Comprehensive Guide to Forex Trading: From Theory to Practice

What Is Forex? The Basic Things You Need to Know

The foreign exchange market (Forex, FX) has become one of the most recognized investment channels in recent years. However, most new investors often lack a clear understanding of the nature of foreign exchange trading and how it operates.

Forex Concept

Forex can be understood through various definitions:

• Foreign currencies: International currencies such as USD, EUR, AUD
• Payment instruments: International bank cards, bills of exchange, money transfer checks
• International certificates: Government bonds, international company stocks
• Cryptocurrencies: Bitcoin, Ethereum, and other decentralized currencies
• Gold and precious metals
• Domestic currency: When used in international payments

In the context of investment, foreign exchange trading simply involves buying and selling currency pairs to capitalize on exchange rate fluctuations and earn profits.

Market Size And Importance of the Forex Market

The foreign exchange market is the largest financial market globally, with an average daily trading volume of 5.3 trillion USD. This scale is many times larger than the stock market and commodity markets, creating continuous trading opportunities for any investor.

How the Forex Market Works

Currency Pairs And Exchange Rates

Transactions in the Forex market are conducted through currency pairs. A typical example is EUR/USD, where:

• EUR (Euro of the European Union) is the base currency (base currency)
• USD (US dollar) is the quote currency (quote currency)

The EUR/USD exchange rate fluctuates constantly based on various economic, geopolitical, and market sentiment factors. These fluctuations create trading opportunities for investors.

Important Concepts in Forex Trading

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

Quote Currency (Base Currency): The currency on the right side, used to quote the base currency.

Pip (Point): The smallest unit of price movement in exchange rates. If EUR/USD rises from 1.2000 to 1.2005, that is a 5 pip change.

Spread (Bid-Ask Spread): The difference between the bid price (bid) and the ask price (ask), measured in pips. This is how brokers earn their profit.

Leverage (Leverage): Allows investors to trade with more money than they have. For example, with 200:1 leverage, you only need a margin of 1 USD to trade 200 USD.

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

Lot (Lot): The trading unit, which can be nano (100 units), micro (1,000 units), mini (10,000 units), or standard lot (100,000 units).

Main Currency Pairs in the Market

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

Types of Forex Trading Markets

Spot Forex Market (Immediate Settlement Market)

This is the market for spot transactions settled immediately or within 2 business days. Common among banks and financial institutions. In Vietnam, this type of market is not permitted for trading.

Forex CFD (Contract for Difference)

CFD allows investors to trade based on the price difference of an asset without owning it. This is the most popular form in Vietnam, accounting for about 99% of trading platforms. CFD trading is not prohibited, but to ensure safety, you should choose platforms licensed by international regulatory bodies such as ASIC, FCA, CySEC.

Currency Futures (Currency Futures Contracts)

Contracts to exchange currencies at a specific future date at an agreed-upon price. This type is less common in Vietnam.

Currency Options (Currency Options)

Allows investors to predict whether the currency will rise or fall relative to a fixed price at expiration. If correct, you profit; if wrong, you incur losses.

Currency ETFs (Currency Exchange-Traded Funds)

Funds that track the relative value of a currency or a basket of currencies. This approach is less common in Vietnam.

Profit Mechanism in Forex Trading

How to Make Profits from Forex

Long Position (Buy): You buy a currency pair expecting the exchange rate to increase. Profits increase as the rate goes up, losses occur if it goes down.

Short Position (Sell): You short a currency pair expecting the rate to decrease. Profits increase as the rate falls, losses if it rises.

Real Example

Suppose you have 11,500 USD and decide to buy 10,000 Euros at EUR/USD = 1.1500. Two weeks later, when the rate rises to 1.2500, you sell 10,000 Euros and receive 12,500 USD. Your profit is 1,000 USD.

But with leverage (for example 200:1), you only need a margin of about 60 USD to execute this trade, demonstrating the power of Forex trading with leverage.

Advantages of Forex Investment

Very Low Trading Costs

The Forex market eliminates many intermediaries such as asset management fees, brokerage fees, or taxes. Instead, brokers earn profits mainly from the spread (difference between bid and ask prices).

24/7 Global Operation

The Forex market never sleeps, operating continuously from Monday to Sunday. This allows investors to trade at any time according to their schedule.

Market Manipulation Is Impossible

With its enormous scale and the huge number of participants, no organization or authority (including central banks) can control or manipulate the Forex market.

Leverage Power

Investors can deposit a small amount but trade with a much larger sum. However, leverage is a double-edged sword—it can increase profits but also amplify losses.

Low Entry Barriers

You can start trading with just a few hundred thousand VND in margin, which no other market (stocks, real estate) can offer.

Detailed Guide to Starting Forex Trading

Step 1: Understand Basic Concepts

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

Long (Buy): Buying a currency expecting to sell it at a higher price. Profits from market upward movements.

Short (Sell): Short selling a currency expecting it to decrease in value. Profits from downward movements.

Leverage (Leverage): Trading with a larger amount of money than your capital, expressed as ratios like 50:1, 100:1, or 500:1.

Margin (Margin): The amount required to open and maintain positions with the broker.

Pip: The smallest change in the exchange rate of a currency pair, calculated to the thousandth.

Spread: The difference between bid and ask prices, measured in pips.

Lot: The trading size, including nano, micro, mini, or standard lots.

Step 2: Choose a Reputable Broker

Criteria for choosing a broker:

• Trustworthiness: Licensed by international regulatory agencies
• Cost: Low spread and commissions
• Products: Diverse trading instruments
• Platform: User-friendly interface, good analytical tools

Step 3: Open a Trading Account

To open an account, you need to prepare:

• ID card/CCCD (front and back)
• Valid email
• Phone number
• Bank account information

Step 4: Select Currency Pairs to Trade

After opening an account, analyze and choose suitable currency pairs. Factors to consider:

Economic Situation: If a country’s economy is expected to weaken, its currency tends to depreciate. Conversely, a strong economy usually correlates with a strong currency.

Trade Balance: Countries exporting many high-demand goods will receive more foreign currency, increasing demand for their local currency and raising its value.

Political Situation: Political events like elections or new monetary policies also significantly impact the foreign exchange investment market.

Step 5: Determine Margin Amount

The general rule is to invest no more than 2% of your capital in any currency pair. For example, to trade 100,000 USD with a 1% margin requirement, you need a margin of 1,000 USD.

Step 6: Decide to Buy or Sell

BUY (Long): If you believe the quote rate will strengthen relative to the quote currency

• Profit increases with each upward movement of the rate
• Loss occurs with each downward movement

SELL (Short): If you believe the quote rate will weaken

• Profit increases with each downward movement
• Loss occurs with each upward movement

Step 7: Use Risk Management Orders

In the volatile Forex environment, using risk management orders is crucial:

Stop Loss Order (Stop Loss): Automatically closes the position when the price drops to a certain level, limiting losses.

Take Profit Order (Take Profit): Automatically closes the position when the price reaches a target level, locking 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.

Step 8: Monitor and Manage Trades

The most important point is to avoid emotional decision-making. The Forex market is highly volatile, with prices constantly fluctuating. You should:

• Continue researching and updating market information
• Stick to your trading strategy
• Be patient and wait for suitable opportunities
• Objectively monitor profits and losses

Factors Affecting the Forex Market

Central Bank Policies

Money supply is controlled by central banks. Policies like quantitative easing (injecting money into the economy) can cause the currency’s value to decrease.

Financial News

Economic data, company earnings, employment indices, or other economic indicators directly influence investor sentiment and currency demand. Good news often encourages investment in that economy.

Market Sentiment

Investor sentiment, often linked to news, can create large trading waves. If traders believe a currency will move in a certain direction, they will trade accordingly and may influence others, affecting price volatility.

Supply and Demand

Like any market, supply and demand are fundamental factors. The imbalance between currency supply and demand determines exchange rate fluctuations.

Regulations and Oversight of the Forex Market

Although Forex is a huge market, regulation is relatively limited because there is no single overseeing authority operating 24/7. Instead, national and international organizations supervise forex trading within their jurisdictions.

In the United States, two main agencies are responsible:

• CFTC (Commodity Futures Trading Commission)
• NFA (National Futures Association)

Daily Trading Volume in the Forex Market

Every day worldwide, the forex trading volume reaches about 5 trillion USD, with an average of 220 billion USD per hour. The market mainly involves financial institutions, large corporations, governments, and currency speculators.

Approximately 90% of trading volume comes from speculative activities, mostly centered on USD, EUR, and JPY.

Major Participants in the Forex Market

Government and Central Banks: Participate to manage foreign exchange reserves and support economic policies.

Large Banks: Conduct forex transactions for clients and for their own accounts.

Forex Brokers: Provide trading platforms for retail investors.

Retail Investors: Account for nearly one-third of daily trading volume, approximately 1.7 trillion USD daily, executed through forex brokers.

Conclusion

The foreign exchange investment market is one of the largest financial markets worldwide, offering many advantages such as low entry costs, 24/7 operation, no price manipulation, and leverage power. However, it also involves significant risks, especially when using high leverage.

To succeed in Forex trading, investors should:

• Understand basic concepts thoroughly
• Choose reputable, licensed brokers from international regulatory bodies
• Develop clear trading strategies
• Manage risks wisely
• Continue learning and updating market knowledge

With patience, discipline, and proper knowledge, foreign exchange investment can become an effective investment channel and diversify your asset portfolio.

Frequently Asked Questions About Forex Trading

Q1: How much capital do I need to start?

You can start with just a few hundred thousand VND in margin. However, to manage risks effectively, it’s advisable to start with an amount that can withstand initial losses.

Q2: How to choose a safe broker?

Select a broker licensed by international regulatory agencies such as ASIC (Australia), FCA (UK), CySEC (Cyprus). Check their history, user reviews, and investor protection policies.

Q3: Is high leverage good?

High leverage can increase profits but also amplifies risks of losses. For safety, new investors should use leverage from 10:1 to 50:1.

Q4: When is the best time to trade?

The Forex market operates 24/7, but the highest liquidity usually occurs during major trading sessions: London (13:00-21:00 GMT), New York (17:00-01:00 GMT), Tokyo (20:00-04:00 GMT).

Q5: Can I trade from Vietnam?

Yes, you can trade Forex CFD from Vietnam through platforms licensed internationally. Choose brokers licensed by international authorities to ensure your rights.