Comprehensive Guide: What Is Forex Trading and How to Get Started for Beginners

Basic Concepts of Forex Trading

What Is Forex?

In recent years, the foreign exchange market in Vietnam has become an attractive investment field, drawing the attention of tens of thousands of investors. However, many people still do not fully understand what forex trading is, leading to unnecessary misconceptions.

According to the definition, forex (Forex or FX) can refer to:

● Foreign currencies: International currencies such as USD, EUR, AUD
● International payment tools: International bank cards, bills of exchange, money transfer checks
● International certificates: Government bonds, international company stocks
● Digital assets: Bitcoin, Ethereum, and other cryptocurrencies
● Precious metals: Gold and other metals

Generally, when mentioning forex trading, people refer to a decentralized trading market where investors can buy and sell these currencies for various purposes—from international trade to risk hedging.

How Does Forex Trading Work?

Forex trading involves buying and selling currencies. Each investor’s purpose for participating may differ:

• Financial institutions: Maintain foreign currency reserves, support the national economy
• Individual investors: Exploit exchange rate fluctuations to earn profits

The forex market is vibrant, with an average daily trading volume of 5.3 trillion USD. This scale makes other markets like stocks or bonds seem small in comparison. The continuous volatility of Forex creates countless opportunities to make money through currency pair trading.

What Is Forex Trading: Main Assets

Currency Pairs in the Forex Market

The primary traded asset in the forex market is CURRENCY, traded in pairs. For example: EUR/USD.

The exchange rate between currency pairs constantly changes due to various economic, geopolitical, and market sentiment factors. This volatility opens up continuous trading opportunities for anyone willing to participate.

Two Important Concepts About Exchange Rates

Base Currency (Base 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 can be exchanged for 1.1500 USD.

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

Major Currency Pairs in the Market

Although more than 30 major currencies are traded, a few pairs account for up to 85% of the market value with high liquidity. These are called major currency pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD.

Other Assets on the Trading Platform

Besides Forex, reputable trading platforms also offer other investment assets such as: Stock Indices, Commodities, Gold, Cryptocurrencies (Bitcoin, Ethereum,…) to give investors more options.

Forex Investment: How It Works

Basic Principles

Forex investment involves trading a currency pair and earning profits from exchange rate differences.

Illustrative Example:
You predict EUR/USD will increase in value in the future. You use 11,500 USD to buy 10,000 EUR at an exchange rate of 1.1500. Two weeks later, you sell 10,000 EUR at an exchange rate of 1.2500, earning 12,500 USD. Your profit is 1,000 USD.

Important Note: You can Buy or Sell currency pairs (in a two-way market). If your prediction is opposite, you can short sell (sell first, buy later).

Leverage Tools

A prominent feature of forex trading is leverage (Leverage). You do not need to put up the full amount to trade. For example: With 200x leverage, you only need about 60 USD margin to trade 11,500 USD as in the above example.

Why Invest in Forex?

Competitive Advantages

Very Low Trading Fees
Forex trading eliminates intermediary costs such as asset management fees, brokerage fees, taxes. Brokers only earn from the spread (the difference between buy and sell prices).

24/7 Market Operation
Forex operates worldwide around the clock, allowing you to trade anytime—morning, afternoon, evening, or even while sleeping—ideal for part-time investors.

No Single Authority Controls the Market
The forex market is too large and involves many participants, so no single organization or central bank can monopolize control.

Power of Leverage
You can deposit a small amount of margin but trade large volumes, potentially earning hundreds of times the profit. However, leverage is a double-edged sword—use it carefully.

Low Entry Barriers
You can start with just a few hundred thousand VND in margin, something that stock, commodity, or real estate markets cannot offer.

8 Steps to Start Forex Trading

Step 1: Master 8 Basic Concepts

Before trading, you need to understand the terms and concepts used:

Long (Buy): Buying a currency expecting to sell at a higher price. Profit comes from price increase.

Short (Sell): Short selling a currency expecting it to decrease in value. Profit comes from price decline.

Leverage (Leverage): Trading with a larger volume than your current capital, often expressed as ratios (50:1, 100:1, 500:1).

Margin (Margin): The amount you must deposit with the broker to open and maintain a trade.

Pip (Point): The smallest change in exchange rate, usually to the thousandth. For example: EUR/USD from 1.2000 to 1.2005 = 5 pips.

Spread (Difference): The difference between the bid price (bid) and the ask price (offer), measured in pips. This is the broker’s revenue.

Lot (Lot): The number of currency units you buy/sell. Ranges from nano (100 units) to standard lot (100,000 units).

Slippage: The difference between the expected price and the actual execution price.

Step 2: Understand Types of Forex Markets

Spot Forex Market (Immediate Delivery Market)
Trading at agreed prices, settled immediately or within 2 business days. In Vietnam, this market type is prohibited for individual investors.

Forex CFD (Contract for Difference)
A contract between two parties on the price difference of an asset. Allows speculation on various markets without owning the underlying asset. In Vietnam, 99% of forex brokers operate under this model. Not banned but must choose licensed brokers from international regulators like ASIC, FCA, CySEC for safety.

Currency Futures (Futures Contracts)
Contracts to exchange currencies at a specific future date at a pre-agreed price. Not common in Vietnam.

Currency Options (Options)
Trading tools based on price predictions. If correct, profit; if wrong, loss. Not common in Vietnam.

Currency ETFs (Currency Exchange-Traded Funds)
Funds tracking the relative value of a currency against the US dollar. Not common in Vietnam.

Conclusion: In Vietnam, you can trade Forex via CFDs and should choose reputable brokers with reasonable costs.

Step 3: Choose a Reputable Broker

Criteria for selecting a broker:

• Reputation: Licensed by international regulatory agencies (ASIC, FCA, CySEC)
• Trading costs: Low spread and commissions
• Products: Diverse and suitable for your needs
• Platform: User-friendly interface, good analytical tools
• Customer support: Professional and responsive

Step 4: Open a Trading Account

Required information:

• ID card/Passport (both sides)
• Email and phone number
• Bank account details
• Complete risk assessment survey

Step 5: Decide Which Currency Pair to Trade

After opening an account, select currency pairs and analyze whether the rate will rise or fall. Factors to consider:

Economic Conditions
If the US economy weakens, the USD will be negatively affected. You might sell USD to buy the currency of a stronger economy.

Trade Balance Position
Countries with high export demand will export more, leading to economic growth and currency appreciation.

Political Situation
Political events like elections or interest rate policy changes can directly impact currency prices.

Step 6: Determine Margin Amount

Depending on the broker’s policy. For example: To trade 100,000 USD with 1% margin, you need 1,000 USD margin. General rule: invest only 2% of your capital in a currency pair to control risk.

Step 7: Decide to Buy or Sell

BUY (Long) if you believe the currency will strengthen:

• Profit increases with upward movements
• Loss occurs if the rate drops below entry point

SELL (Short) if you believe the currency will weaken:

• Profit increases with downward movements
• Loss occurs if the rate rises above entry point

Step 8: Use Risk Management Orders

Orders are automatic trading instructions when prices reach certain levels:

Stop Loss (Stop-Loss Order): Close the trade at a lower price to reduce losses.

Take Profit (Take-Profit Order): Close the trade at a higher price to lock in profits.

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

Step 9: Monitor and Adjust

Avoid emotional decisions. Forex markets fluctuate; there will be ups and downs. The key is to continue researching, stick to your strategy, and monitor results. Ultimately, discipline and patience will bring profits.

Factors Affecting the Forex Market

Central Banks

Control the money supply through policies like quantitative easing (QE). These measures significantly influence currency prices.

Financial News

Traders want to invest in countries with good economic prospects. Positive news stimulates the currency of that region, pushing prices up.

Market Sentiment

If traders believe a currency will move in a certain direction, they will trade accordingly and persuade others, affecting demand up or down.

How the Forex Market Is Managed

The forex market is very large but has few regulations because there is no overseeing authority 24/7. Instead, local trading organizations monitor to ensure providers comply with standards. In the US, CFTC and NFA are the main agencies responsible.

Market Size Figures

• Daily trading volume: About 5 trillion USD worldwide
• Average per hour: 220 billion USD
• Participants: Organizations, corporations, governments, and currency speculators
• Speculators: Account for about 90% of trading volume, mostly in USD, EUR, Yen
• Retail investors: Nearly 1/3 of daily trading volume, approximately 1.7 trillion USD

Participants in the Forex Market

Governments and Central Banks
Maintain foreign reserves, support monetary policy.

Large Banks
Provide liquidity, earn profits from spreads.

Forex Brokers
Offer trading platforms for retail investors.

Individual Investors
Trade personally to profit from exchange rate fluctuations.

Conclusion

Now, you understand what forex trading is, how the forex market operates, and the necessary steps to get started. Forex is the largest investment market globally, transparent, with low entry costs, and offers many opportunities for investors from different countries. With basic knowledge, discipline, and good risk management, you can participate effectively in the forex market.