Forex trading is a dynamic global market that operates almost around the clock. Unlike stock exchanges, there's no physical location for all currency trading.

Forex trading involves currency pairs, where each pair represents the value ratio of one currency to another, investors buy one currency while simultaneously selling another. For example, a trader buying the EUR/USD pair holds a long position in EUR and a short position in USD.

Trading Units and Costs

In forex trading, currency pairs are traded in units of 10,000, with no commission. However, the cost of trading is reflected in the spread between the buying and selling prices.

The smallest price movement in the currency market is called a pip. For most currencies, one pip equals 0.0001, while for JPY pairs, one pip equals 0.01. Therefore, the value of a pip depends on the trading volume and the currency pair.

Leverage and Trading Hours

Forex trading involves leverage, allowing traders to engage in larger trades with a smaller initial capital. Leverage can amplify profits but can also lead to significant losses, sometimes exceeding the initial investment. Forex trading operates almost 24/7, six days a week, requiring traders to stay vigilant to market conditions and economic events.

Interest Rates and Capital Flows

Currency values are influenced by various factors, including interest rates and interest rate differentials. Interest rates and their differences reflect the economic strength of different countries. Capital flows across borders are crucial in determining currency appreciation or depreciation. Economic data and interest rates are key drivers of capital flows.

Trading Opportunities

Forex trading offers both short-term and long-term trading opportunities. Investors focused on fundamental factors can trade based on news releases for short-term profits or intraday movements. Economic news releases often cause short bursts of activity in financial markets, including volatile moves in currency pairs.

Risk Management

Forex trading involves risks. It's essential to understand these risks before engaging in trading.

For instance, holding short-term currencies may incur interest payments, affecting position values. Additionally, leverage trading can lead to losses exceeding the initial investment due to the dynamic nature of currency markets.

Portfolio Diversification

Forex trading offers opportunities for portfolio diversification. It allows investors to offset losses from stock investments, although it comes with its own risks.

Interest Impact

Lastly, traders should understand the impact of holding currencies on interest rates. Depending on interest rate differentials, holding positions may result in interest income or payments, known as the "net financing rate." Changes in the net financing rate can increase or decrease position values.