Overview of Forex Trading and How to Start Your Journey

What Is Forex Foreign Exchange? Basic Concepts

In recent years, the foreign exchange trading sector has become one of the most attractive financial markets in Vietnam. Tens of thousands of investors participate in this market daily, but many still misunderstand what the concept of foreign exchange is.

Forex (Forex or FX) is not just a type of currency. According to Wikipedia, foreign exchange can include:

• Foreign currencies: USD, EUR, AUD, GBP, JPY…
• International payment tools: International bank cards, checks, bills of exchange
• International securities: Government bonds, multinational company stocks
• Cryptocurrencies: Bitcoin, Ethereum, and other digital currencies
• Precious metals: Gold is also considered a form of foreign exchange

In the context of the modern financial market, when people mention the foreign exchange trading market Forex, they mainly refer to a decentralized platform where participants can buy, sell, and exchange currency pairs with each other, serving purposes from import-export, hedging risks to speculation for profit.

How Does Forex Trading Happen?

Forex trading is the activity of buying and exchanging different currencies. The purpose of each market participant can vary. Central banks participate to maintain national currency stability, while individual investors mainly aim to: capitalize on exchange rate fluctuations to generate profits.

The Forex market is one of the most dynamic markets in the world, with an average daily trading volume of about 5.3 trillion USD. This enormous scale makes other markets like stocks or bonds seem small in comparison. Due to the continuous volatility of exchange rates, the Forex market creates endless opportunities to make money when buying and selling currency pairs.

Assets You Can Trade on the Forex Market

Currencies Traded in Pairs

The main commodity in the foreign exchange market is CURRENCY, and they are always traded in pairs. For example: EUR/USD.

In this pair, EUR is the Euro of the EU bloc, USD is the US dollar. Because the exchange rate between these two currencies fluctuates constantly under the influence of many economic and geopolitical factors, this creates continuous trading opportunities for anyone willing to participate.

The Two Basic Components of Exchange Rates

Base Currency (Quote Currency): The currency unit on the left of the currency pair, representing its value relative to the other currency.

For example: If the EUR/USD pair is 1.1500, it means 1 EUR = 1.1500 USD.

Quote Currency (Counter Currency): The currency unit on the right of the currency pair, also called the pip currency.

Major Currency Pairs in the Market

Although more than 30 major currencies are traded on Forex, some currency pairs account for 85% of the market value and have very high liquidity. These are called major currency pairs:

Reputable trading platforms today not only offer Forex trading but also integrate many other assets such as Stock Indices, Commodities, Gold, Cryptocurrencies to provide investors with diverse options.

Starting Your Forex Trading Journey: Step-by-Step Guide

Step 1: Master Basic Forex Terms

Before participating in the market, you need to understand the concepts used daily in trading:

Long (Buy): When you buy a currency expecting its price to rise. Your profit increases with each upward price movement, and you will incur a loss if the price moves against you.

Short (Sell): When you short-sell a currency expecting its price to fall. Your profit increases with each decline, but you will lose if the price rises.

Leverage (Leverage): A tool that allows you to trade with a larger volume of money than you actually have. Expressed as ratios like 50:1, 100:1, or 200:1. With 200:1 leverage, you only need $60 margin to trade $12,000.

Margin (Margin Money): The amount of money you need to deposit with the broker to open and maintain trades in the market. The broker automatically holds this amount from your account.

Pip (Point): Represents the smallest change in the exchange rate of a currency pair, detailed to the thousandth. If EUR/USD changes 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 the main income source for brokers.

Lot (Lot): The trading unit size you buy or sell. Currently, you can trade from nano (100 units), micro (1,000 units), mini (10,000 units), to standard lot (100,000 units).

Step 2: Understand Different Types of Forex Markets

There are many ways to trade forex:

Spot Forex Market (Immediate Delivery Market): Trades executed at agreed prices with settlement immediately or within 2 business days. This market includes banks and financial agencies and is considered the largest. In Vietnam, Spot Forex trading is prohibited.

Forex CFD (Contract for Difference): An agreement between two parties on the price difference of an asset. CFDs allow speculation on various markets without owning the actual asset. In Vietnam, 99% of Forex brokers operate under this model. Although not banned, you should choose brokers licensed by international regulators like ASIC, FCA, CySEC for safety.

Currency Futures (Futures Contract): Contracts to exchange one currency for another at a specific future date at a predetermined price. This market is not popular in Vietnam.

Currency Options (FX Options): Tools that allow you to predict whether the price of an asset will rise or fall relative to a fixed price at expiration. If your prediction is correct, you profit; if wrong, you lose money. This market is also not common in Vietnam.

Currency ETFs (Exchange-Traded Funds): Funds that track the relative value of a currency against the US dollar or a basket of currencies. Not popular in Vietnam.

Step 3: Choose a Reputable Trading Platform

A suitable Forex platform should be evaluated based on many criteria:

• Reputation: Licensed by international regulatory authorities (mandatory)
• Trading Fees: Low and competitive
• Broker Commission: Reasonable levels
• Trading Products: Suitable for your needs
• Trading Platform: Simple, user-friendly
• Customer Support: Professional and timely

Step 4: Open a Trading Account

To open an account, you need to provide:

• ID documents/passport (2 sides)
• Email and contact phone number
• Bank account

The broker will verify your identity and information before activating your account.

Step 5: Choose Currency Pairs to Trade

After your account is activated, you will select the currency pairs you want to trade. Analyze whether the exchange rate will rise or fall based on:

Economic Forecasts: If you believe the US economy will weaken, this will negatively impact the dollar. You can sell USD to exchange for the currency of a stronger economy.

Trade Balance of the Country: If a country exports many high-demand goods, it will earn more foreign currencies, stimulating economic growth and increasing its currency value.

Political Situation: Political events such as elections, interest rate changes, or monetary tightening can significantly affect currency prices.

Step 6: Determine Margin Amount

Depending on the broker’s policy, you can trade large amounts with small margins. For example, with a 1% margin requirement, to trade $100,000 USD, you only need a $1,000 margin.

Profit or loss will be added or deducted from this margin. A useful rule is to only invest 2% of the margin amount in a single currency pair.

Step 7: Decide to Buy or Sell

Once you have chosen the market, check the current price and place an order. Forex prices are always quoted as one currency against another.

BUY a currency pair if you believe the bid price will be stronger than the quote currency

• Profit increases with each upward price movement
• Loss occurs if the price drops below your order level

SELL a currency pair if you believe the bid price will be weaker than the quote currency

• Profit increases with each downward price movement
• Loss occurs if the price rises above your order level

Step 8: Add Risk Management Orders

Orders are automated trading instructions set for the future when the price reaches a specified level. This is an essential tool to protect profits and minimize risks.

Stop Loss (Stop Loss): Close the trade when the price drops to a certain level, helping to minimize losses. For example, if you buy at 1.1500, you can set a stop loss at 1.1400 to automatically sell if the price falls to this level.

Take Profit (Take Profit): Close the trade when the price reaches a target level, locking in profits. For example, if EUR/USD is currently 1.11128 and you expect it to rise to 1.2000, you set a limit sell order at 1.2000. When the price hits 1.2000, the order executes automatically.

Step 9: Monitor Profits and Losses

The most important thing is to avoid emotional trading. The forex market fluctuates constantly, with prices rising and falling many times. Continue researching, stick to your strategy, and be patient. Eventually, you will see profits from the market.

Factors Affecting the Forex Market

Like most other financial markets, the Forex market is mainly driven by supply and demand. Understanding what influences these factors is key:

Central Banks: Central banks control the money supply and implement policies that significantly impact prices. Quantitative easing (injecting money into the economy) can cause currency prices to fall.

Financial News: Commercial banks and investors prefer to invest in economies with strong prospects. Good news from a region encourages investment, increases demand for that region’s currency, and raises its value.

Market Sentiment: Trader psychology, often linked to news, plays an important role. If traders believe a currency will move in a certain direction, they will trade accordingly, convincing others to follow, which impacts demand to rise or fall.

Forex Investment: Real-Life Example

Suppose you use $11,500 to buy 10,000 EUR at an EUR/USD rate of 1.1500. Two weeks later, you sell 10,000 EUR at a rate of 1.2500, earning $12,500 USD. You make a profit of $1,000.

But on the Forex platform, you have a tool called leverage. With leverage up to 200 times, you don’t need to put in the full $11,500 — just about $60 margin to execute this trade!

Advantages of Forex Trading Investment

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

24/7 Market Operation: The Forex market operates worldwide around the clock. You can participate in the morning, noon, afternoon, evening, or even while sleeping — fully flexible with your time.

No One Can Manipulate the Market: The enormous size of the Forex market with many participants means no single entity (including central banks) can control or manipulate it.

Leverage Power: You can deposit a small amount of money but trade a much larger volume, potentially earning hundreds of times your margin. However, caution is needed because leverage is a double-edged sword.

Low Barriers to Entry: You can start with just a few hundred thousand VND in margin, something no other markets like stocks, commodities, or real estate can offer.

Who Are the Participants in the Forex Market?

The Forex market includes many groups:

• Government and Central Banks: Participate to stabilize the national currency
• Large Banks: Conduct large trades with huge amounts of money
• Forex Brokers: Provide platforms and support for investors
• Retail Investors: Account for nearly ⅓ of daily trading volume

With a total market size of 5 trillion USD daily, retail investors conduct about 1.7 trillion USD in trades through various platforms.

Regulations and Supervision of the Forex Market

The Forex market is enormous but has few regulations because there is no single authority overseeing it 24/7. Instead, global trading organizations supervise domestic trading activities to ensure all providers comply with certain standards.

In the US, two main agencies are responsible:

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

Conclusion

Now you understand clearly what Forex foreign exchange is, how the forex market operates, and basic forex investment guidance. The forex market is the largest financial investment market worldwide. With transparency, low entry costs, Forex is an effective investment channel for investors around the globe.

Your forex trading journey will require knowledge, skills, and patience. Start learning from basic concepts, choose reputable brokers with international licenses, and always manage risks wisely.