What is Forex? A step-by-step guide for beginners to start investing in forex

1️⃣ Understanding the Forex Market

Basic Concepts of Forex

In recent years, the international currency market has attracted the attention of tens of thousands of investors in Vietnam. However, many people are still confused due to a lack of comprehensive understanding of this field. So, what is forex trading and how does it operate?

Foreign exchange (Forex or FX) is a decentralized global market where people trade various currencies. Broadly defined, forex can include:

● International currencies: such as USD (US Dollar), EUR (Euro), AUD (Australian Dollar) ● International payment tools: bank cards, money transfer checks, bills of exchange ● International certificates: government bonds, foreign company stocks ● Cryptocurrencies: Bitcoin, Ethereum, and other virtual currencies ● Precious metals: gold is considered an asset in forex ● Local currencies: when used in international transactions

However, when talking about the forex market, people usually refer to a decentralized currency trading place, where traders can buy, sell, or exchange one currency for another for purposes such as import-export, hedging risks, or making profits.

Forex Market Size

The forex market is the largest financial market in the world, with an average daily trading volume of 5.3 trillion USD. This enormous figure makes other markets like stocks or bonds seem small in comparison. Due to its dynamic nature and continuous profit opportunities, forex trading has become a widely chosen investment channel globally.

Purpose of Forex Trading

What is forex investment from a purpose perspective? Forex trading involves buying and selling currencies for various objectives:

• Large financial institutions (central banks, commercial banks) trade to ensure foreign currency supply and support the national economy
• Individual investors participate mainly with a single goal: to exploit exchange rate fluctuations for profit

2️⃣ What You Can Trade on the Forex Market

Trading Asset: Currencies

Unlike other markets, the main commodity traded on Forex is money. These currencies are traded in pairs, such as EUR/USD. In this pair, EUR is the Euro of the European Union, and USD is the US dollar.

Because the exchange rate between EUR and USD constantly fluctuates due to various economic and geopolitical factors, this creates countless trading opportunities for anyone willing to participate and profit.

Two Important Concepts About Exchange Rates

Base currency (Price quote currency): The currency on the left side of the exchange rate pair, representing its value relative to the other currency. For example, if EUR/USD = 1.1500, it means 1 EUR = 1.1500 USD.

Quote currency (Counter currency): The currency on the right side of the pair, also called the counter currency or pip currency.

Major Currency Pairs in Forex Market

Although over 30 currencies are traded, only some pairs account for 85% of market trading value and have extremely high liquidity. These are called major currency pairs:

Other Tradable Assets

Besides Forex, modern trading platforms offer a variety of assets including:

• Stock indices
• Commodities (oil, gas, wheat)
• Gold and silver
• Cryptocurrencies (Bitcoin, Ethereum)

3️⃣ How Forex Investment Works

Profit-Making Principles

What is forex investment at its core? It’s predicting exchange rate changes between two currencies and executing trades to profit from price differences.

The process is as follows: You predict that the EUR/USD pair will increase in value in the future, so you place a buy order. When the rate rises as expected, you sell and realize profit. Conversely, if your prediction is wrong, you can execute a sell order (short selling) by selling first and buying later.

Real Example of a Trade

Suppose you have 11,500 USD and want to trade:

Buy scenario:

• Use 11,500 USD to buy 10,000 EUR at EUR/USD = 1.1500
• Two weeks later, sell 10,000 EUR at EUR/USD = 1.2500, receiving 12,500 USD
• Profit: 1,000 USD

Leverage Tool (Leverage)

A special feature of the forex market is leverage (Leverage), allowing you to trade with a much larger amount than your actual capital. For example:

Instead of investing 11,500 USD, with 200:1 leverage, you only need to deposit about 60 USD as margin to execute the trade. This means your profit can be 100-200 times your margin.

Note: Leverage is a double-edged sword. It can help you make a lot of money but can also cause rapid losses if misused.

4️⃣ Why Trade Forex?

There are many reasons why forex trading has become a popular choice today compared to other investment tools:

★ Extremely Low Trading Costs

The forex market has no management fees, brokerage fees, or other intermediary costs. Brokers earn profit from spread (s the difference between bid and ask prices), which is a very small margin.

★ Open 24/7

Unlike stocks or traditional markets, Forex operates around the clock worldwide. You can participate anytime — morning, noon, evening, night, or even while sleeping. This is perfect for those who want to treat forex as a side job.

★ Market Cannot Be Manipulated

Due to its enormous size with daily trading volume of thousands of billions USD, no organization, authority, or even central bank can control or manipulate the forex market. This protects traders’ interests.

★ Power of Leverage

With a small deposit, you can trade large amounts of currency. This allows you to exploit small fluctuations in exchange rates to earn significant profits.

★ Very Low Entry Barriers

Unlike stocks, real estate, or other markets, you can start trading forex with just a few hundred thousand VND as margin. This makes forex more accessible, especially for new investors.

5️⃣ 9-Step Guide to Starting Forex Trading for Beginners

Forex trading is not as difficult as you think. Here is a detailed process to begin your forex journey:

Step 1: Master Basic Concepts

Before starting, you need to understand the specialized terms used in forex trading:

● Long (Buy): When you buy a currency expecting it to appreciate, you profit from the increase.

● Short (Sell short): When you predict a currency will depreciate, you sell first and buy later to profit from the difference.

● Leverage (Leverage): Allows trading with more money than your actual capital. For example, 50:1, 100:1, or 500:1.

● Margin (Margin): The amount you must deposit into your account to allow the broker to open a position. The broker automatically locks this amount to ensure you can cover potential losses.

● Pip: The smallest unit of exchange rate movement. If EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.

● Spread: The difference between bid and ask prices, measured in pips. This is the broker’s profit source.

● Lot: The trading volume unit. Ranges from nano (100 units), micro (1,000 units), mini (10,000 units), to standard lot (100,000 units).

( Step 2: Learn About Types of Forex Trading

There are various ways to trade forex:

● Spot Forex Market: Immediate currency exchange, with settlement on the same or next business day. In Vietnam, this form is prohibited.

● Forex CFD: Contract for difference between two parties on the price change of an asset )foreign currency, index, stock(. This allows speculation on different markets without owning the actual asset. In Vietnam, 99% of forex brokers operate under this model and are not banned, but you should choose brokers licensed by international authorities )such as ASIC, FCA, CySEC### for safety.

● Currency Futures: Futures contracts to exchange currencies at a predetermined price on a future date.

● Currency Options: Rights to buy or sell at a fixed price at expiration.

● Currency ETFs: Exchange-traded funds tracking the relative value of a currency against the US dollar.

( Step 3: Choose a Reputable Trading Platform

When selecting a broker, consider:

• Reputation: Licensed by international regulatory bodies
• Costs: Low trading fees, competitive commissions
• Products: Wide range of currencies and assets
• Trading Platform: User-friendly, stable, with analytical tools

) Step 4: Open a Trading Account

To open an account, you need to provide:

• ID card (both sides)
• Email and phone number
• Bank account

The process usually takes a few minutes to a few hours for verification.

Step 5: Choose Currency Pairs to Trade

After opening an account, analyze and decide which currency pairs to trade. Some factors to consider:

⭐ Economic Situation: If a country’s economy weakens, its currency may depreciate. Conversely, a strong economy usually leads to a stronger currency.

⭐ Trade Balance: If a country exports more, it will receive more foreign currency, increasing its currency’s value.

⭐ Political Situation: Political changes, elections, or new policies can significantly impact currency prices.

Step 6: Determine Margin

Depending on the broker’s policy, you can deposit a small amount but trade large volumes. For example, if you want to trade 100,000 USD with a 1% margin requirement, you only need to deposit 1,000 USD.

Golden Rule: Only invest a maximum of 2% of your capital in a single trade to manage risk effectively.

( Step 7: Decide to Buy or Sell

Once you’ve selected a currency pair, decide your trading direction:

BUY the currency pair if:

• You believe the base currency will strengthen against the quote currency
• Profit increases with each upward movement of the rate
• Loss occurs if the rate drops below your entry point

SELL the currency pair if:

• You believe the base currency will weaken against the quote currency
• Profit increases with each downward movement
• Loss occurs if the rate rises above your entry point

) Step 8: Set Risk Management Orders

Orders are automatic instructions for the broker to close your position when the price reaches a certain level. The two most important orders are:

● Stop Loss ###Stop-loss order###: Closes the trade when the price drops below a set level, limiting losses.

● Take Profit ###Take-profit order###: Closes the trade when the price rises to a certain level, locking in profits.

Example: EUR/USD is currently 1.11128, and you predict it will rise to 1.2000. You set a sell limit order at 1.2000. When the price hits this level, the order executes automatically, and you realize profit.

( Step 9: Monitor and Adjust

The forex market is highly volatile, so:

• Avoid emotional reactions to price fluctuations
• Continue researching and stick to your strategy
• Periodically review profits and losses
• Learn from each trade to improve skills

6️⃣ Factors Affecting the Forex Market

) Central Banks

Central banks control the money supply in the economy. Policies like quantitative easing (injecting money into the economy) can weaken the currency, while tightening monetary policy ###raising interest rates### can strengthen it.

( Economic News

Banks and investors tend to invest in economies with strong prospects. When a country releases positive economic news, demand for its currency increases, causing its value to rise.

) Market Sentiment

If many traders believe a currency will move in a certain direction, they will trade accordingly, potentially convincing others to follow and changing supply and demand.

( Geopolitical Events

Elections, international conflicts, or major political decisions can cause significant volatility in the currency markets.

7️⃣ Common Questions About Forex Investment

) How is the Forex Market Regulated?

Although the forex market is enormous, it has limited regulation because there is no single authority overseeing it 24/7. Instead, each country has its own organizations supervising the domestic forex market. In the US, the main agencies are:

• CFTC ###Commodity Futures Trading Commission###
• NFA ###National Futures Association###

( How Much Money Is Traded Daily?

Every day, the forex market processes about 5 trillion USD in trading volume, averaging 220 billion USD per hour. Most of this volume comes from large organizations, corporations, and governments. Speculation accounts for about 90%, mainly involving USD, EUR, and JPY.

) Who Participates in the Forex Market?

Participants include:

• Governments and central banks: Managing money supply
• Major banks: Trading large volumes
• Multinational companies: Managing international currencies
• Forex brokers: Providing services to investors
• Retail investors: Account for nearly ⅓ of daily trading volume

With a total of 5 trillion USD traded daily, retail investors trade approximately 1.7 trillion USD through forex platforms.

Conclusion

What is forex investment? - It’s an opportunity to participate in the world’s largest financial market, exploiting exchange rate fluctuations to earn profits. Forex stands out for its low entry costs, 24/7 operation, resistance to manipulation, and continuous earning opportunities for those who know how to manage risks.

However, remember that forex is a powerful trading tool but also involves risks. Before starting, you should:

• Study the market thoroughly
• Understand risk management
• Only trade with money you can afford to lose
• Choose licensed and reputable brokers
• Develop a clear trading strategy

With these basic knowledge, you are ready to step into the world of forex trading. Start small, keep learning, and gradually build your skills to become a successful trader.