Forex Trading Online: Foreing Exchange (FX) Currency Trading

Source: BabyPips.com

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:

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 necessarily get the worm in this market. You might get the worm but a bigger nastier falcon can sneak up and eat you too.

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 percent. 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

This entry was posted on Wednesday, June 14th, 2006 at 9:31 am and is filed under Forex Guides. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.