early bird doesn’t necessarily get the worm in this market -
you might get the worm but a bigger, nastier bird of prey 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
counterpart.

The chart below shows global foreign exchange activity. The dollar is the most
traded currency, being on one side of 89% of all transactions. The Euro’s share is
second at 37%, while that of the yen is at 20%.

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 their services through something called the bid-ask
spread.
No middlemen. Spot currency trading eliminates the middlemen, and allows
you to trade directly with the market responsible for the pricing on a particular
currency pair.
No fixed lot size.

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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 your own lot size. This allows traders to participate with accounts as
small as $250 (although we explain later why a $250 account is a bad idea).
Low transaction costs.
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 percent. Of course this depends on your leverage and all 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 awesome 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 foreign exchange 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.
Leverage.
In Forex trading, a small margin deposit can control a much larger total contract
value. Leverage gives the trader the ability to make nice 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 enormous, it is also extremely liquid. This means
that under normal market conditions, with a click of a mouse 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 (a limit order), and/or close a trade if a trade is going
against you (a stop loss order).
Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex
brokers offer 'demo' accounts to practice trading, along with breaking Forex
news and charting services. All free! These are very valuable resources for
“poor” and SMART traders who would like to hone their trading skills with 'play'
money before opening a live trading account and risking real money.
“Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of
money. The fact is, compared to trading stocks, options or futures, it doesn't.
Online Forex brokers offer "mini" and “micro” trading accounts, some with a
minimum account deposit of $300 or less. Now we're not saying you should
open an account with the bare minimum but it does makes Forex much more
accessible to the average (poorer) 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 “micro account”) may be opened for with a couple
hundred bucks. Do not laugh – micro accounts and its bigger cousin, the mini
account, are both good ways to get your feet wet without drowning. For a micro
account, we'd recommend at least $1,000 to start. For a mini account, we’d
recommend at least $10,000 to start.

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