Forex Tradings

Repurchase Agreements

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Anybody who owns a portfolio of securities can use these securities as collateral to obtain funds in the money market. Security dealers, in particular, need funds to finance their inventory of securities. This need has given rise to the specialized financing insruments named repurchase agreements (RPs). With government securities being the largest single sector of the money market, dealers in government securities have been traditional users of these instruments as sources of financing.

In RP, one or several securities, usually government bonds, are actually sold to the lender. However , the seller or borrower makes the commitment to repurchase the security at the same price, plus a stipulated interest charge. The maturity of RPs may be fixed or left open, in which case either the lender or the borrower can terminate the agreement at any time. Most RPs are overnight , although agreements for 1 week to six months are common.

Commercial banks have traditionally been large suppliers of funds to government security dealers in the form of RPs. However, commercial banks also hold substantial portfolios of government securities and they have also found it advantageous to use RPs as a source of funds.

Responsiveness of Consumption and production

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To understand fully the impact which a change in prices and incomes would have on the trade acount, it is necessary to study the commodity composition of the trade account with each trading partner.

There are certain goods whose purchase and production is highly sensitive to changes in prices. As the price of beef , for example increases, in many cases there is more than a proportional reduction in quantity purchased. On the other hand , there are some products where changes in prices have little , if any , impact on the amount purchased. For Example, when the price of Mercedes Benz cars began to soar because of the upvaluation of the German mark against the US dollar, people in th United States continued to buy them.

In evaluating the responsiveness of quantity purchased and produced to change in prices, one must bear in mind the magnitude of the price changes. In general, statements about how responsive purchases or production of a certain good are to changes in prices refer to relatively small price shifts. If large changes are preceived to be permanent , the changes in amount purchased and produced relative to the change in price may be proportionally very different from what they would have been if the change in price had been relatively small.

The impact of changes in income on quantities purchased , like the impact of changes in prices , also depends on the magnitude of the income change as well as on the general level of income in the given country. A small change in income in a development country is likely to have less impact on the amount of beef purchased than when a large change in income takes place in a less wealthy country.

Relative Incomes

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As Income expands, consumption and investment also tend to expand. Domestically , this increase in demand will put an upward pressure on prices unless there is some unutilized capacity in the economy. The impact on the trade account depends on how the increased demand is channeled. An increased demand completely channeled into consumption will surely increase the amount of goods imported. On the other hand, an increased demand completly channeled into great levels of investment , particullarly in export industries , will make these industries more competitive and will increase exports.

Factors Affecting Spot Exchange Rates

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For any party who assumes net exchange positions an assessment of future exchange rates is imperative. However, this assessment is hard to make. It can only take the form of a forecast , and forecasting remains more of an art than a science. Neverthless , these limitations do not excuse the funds manager who operates in these markets from making an educated of the future movemnts of the values of relevant currencies.

There are two major approaches to explain the behaviour of exchange rates. In one approach a attempt is made to understand the forces of supply an demand for foreign exchange by analyzing the behavior of major participants in international transactions. Since these transactions ara measured in the so called balance of payments statement , the forecasting of exchange rates involves the forecasting of the accounts in this statement and their balance . In the other major approach to forecasting exchange rates attention is placed instead on the behavior of aggregate variables, such as expected inflation rates and interest rates. a thorough discussion of the theories of exchange rate determination is outside the scope. Instead we will try to familiarize the reader with the variery of factors that affects exchange rates.

Arbitrage!

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The process of taking advantage of the existence of different prices for the same product ( or its substitute) at the same time but in different markets. The different markets can be different geographic locations for the same financial asset or different financial assets in one or more geographic locations. Arbitrage between different locations can involve two or more currencies and occurs, for example , when the price for Swiss francs against U S dollars in Zurich is higher than the price for Swiss franc against U S dollars in New York.

In this case profits can be obtained by purchasing Swiss francs against U S dollar in New York and , at the same time selling Swiss francs against U S dollar in zurich. More than, two currencies could be involved if the price of Swiss francs in Amsterdam expressed in guilders were higher than the price for Swiss francs in New York expressed in US dollars, Profits in this case could be derived from purchasing Swiss francs against US dollar in New York and, simultaneously Swiss francs against guilders in Amsterdam. Since at , this point , there is a net long position in guilders and a net short position in dollars , an additional transaction is necessary . Guilders must be sold against US dollars to eliminate any risk.

Aggregate Limit

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The total volume of all unliquidated contracts allowed to be outstanding at any one time. This limit is only a total volume indicator and is not affected by the characterstics of the particular parties involved in a contract.

Appreciation

A gradual increase in the value of a currency usually occuring over several days or weeks as the result of market forces of supply and demand in a system of floating exchange rates. By contrast , an unpvaluation is an official government act which produces a subtatantial increase in an exchange rate, usually overnight.

Future Market

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A market in which contracts are traded for future delivery of commodities (coffee, gold ) , currencies (marks, ponds ) and financial instruments ( Treasury bills, certificates of deposit). The purchase or sale of a futures contract requires that a deposit, called margin, be maintained with a broker. The market is designed in such a way that it is easy to get out of a contract or cancel it.

The vast majority of the participants , the buyers and seller of futures contracts , do not intend to take delivery or deliver , what they bought or sold. Futures contracts are used as an investment vehicles and as a vehicle for hedging positions.

As an example, a manufacturer of gold jewelry who has bought gold on the spot or cash market will sell gold in the futures market until the time when the jewelry is completed and sold in the wholesale or retail market. At that time the manufacturer will buy gold in the futures market. If the price of gold rose in the meantime , he losses on the futures contracts but obtains a higher price for his gold jewelry.

If the price of gold fell down in the meantime . he makes profit on the futures contract but obtain a lower price for his gold jewelry. The sale of a futures contract protected him against fluctuations in the price of gold; however, he never intended to deliver gold under that contract.

Effective Interest Rates.

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The amount of money , expressed as per annum percentage , actually paid on a loan or deposit. The effective interest rate may differ from the nominal interest rate, depending on interest payment schedule .

For instance , when the interest is deducted from a loan when the load is first made , the actual proceeds available to the borrower are less than the nominal loan principal used to calculate the interest payments. The effective interest rate in this case is the interest payments expressed as a percentage of the actual proceeds on a per annum basis.

Certificate of Deposit. ( CD )

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A placement of funds for a certain period of time with a bank for which the depositor of the funds receives a confirmation which makes the deposit receipt a negotiable instrument . Investment bankers create a secondary market where CD’s can be purchased and sold prior to maturity.

Investors usually accept a smaller interest rate on CD’s than on regular time deposits because investment is more liquid , that is, the CD can be converted into cash at any time without asking the bank to break the deposit. CDs were originally invented in the United States in the early sixties and were used in the domestic U.S money market.

They were later also used for external dollar in several financial centers. The technique is so attractive that the instrument has also been introduced into the domestic money market of several other countries .

Commercial Paper

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A money market instrument which shows that there has been a money market transaction between two nonfinancial institutions. For example , a petroleum company with excess funds may purchase commercial paper issued by an automobile company which needs funds. In this case , the petroleum company is in effect , lending funds to the automobile company for the period during which it holds the commercial paper.

Only the largest companies have access to the commercial paper market. It is particularly developed in the United States because bank regulations do not allow interest to be earned on bank deposits for periods of less than 14 days. Consequently , the main activity in the U S commercial paper market is for periods of less than a month.

The very largest companies place their commercial paper directly with investors. Other companies use the services of a broker , who places the commercial paper for a fee. Usually , companies borrowing in the commercial paper market have confirmed back - up lines of credit with commercial banks. These lines can be used for borrowing if money is not available in the commercial paper market.

Option Exchange Contract

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A contract for foreign exchange without a fixed maturity date. In this type of contract , a period of time is stated during which the person who has the option can choose any day for liquidation and settlement of the contract.

The contract must state which party has the option (the buyer or the seller) and is usually employed when the date on which foreign exchange will be needed or will be available for sale is not known precisely.

This can happen when the availability of foreign exchange depends on uncertainties regarding the production of goods or the arrival of a ship. These options are different from options in securities trading because option exchange contracts must be carried out by the final date of the contract. A security option need never be exercised. The traditional option is also available in the exchange market and called true option.

Forward Market.

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A market in which foreign currency and some money market instruments are traded for future delivery. There are no margin requirements to be met in this market. Most transactions are closed directly between the buying and selling parties, and it is difficult to cancel a contract. A forward contract is expected to be settled with actual deliveries being made. The usual way to eliminate the economic impact of an outstanding contract is to arrange an (offsetting) contract for the same amount and maturity with another market participant. However, even though the economic impact has been neutralized there are now two (offsetting) contracts outstanding. In the absence of margin requirements like those in the futures market , operators in the forward market must establish lines of credit before they can trade with another party.

Break even Exchange rate

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The particular spot exchange rate which must prevail at the maturity of a deposit or debt in a foreign currency ( which has not been covered in the forward market ) so that there will be no advantage to any party from interest rate differentials. For example , if the Swiss franc interest rate is 5 percent and the pound interest rate is 12 percent , it may be desirable for the holder of Swiss francs to convert the Swiss francs into pounds and invest them at 12 percent. if this is done without forward cover, an interest gain of 7 percent will be derived. Then, the investor can afford an exchange loss of up to 7 percent which might result from a depreciation of the exchange rate of the pound against the Swiss franc. Thus the break even exchange rate for this transaction would be that spot rate which is 7 percent per annum below the exchange rate at which the original conversion from Swiss fran to pounds took place.

Currency Liquidity

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In a multicurrency - investment portfolio the liquidity of a given foreign currency has to be viewed in terms of exchange liquidity and instrument liquidity. Exchange Liquidity depends upon the ease with which a currency can be converted into and out of another major currency, usually the U S dollar. In the past the British pound, the German mark , the Swiss franc, the Canadian dollar and the Japanese yen had an excellent exchange liquidity. Very sizable amounts could be purchased and sold in in these currencies without affecting market rates in a notable way. Instrument liquidity depends upon the ease with which a negotiable instrument denominated in that currency can be purchased and sold without noticeably affecting the market rate for that instrument. For example , if a funds manager wishes to diversify from U S dollars into yen he or she may go through tow steps: First convert the dollars into yen in the exchange market and then invest the yen in a yen denominated security. If after a period of time the funds manager needs to get back the original U S dollars. two steps are again required : first sell the yen denominated securities affected by the instrument's liquidity and then convert the yen into dollars in the exchange market affected by the yen exchange liquidity. Both types exchange liquidity and instrument liquidity determine the overall liquidity of a given currency in a portfolio.

Meaning of Exchange Quotations

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As in the money market when a foreign exchange trader is asked for a quotation for a given foreign currency , the individual will answer with two numbers. The first number indicates the price at which the trader is willing to purchase the foreign currency in terms of local currency, the second number indicates the price at which the trader is willing to sell the foreign currency in terms of local currency.

For example an American trader , when asked for a two way quotation for German mark against U. S dollar in American terms , might answer 36 - 37. This is a sort of shorthand expression for the quotation. When this quotation is expressed in full it can be read as follows: willing to purchase German marks against U.S dollar (to sell US dollars against German marks) at $0.36/DM ; willing to sell German marks against US dollars ( to purchase US dollars against German marks at $0.37/DM .

Actors in the Foreign Exchange Market

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In principle anyone who exchanges currency of a given country for currency of another country participates in the foreign exchange market. However it is useful if we concentrate on the major actors in this market. Under any priority system commercial banks are the main participants in the foreign exchange market. Indeed one can say that it is the commercial banks that “make a market “ in foreign exchange. Next in importance are the large corporations with foreign trade activities or direct investment abroad. Finally central banks are omnipresent in the foreign exchange market.

Commercial Banks.

Obviously when we talk of the commercial bank as the leading actor in the foreign exchange scene we are speaking mostly of large commercial banks with many clients engaging in imports and exports which must be paid for in foreign currencies or of banks which specialize in the financing of trade.

Commercial banks participants in the foreign exchange market as an intermediary for their corporate customers who wish to operate in the market. They also operate on their own account.

Central Banks

These institutions are not only responsible for the printing of domestic currency and the management of the money supply (as well as all the other objectives of monetary policy ) but in addition they are often responsible for maintaining the value of the domestic currency vis-à-vis the foreign currencies. This is certainly true under the system of “fixed exchange rates”. However even within systems of “floating exchange rates “ the central banks have usually felt compelled to intervene in the foreign exchange market at least to maintain “orderly markets”.

What the Foreign Exchange Market is

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Like the money market, the foreign exchange market is a market where financial paper with a relatively short maturity is traded. However, the financial paper traded in the foreign exchange market is not all denominated in the same currency. In the foreign exchange market, paper denominated in a given currency is always traded against paper denominated in a given currency is always traded against paper denominated in another currency. One justification for the existence of this market is that nations have decided to keep their sovereign right to have and control their own currency. There would not be a foreign exchange market.

Like the money market, the foreign exchange market considers the time when the transaction is closed to be one of the elements in the market. In describing the money market, we made this point by comparing currency and treasury bill. Currency provides immediate acquisitive power, whereas a treasury bill provides this purchasing power at some specified future date (assuming the bill is held to maturity and not sold in the secondary market). In the foreign exchange market into spot and forward markets. The spot market is for foreign exchange to be delivered within 2 business days; the forward market is for exchange to be delivered at some specified future date. However foreign exchange transactions for immediate delivery or for delivery up to 7 days later are traditionally considered to be spot transactions, although they carry a different rate depending on the specific deliver date. The date of delivery is technically called the value date.

Foreign Money Market

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Domestic money markets trade in funds denominated in the local currency and operate under regulations governing domestic markets. When funds in any currency are traded outside the regulations governing domestic markets in that currency , then we have a foreign or external money market. This is the case when U S dollar deposits are traded outside the banking regulations governing domestics U.S dollar deposits, usually outside the United States. This type of transaction is the core of the so - called eurodollar market. When speaking of all the currencies traded in foreign markets, one usually refers to them as the Eurocurrency markets; these include Euro – French francs, Euro - German marks, and so on.

We should note, too that in addition to the Eurocurrency markets, foreign money markets have also emerged in Aisa. The Middle East and to a much lesser extent , in other regions. These other markets are often identified by names such as the “ Asian dollar market.” The limitations on the term “Eurodollar market” also apply to terms such as Asian dollar market.”

What the money market is

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We begin with the money market because it is the one in which we all have operated at one time or another. Anybody who has a checking account is a participant in the money that one person (or enterprise ) owes to another. In the case of currency , that is cash in your pocket, it is the government that owes the money to you as the bearer of the currency. In the case of a treasury bill it is also the government that owes an equivalent value to the owner of the bill. Here however a specified time has to elapse before the piece of financial paper - the treasury bill – becomes payable in hard cash by the government i.e before the date of the maturity of the document. In the first case , the government currency is actually money. In the second instance, the treasury bill is only near money. It would not be very hard to sell the treasury bill to another person. However the govt itself is not liable for the payment of the money represented by the bill until the instrument matures.

The bulk of the financial assets traded in the money market have a maturity of less than a year. However active trading is carried on in documents of up to 5 years maturity. Anything above 5 years is pretty much the domain of the investors in the capital markets where these longer term securities are traded.market. The article that is bought and sold in this market is “money” or “near – money “. Money or near-money is nothing more than financial paper representing a sum of money

Forex scam

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A forex (or foreign exchange) scam is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.^[1] But "the market has long been plagued by swindlers preying on the gullible," according to the New York Times.^[2] "The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to The Wall Street Journal.^[3] The North American Securities Administrators Association says that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud."^[4]

"In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists."^[5]

In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud.”^[6]

The forex market is a zero-sum game,^[7] meaning that whatever one trader gains, another loses, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, technically making forex a "negative-sum" game.

These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,^[8] improperly managed "managed accounts",^[9] false advertising,^[10] Ponzi schemes and outright fraud.^[4]^[11] It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.^[12]

The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.^[13]

An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically."^[14] Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds.^[1] CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

Determinants of FX Rates

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The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):

(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.

(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.

(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”

None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Foreign exchange market

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The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies. ^[1]

The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.

In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of

its trading volumes,
the extreme liquidity of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage

As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks.^{[citation needed]} According to the Bank for International Settlements,^[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting

Ways to Trade Forex

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Essentially there are two ways to analyze and make forecasts in a market: Technical Analysis and Fundamental Analysis.

Technical Analysis is when a trader looks at past price patterns in order to analyze the market and make any future predictions. This is typically done by looking at charts such as the ones shown above and extrapolating price movement patterns from the past.

The graph below is an example of a typically used chart pattern known as a head and shoulders. This pattern was formed from October 2006 through November of 2007. Because of the nature of supply and demand and psychology of investors this pattern is suggested to predict downward movements in the markets, according to some technical analysis theories.

Technical Analysis patterns can be used over long time frames such as the one depicted above or over much shorter time frames.

Technical Analysis can be used stand alone or in conjunction with Fundamental Analysis.

The basic premise of fundamental analysis is analyzing and forecasting the market based on economic fundamentals similar to those described above: like interest rates, geo-political situations, economic growth and merger and acquisition activity in various countries. The Forex market reports on various economic events such as the key unemployment numbers, and supply and demand analysis. Various reports are put out on an almost daily basis. Typically the reports have a consensus before the report is put out. However when the report comes out it is sometimes not in line with the forecast. When this is the case for a particular currency pair, it will make a quick move to adjust, as the forecasted consensus is already priced in.

Below is an example of the ISM Manufacturing Report that came out higher than expected which strengthened the US Dollar causing the GBP/USD to fall at 10 am eastern time. Within 10 minutes the market moved over 35 pips. Keep in mind that this type of trading can be very risky as the market moves very quickly when these types of reports come out.

However, fundamental traders can also trade investment positions that are more long term. For example, a trader can believe that a certain countries economy will flourish over time relative to another economy and then he can take a position in that currency pair to reflect his/her economic outlook.

There are many different ways to trade Forex. And due to the fact that forex is a 24 hour a day market, people are able to find ways to participate that fit around their schedules. For example, you can use trading robots that are readily available on the internet to trade on your behalf or you can trade manually based on your own analysis as you watch the forex market yourself.

Although trading Forex can easily be a full time job most retail traders trade part time within their schedule, either after work or in the wee hours of the morning.

Some of the popular ways to trade forex are using trading robots that execute trades based on pre set parameters on your behalf, trading based on fundamental announcements and discretionary trading using fundamental and technical analysis.

There are some very strong benefits to using a robot. For starters it removes one of the greatest factors that negatively impacts traders. That factor is human emotion. Whether you believe it or not emotions such as greed and fear are the number one culprits to a trader's demise. Imagine being convinced that your trade will become profitable and not walking away from a loss because of fear of taking a loss and greed of giving up money. As you trade, these emotions are there and they need to be continuously managed. A trading robot enters and exits positions on your behalf and you do not need to be there to press the button on losing or winning trades. This feature of a trading robot has a diminishing effect on human emotions. Another key aspect of a trading robot is that it is making trades for you while you are not in front of your computer. This way, in the 24 hours per day forex market, you are consistently making trades even when you are at work or asleep.

There are many robots available, some good and some that are very dangerous to use. We offer our clients multiple trading robots for the Metatrader 4 platform and many other stand alone platforms. When dealing with trading robots it is highly suggestible that you test them on a demo forex account before risking your hard earned money with the robot. Please keep in mind that people can make promises on the internet without any substance behind them.

Another way of trading is through a managed account. Where you have a professional trader trade your money along with others, then everyone that has invested in these trades will get a portion of the profits or take on a portion of the losses, depending on the percentage they put in. You need to be very careful when selecting a manager for your account and making sure they are qualified to trade on your behalf. Managers typically charge a management fee and performance fees in return for them trading your account. Most retail traders prefer to trade themselves and experiment with different dealing firms, currencies and trading styles. However, some traders prefer to use managed accounts in order to have someone who they believe is more qualified control their investments.

Forex Trading Features

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The forex market is traded over the counter through an electronic network of Banks, Broker Dealers and Hedge Funds. There is no centralized physical exchange like with equities or futures. There are some key advantages to this. One key advantage is that the Forex Market is open 24 hours a day 6 days per week. The hours are from Sunday starting at 5pm going to Friday at 5pm New York Time. The market begins in Australia (Sydney) and continues around the world to the United States (New York).

Because the network of banks, brokers and dealers is so large, liquidity becomes a smaller issue than if you were dealing with some stocks or futures. During normal market conditions getting in and out of trades is a fairly smooth process, with a counterparty or a market maker usually available to facilitate your trade.

Another benefit of forex trading is that since you are not taking positions in companies there is no uptick rule. Therefore you can take a particular currency pair and speculate on it going up or down without any restrictions.

Information and market news broadcasts are broadly available to all traders in the FX Market. Therefore, particularly through the use of technology, the market is fairly transparent to the investor.

In most retail forex dealing firms trading is conducted commission free. However the dealing firm does have a bid/ask spread in place which the client pays in order to facilitate transactions. You can try out forex trading by using a demo forex platform.

One nice advantage about forex trading is flexible contract sizes. We will later address how forex contracts are set up and learn more about leverage but for now there is a key concept to understand. If you are completely new to forex trading you can trade a real money account with relatively small contract sizes where currency price fluctuation will translate to relatively small moves in dollar terms. You can control real money with an account as small as $200. With every lot you will control 1000 units worth of currency. This means that every tick in the price will be approximately 10 cents. Because you cannot lose more than you put in with many retail forex dealing firms that we work with you can practice with a real money micro account with an investment risk as small as $300

Forex Basics

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Introduction

Have you ever exchanged your currency to go on a trip? If you did, whether you knew it or not you were trading forex. Due to easily available, high speed interned forex trading, for speculation purposes, is becoming significantly more and more popular to the retail crowd. There are many names for forex trading, here are just a few examples so you don't get confused as you read along. Forex Trading is also known as Foreign Exchange Trading, Currency Trading, Spot Forex Trading, FX Trading, and the list goes on and on.

The simple definition of forex trading is the simultaneous selling of one currency and the buying of another. Forex Trading can be done for both business and speculation purposes. For example of a business forex transaction is a company buying a resources in a foreign country exchanging their currency into the other country's currency.

An example of speculation is an individual expecting a particular currency to appreciate relative to another therefore buying one and selling the other simultaneously. To take this example one step further you may think that the Euro will appreciate relative to the US Dollar, thus you will buy Euros and sell US Dollars. If the value of the Euro goes up you can sell your Euros back for the US Dollars and lock in your profit. If the value goes down you will incur a loss.

To sum it up, the retail forex market allows you to speculate on the price movements of various currency pairs around the world. The Forex market is the largest market in the world. The average daily volume in the forex market is around $2 trillion per day. Over 85% of this volume is traded for speculation purposes. There are many participants in the forex market including: banks, commercial companies, central banks, investment management firms, hedge funds, retail Forex brokers and individual traders.

Until the late 90's it was difficult for retail traders to speculate in the forex markets. Minimum investments were typically as high as $10 million. Through the development of retail Forex brokers and the internet retail spot FX now makes up over 10% of the Forex market. You can trade forex online for speculation purposes with as little as $200 in your account from you home computer.

What is traded on the Foreign Exchange market?

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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 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 FOREX?

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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 over $4 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!