With the increasingly widespread use of the internet, foreign currency trading has never been more accessible to investors. The participation of large international corporations, hedge funds and banks makes the foreign currency (Forex) market the most highly traded and most liquid market in the world. The Forex market is open 24 hours a day, 5 days a week, with more than $1.4 trillion dollars changing hands every day.

This tremendous liquidity together with the availability of different currency pairs can result in a high level of volatility on a day-to-day basis. Forex markets are also highly affected by financial news releases which are relatively frequent and can bring about huge swings in the value of a currency. These fluctuations in price give traders opportunity to profit. Forex markets offer investors the ability to profit in both rising and falling markets. With a wide range of instruments to trade and highly leveraged trading, it is possible to begin trading Forex with a very small account.

Most of the instruments traded on the Forex market have a minimum trade size, calculated on the base currency, a common minimum trade size is 100,000 units, for this reason the use of leverage is essential for traders. Many Forex brokers offer mini accounts, where traders are able to place trades with a minimum size of 10,000 units.

Currencies are always priced in pairs, with each trade resulting in the purchase of one currency and the sale of another. If the currency you are buying increases in value relative to the currency you are selling, you will make money. The first currency in a pair is the base currency and the second is the counter or quote currency.

Forex quotes include two prices, a bid and an ask price. The bid price is the price at which you can sell the base currency in exchange for the counter currency. The ask price is the price at which you can buy the base currency in exchange for the counter currency. There is always a gap between the two prices, referred to as the spread. You can calculate the spread by looking at the last two numbers in the bid and ask prices, for example if the prices are 1.8967 / 1.8971, the spread is 4 pips, so the trade would need to move in your favor by 4 pips for you to break-even.

Margin in Forex is a deposit taken from the trader’s account to cover any future trading losses. The margin required is calculated automatically by your Forex broker before the trade is placed. Your Forex broker will generally close all positions held if the trade turns against you and your trading losses are close to emptying your account.

If you hold a currency pair overnight, you will be charged or paid the difference between the two interest rates of the currencies you are holding. Your interest will be calculated each day as part of the rollover process. If you don’t hold a position overnight you will not pay or receive any interest.

Trading in Forex can be quite similar to trading other instruments but does require a slightly different way of thinking. The best way to learn how it all works is to open a currency trading demo account and start experimenting with placing trades. The high level of leverage available to Forex traders can bring great opportunities but also has the potential to bring significant risk. Before trading with any real money traders need to have a money management plan to ensure the decisions they make are appropriate for their account balance.