What Is the Forex Foreign Exchange Market? A Detailed Guide for New Investors in 2025

What is Forex - Basic Definitions

In recent years, foreign exchange trading has become a popular investment choice in Vietnam. However, many people still have misconceptions about this concept.

Forex (Forex or FX) is not just about currency. Broadly defined, forex can include:

• Foreign currencies: USD, EUR, AUD, JPY…
• International payment instruments: bank cards, bills of exchange, checks
• International certificates: bonds, foreign company stocks
• Digital assets: Bitcoin, Ethereum
• Gold and precious metals: recognized as forex
• Domestic currency in international transactions: such as CNY used in African countries

In the trading context, forex refers to a decentralized market where participants can buy, sell, and exchange different currencies for various purposes: import-export, risk hedging, or speculation for profit.

Currently, the average trading volume on the forex market reaches $5.3 trillion per day, making it the largest financial market globally, far surpassing stock or bond markets.

Features of Forex Trading

Trading Commodities - Currency Pairs

Unlike stock markets that buy and sell individual shares, forex operates through currency pairs. For example: EUR/USD is a currency pair of Euro (EU) and US dollar (USD).

Because exchange rates fluctuate continuously based on economic, geopolitical, and market sentiment factors, this creates endless trading opportunities.

Basic Concept of Exchange Rate

Base Currency (Yết Giá Đồng): The currency listed first in the pair, representing the base value.

• Example: EUR/USD = 1.1500 means 1 EUR = 1.1500 USD

Quote Currency (Đồng Định Giá): The currency listed second, used to quote the exchange rate.

Major Currency Pairs

Although over 30 currencies are traded, the main pairs account for 85% of the market value:

How It Works - From Prediction to Profit

Profit-Making Principles

Forex trading is based on a simple principle: predict the direction of exchange rate movements, then buy or sell to profit from the difference.

If you believe EUR/USD will rise, you buy (called Long). If you predict the opposite, you sell (called Short).

Illustrative Example

You use $11,500 to buy 10,000 EUR at an exchange rate of 1.1500. Two weeks later, the rate rises to 1.2500, and you sell 10,000 EUR, receiving $12,500. Profit: $1,000.

However, the trading platform offers a leverage (leverage) tool that allows you to margin only $60 (with 200x leverage) to execute this trade. This is an advantage but also a double-edged risk.

Other Assets on Forex Platforms

Besides basic forex, modern platforms also offer: stock indices, commodities, gold, cryptocurrencies.

Essential Terms You Need to Know

Long (Buy): Predicts price increase, buy to sell higher.

Short (Sell): Predicts price decrease, sell first then buy later to profit from the difference.

Leverage (Leverage): A tool that allows trading larger amounts than your current capital. For example: 50:1, 100:1, 500:1 leverage.

Margin (Margin): The amount required to be kept in the account to maintain the trade.

Pip (Point): The smallest change in the exchange rate, calculated to the thousandth. EUR/USD changing from 1.2000 → 1.2005 equals 5 pips.

Spread (Spread): The difference between the bid price (bid) and ask price (ask), measured in pips. This is the main income source for brokers.

Lot (Lot): The trading unit—Nano (100 units), Micro (1,000), Mini (10,000), Standard (100,000).

Different Types of Forex Markets

Spot Forex Market

Trading at agreed prices, settlement immediately or within 2 business days. In Vietnam, this type is prohibited.

Forex CFD (Contract For Difference)

A contract that pays the difference between two sides, without owning the actual asset. Accounts for 99% of forex trading in Vietnam. Not banned but it’s recommended to choose platforms with international licenses (ASIC, FCA, CySEC) for safety.

Currency Futures

Futures contracts to exchange currencies on a predetermined date at a fixed price. Less common in Vietnam.

Currency Options (FX Options)

Allow predicting whether the price will rise or fall relative to a fixed level. Correct predictions earn profit, wrong predictions result in loss.

Currency ETFs

Funds tracking the relative value of a currency against USD or a basket of currencies. Not popular in Vietnam.

Advantages of Forex Trading

Very Low Costs

No management fees, brokerage fees, or income taxes. Brokers only earn from the spread—the small difference between buy and sell prices.

24/7 Market

Operates continuously worldwide, suitable for those who want to trade outside working hours. You can trade in the morning, afternoon, evening, or even while sleeping.

No One Can Manipulate

With a daily volume of $5 trillion and countless participants (governments, banks, companies, retail investors), no entity—even central banks—can control the market.

Leverage Power

Small margin but can generate profits hundreds of times larger. For example: a $60 margin can control $12,000 with 200x leverage. But leverage also amplifies losses.

Low Entry Barriers

Starting with just a few hundred thousand VND is enough. Other markets like stocks, real estate, or precious commodities require much higher initial capital.

How to Start Forex Trading - 9 Essential Steps

Step 1: Master 8 Fundamental Concepts

Before trading, you need to be proficient in terms: Long, Short, Leverage, Margin, Pip, Spread, Lot, CFD. Understanding these helps you place orders accurately and manage risks effectively.

Step 2: Learn About Trading Models

There are 5 main forex markets: Spot Forex (prohibited in Vietnam), Forex CFD (allowed with international licenses), Futures, Options, ETFs. In Vietnam, you mainly trade via CFDs.

Step 3: Choose a Reputable Broker

Criteria: international license (mandatory), low spread, low commissions, diverse products, user-friendly platform. Compare options before deciding.

Step 4: Open an Account

Provide basic info: ID card (front and back), email, phone number, bank account. Identity verification usually takes a few hours to a few days.

Step 5: Select Currency Pairs to Trade

Analyze factors:

• Economic situation: Weak economy causes currency depreciation, strong economy causes appreciation.
• Trade balance: Export-heavy countries tend to have stronger currencies.
• Political situation: Elections, interest rate policies greatly influence currency prices.

Step 6: Determine Margin Amount

If you want to trade $100,000 with 1% margin, you need $1,000 margin. A safe rule: invest only 2% of your account in one currency pair.

Step 7: Decide to Buy or Sell

• Buy: if you believe the quote will strengthen. Profit increases as the rate rises, loss as it falls.
• Sell: if you believe the quote will weaken. Profit increases as the rate falls, loss as it rises.

Step 8: Set Risk Management Orders

Use two main types:

• Stop Loss: close the trade at a lower price to minimize loss.
• Take Profit: close at a higher price to lock in target profit.

Example: EUR/USD is currently 1.11128, you predict it will rise to 1.2000 then fall. Set a Take Profit sell order at 1.2000; when the price hits this level, the order executes automatically.

( Step 9: Monitor and Adjust Forex markets fluctuate constantly. Avoid emotional trading—stick to your strategy, keep learning, and believe that profits come from discipline and perseverance.

Factors Affecting the Forex Market

) Central Banks Control money supply through policies like quantitative easing ###QE### or tightening monetary policy. These policies directly impact currency value.

( News and Economic Data Investors tend to pour capital into economies with good prospects. Positive economic news encourages demand for the currency, increasing its value.

) Market Sentiment When traders believe a currency will move in a certain direction, they trade accordingly. This consensus can persuade others to follow, amplifying volatility.

Regulatory and Oversight Framework

The forex market is enormous but has limited regulation due to the lack of a supervising agency 24/7. Instead, domestic organizations oversee and require providers to comply with standards:

• USA: CFTC ###Commodity Futures Trading Commission### and NFA (National Futures Association)
• Europe: FCA, CySEC
• Asia-Pacific: ASIC

Choose brokers licensed by these authorities to protect your interests.

Daily Trading Volume

The forex market handles about $5 trillion per day, equivalent to $220 billion per hour. The main participants include:

• Major financial institutions (50%)
• Multinational corporations (15%)
• Governments and banks (10%)
• Retail investors (25%)

Notably: Speculators account for 90% of trading volume, mainly focusing on USD, EUR, JPY.

Forex Market Participants

1. Governments and Central Banks: Manage national money supply
2. Large Banks: Conduct large-volume trades
3. Forex Brokers: Provide trading platforms for investors
4. Retail Investors: Make up nearly 1/3 of trading volume with a total value of $1.7 trillion per day

Conclusion

The forex market offers attractive investment opportunities with low entry costs, operates 24/7, is uncontrollable by any single entity, and has high profit potential. However, forex is a double-edged tool—profits and losses can be equally large.

To succeed, you need to:

• Understand basic concepts thoroughly
• Choose reputable brokers
• Manage risks carefully (Stop Loss, Take Profit)
• Continuously learn and update your knowledge
• Stick to your strategy, avoid emotional decisions

With this knowledge, you are ready to step into the world of forex trading with confidence, and your chances of success will be closer.