Comprehensive Guide: How to Invest in Forex from A to Z

What is Forex? Understanding the Currency Trading Market

The foreign exchange market (Forex/FX) is a decentralized trading space where investors can buy, sell, and exchange different currencies. Contrary to popular belief, forex is not just a single currency, but a system that includes:

Main aspects of forex:

• Traditional foreign currencies (USD, EUR, AUD, JPY, GBP, CHF, CAD, NZD)
• International payment tools (bank cards, checks, bills of exchange)
• International certificates (bonds, stocks of international companies)
• Digital assets like Bitcoin, Ethereum
• Precious metals such as gold

In modern trading context, when talking about forex investment, it usually refers to participating in the currency trading market to capitalize on exchange rate fluctuations for profit. Daily, the forex market records an average trading volume of 5.3 trillion USD – a figure many times larger than global stock or real estate markets.

How Trading Works: What Will You Buy and Sell in the Forex Market?

On the forex platform, the main traded commodity is currency, organized into pairs. The most common example is EUR/USD – the Euro of the European Union versus the US dollar.

Two basic components of a currency pair:

1. Base currency (Price quote currency) – The first currency, representing its value relative to the second. For example, if EUR/USD = 1.1500, it means 1 EUR = 1.1500 USD.

2. Quote currency (Pricing currency) – The second currency, also called the counter currency or pip currency.

Main currency pairs:

Although over 30 major currencies are traded, only a few pairs account for about 85% of the market value. The main pairs include: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD.

How Forex Investment Works – Real Example

To better understand how forex investment works, consider a specific example:

Suppose you predict that the EUR/USD pair will increase in the near future. You place a buy order for 10,000 EUR at an exchange rate of 1.1500, using 11,500 USD. Two weeks later, the rate rises to 1.2500, and you decide to close the position, earning 12,500 USD. Result: a profit of 1,000 USD.

However, notably, you do not need to have the full 11,500 USD in your account. Through leverage (leverage), a reputable broker can support ratios up to 200:1. This means you only need to deposit about 60 USD as margin to open the trade.

Trade summary table:

Advantages of the Forex Market Compared to Other Investment Channels

Very Low Trading Fees

Unlike traditional investment channels with high management or brokerage fees, forex trading only involves the spread – the small difference between buy and sell prices. This is the sole income for brokers.

Market Operates 24/7

Unlike stocks or real estate with fixed hours, forex operates continuously from Monday to Friday worldwide. You can trade at any time that suits your schedule.

No One Can Manipulate the Market

With enormous scale and diverse participation from hundreds of thousands of traders worldwide, even central banks find it difficult to control the entire forex market.

Leverage Power

Leverage tools allow you to control amounts hundreds of times your initial margin. However, note that leverage is a double-edged sword – high profits come with high risks.

Low Entry Barriers

You can start with just a few hundred thousand VND as margin, which most other investment channels cannot compare with.

How to Invest in Forex – 9 Detailed Steps for Beginners

Step 1: Master 8 Basic Concepts

Before trading, you need to understand essential terms:

Long (Buy): Expect the price to rise. You buy an asset hoping to sell it later at a higher price. Profits increase with each upward movement.

Short (Sell short): Expect the price to fall. You sell an asset you do not own, hoping to buy back at a lower price. Profits increase with each downward movement.

Leverage (Leverage): A financial support ratio that allows you to trade larger amounts than your actual capital. For example, with 50:1 leverage, you have 1,000 USD but can trade 50,000 USD.

Margin (Margin): The amount you deposit with the broker to open a position. It is collateral, not the entire trade amount.

Pip (Point): The smallest unit of price movement, usually 0.0001. If EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.

Spread (Difference): The difference between the bid price (bid) and ask price (ask). It’s the broker’s profit, measured in pips.

Lot (Lot): The volume of currency you buy or sell. Sizes include: Nano (100 units), Micro (1,000 units), Mini (10,000 units), Standard (100,000 units).

Slippage (Slippage): The phenomenon where the executed price differs from the expected price due to rapid market movements.

Step 2: Learn About Types of Forex Markets

Spot Forex Market – Immediate Exchange Market Trading at agreed prices, settlement occurs immediately or within 2 business days. Mainly participated by banks and financial institutions. In Vietnam, this market type is prohibited.

Forex CFD – Contract for Difference An agreement between two parties on the price difference of an asset (foreign currency, index, stock). CFD allows speculation without owning the underlying asset. In Vietnam, 99% of forex brokers operate under this model, but you should choose licensed brokers from international regulators (ASIC, FCA, CySEC) for protection.

Currency Futures – Futures Contracts Agreements to exchange two currencies on a specific future date at a predetermined price. Not common in Vietnam.

Currency Options – FX Options Tools that give the right, but not obligation, to buy or sell an asset at a certain price at expiration. If correct, you profit; if wrong, you lose. Not very common in Vietnam.

Currency ETFs – Exchange-Traded Funds Funds tracking the relative value of a currency against USD or other currencies. Also not popular in Vietnam.

Step 3: Choose a Reputable Broker

Criteria for selecting a forex broker:

• Reputation: Licensed by international authorities (ASIC, FCA, CySEC)
• Trading Fees: Low spread, reasonable commissions
• Products: Diverse currency pairs, indices, commodities
• Platform: User-friendly interface, comprehensive analysis tools
• Support: Professional customer service
• Conditions: Suitable leverage, reasonable margin requirements

Step 4: Open a Trading Account

Typical registration process:

• Fill in personal information on the registration form
• Provide ID/passport (both sides), email, phone number
• Verify address and bank account
• Complete risk tolerance survey

Step 5: Determine Which Currency Pair to Trade

When choosing currency pairs, consider:

Economic Forecast: If you believe the US economy will weaken, USD may depreciate. You can sell USD to buy the currency of a stronger economy.

Trade Position: Countries with high export advantages will have stronger currencies. For example, if Australia exports many precious goods, AUD tends to appreciate.

Political Situation: Stable politics or strict monetary policies can increase currency value.

Step 6: Decide on Margin Amount

General rule: invest only about 2% of your capital in any currency pair. For example, to trade 100,000 USD with a 1% margin requirement, you need to deposit 1,000 USD. Profit/loss will be added or deducted from this amount.

Step 7: Decide to Buy or Sell

Once you have selected the currency pair and current rate:

BUY (Long): If you believe the base currency will strengthen against the quote currency

• Profit increases with upward movements
• Loss increases with downward movements

SELL (Short): If you believe the base currency will weaken against the quote currency

• Profit increases with downward movements
• Loss increases with upward movements

Step 8: Add Risk Management Orders

Orders are automatic instructions to execute trades when prices reach your set levels. Two most important orders:

Stop Loss (Stop-Loss): Closes the trade when the price drops below a certain level, minimizing losses.

Take Profit (Take-Profit): Closes the trade when the price reaches your target profit level.

Example: EUR/USD is at 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, and you gain profit.

Step 9: Monitor Positions and Adjust Strategies

Avoid emotional trading during market fluctuations. Continue observing data, stick to your strategy, and do not over-leverage. Patience and discipline are keys to long-term success.

Factors Affecting the Forex Market

Central Banks

Monetary policy measures like quantitative easing (injecting money into the economy) can depreciate a currency. Conversely, tightening policies can appreciate it.

Financial News

Investors tend to put capital into economies with strong prospects. Good economic news increases demand for that country’s currency, raising its value if supply remains unchanged.

Market Sentiment

If most traders believe a currency will move in a certain direction, they will trade accordingly, convincing others to follow suit. This significantly impacts demand and currency prices.

Regulations and Market Oversight

Although enormous, the forex market has limited regulation because no single authority controls it 24/7. However, many countries have agencies overseeing domestic forex providers:

• USA: CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association)
• UK: FCA (Financial Conduct Authority)
• Australia: ASIC (Australian Securities and Investments Commission)
• Cyprus: CySEC (Cyprus Securities and Exchange Commission)

Market Size and Participants

Daily Trading Volume: About 5 trillion USD traded globally each day, roughly 220 billion USD per hour.

Market Composition:

• Central banks and governments
• Major banks
• Investment funds and insurance companies
• Import-export companies
• Individual investors and forex brokers

Trading Statistics: Retail traders account for nearly one-third of daily trading volume. With a scale of 5 trillion USD/day, this means about 1.7 trillion USD is traded by retail investors via forex platforms.

Conclusion

Now you understand how to invest in forex, from basic concepts to detailed step-by-step procedures. The forex market is the largest financial investment channel worldwide, with outstanding advantages: low entry costs, 24/7 operation, no manipulation, and high profit opportunities.

However, remember that forex also involves significant risks, especially when using leverage. Start small, keep learning, build disciplined trading habits, and never invest money you cannot afford to lose. With proper preparation and strategic planning, forex can become an effective investment channel in your portfolio.