Discover the Foreign Exchange Investment Market: From Theory to Trading Practice

What Is Foreign Exchange (Forex) and Why Is It Important?

Every country has its own monetary system issued by the government’s monetary authorities. Currency is considered an indicator reflecting the economic strength of a nation. Foreign exchange refers to these currencies when used outside their territory, especially international currencies such as the US dollar, euro, British pound, or Japanese yen.

People need foreign currency for practical purposes: paying for international goods and services, traveling abroad, business trips, or studying. From these needs, a group of investors see opportunities to profit through exchange rate differences. Additionally, holding foreign currency helps protect assets against concerns of domestic inflation.

In each foreign exchange transaction, we always encounter a currency pair like USD/VND, EUR/JPY, or GBP/USD. The fluctuations of these pairs create profit opportunities for investors.

Types of Foreign Exchange Transactions

Spot Trading

This is the most common form encountered daily by people. When needing foreign currency for travel or business, you can go to commercial banks or authorized foreign exchange businesses to trade. The process is simple, but the exchange rates are often not very competitive.

For import-export businesses with frequent and large foreign currency needs, other forms are provided:

• Currency Conversion: Exchanging one currency for another at an agreed rate at the time of transaction
• Foreign Exchange Swap: Buying foreign currency today and selling the same amount at a future date at a pre-determined rate

Professional Foreign Exchange Investment Tools

(Spot Forex Market): Buying and selling foreign currencies at an agreed price with immediate settlement or within 2 business days. This is the most basic trading method.

(CFD (Contract for Difference)): A tool allowing investors to predict price movements without owning the actual foreign currency. Notably, you can profit even when the exchange rate declines.

Futures Contracts: Agreements to exchange two currencies on a specific future date at a price set today.

Foreign Exchange Options: Risk management tools for import-export businesses. Investors have the (right but not obligation) to buy or sell a certain amount of foreign currency at an agreed rate within a specified period.

Currency Index Funds (ETF): Funds managing investment portfolios tracking the relative value of one or a basket of currencies against the US dollar. This is a good choice for investors seeking to minimize risk.

Foreign Exchange Market Situation in Vietnam

Vietnam’s foreign exchange market has a history of about half a century, starting when Vietnam opened up to international trade. Initially, only commercial banks were allowed to participate, and they had to strictly follow regulations from the State Bank of Vietnam because foreign exchange is a crucial tool for government economic management.

A decade ago, the market was mainly dominated by state-owned banks like Vietcombank. However, recent development of private banking sectors has created a vibrant interbank foreign exchange market. Banks are required to trade with each other to ensure foreign currency supply for customers and comply with foreign exchange regulations.

The emergence of private foreign exchange businesses has significantly improved the exchange rate landscape compared to traditional banks. Recently, digital technology applications have opened unprecedented opportunities for small investors to access the international foreign exchange market, thereby expanding the scope of foreign currency investment.

Laws and Regulations on Foreign Exchange Transactions in Vietnam

Vietnamese residents have the right to buy and carry foreign currency abroad according to regulations of the State Bank of Vietnam. Permissible purposes include:

• Studying abroad, medical treatment, business trips abroad
• Tourism and visiting family
• Paying international fees and charges
• Financial support for relatives abroad
• Transferring inheritance to beneficiaries abroad
• Resettlement or transferring money for other legitimate needs

For other purposes, individuals must be confirmed by a bank. Each bank has a support department to guide customers and requires proof of the legitimacy of the purpose.

Selling foreign currency to banks is free, but buying foreign currency from individuals or businesses is only permitted through banks, credit institutions, authorized foreign exchange businesses registered and licensed by the State Bank of Vietnam.

Practical Guide: Stepping Into the World of Foreign Exchange Investment

( Step 1: Assess Your Risk Tolerance

Before engaging in any transaction, you must clearly determine your risk level. Remember that all investment forms carry risks. Setting a risk limit is key to protecting your investment capital.

) Step 2: Open a Trading Account

Choose a reputable foreign exchange trading platform. The registration process is usually very simple, requiring basic personal information via an online form. Many platforms support registration via email, phone number, or social media accounts.

Step 3: Deposit Margin

To start trading, you need to deposit money into your account, called margin capital. Most service providers allow trading with leverage ###financial leverage###. For example, with a 1% margin, you can trade with an account value 100 times larger, helping you start with a small capital. However, note that margin can also amplify your losses.

( Step 4: Choose Currency Pairs to Trade

The next step is selecting currency pairs based on your analysis. To make informed decisions, focus on three main factors:

Interest Rate Differential: Central banks control interest rates, influencing inflation and exchange rates. An economy with higher interest rates attracts foreign capital, increasing the currency’s value. However, if domestic inflation is also high, the effect may be offset.

Inflation Differential: Countries maintaining low inflation will have stronger currencies due to higher relative purchasing power. History shows Japan, Germany, Switzerland have low inflation, while countries with high inflation often see their currencies depreciate.

Political Stability and Economic Health: Investors prefer countries with stable politics and strong economies. Political instability erodes confidence and causes investors to withdraw capital to safer countries.

Major currency pairs include: USD )US Dollar###, EUR (Euro), GBP (British Pound), AUD (Australian Dollar), JPY (Yen), NZD (New Zealand Dollar), CHF (Swiss Franc), CAD (Canadian Dollar).

( Step 5: Choose the Appropriate Trading Tool

After analysis, select the suitable investment tool. If you predict a currency will depreciate, instead of buying directly, you can use CFDs to profit from the downward trend without owning the actual foreign currency.

) Step 6: Continuous Monitoring and Risk Management

Foreign exchange rates change every minute, making it one of the most immediate risks. Foreign exchange investment is a long-term journey requiring seriousness, strategic adherence, and tight risk control. Updating market information, mastering basic knowledge, and reacting quickly to changes are essential skills.

Conclusion

The foreign exchange market has existed for centuries worldwide, initially serving trade needs between countries. Today, it has evolved into a complex ecosystem with diverse products and services. Modern financial technology has democratized market access, allowing small investors to participate in foreign exchange trading. With knowledge, risk management skills, and perseverance, you can become a wise investor, seize opportunities, and limit losses.