Forex Foreign Exchange: From Basic Knowledge to Global Trading Practice

1️⃣ Understanding the Concept of Forex

In recent years, the foreign exchange market has become one of the most attractive sectors in finance, drawing the attention of tens of thousands of individual investors in Vietnam. However, many people still have misconceptions about this concept.

What is (Forex)?

Forex, or Foreign Exchange (Forex), is not just about foreign currencies like USD, EUR, or AUD. Broadly defined, forex includes:

• International currencies: currencies used in international transactions
• Payment tools: international bank cards, certificates, money transfer checks
• Financial certificates: government bonds, multinational company stocks
• Digital assets: Bitcoin, Ethereum, and other cryptocurrencies
• Precious metals: gold and other precious metals

In trading context, the Forex market is a global decentralized trading space where participants can buy, sell, and exchange different currencies for various purposes: supporting import-export, hedging exchange rate risks, or making profits from price fluctuations.

Why is forex investment attractive?

The Forex market is the largest financial market in the world, with an average daily trading volume of up to 5.3 trillion USD. Compared to other markets like stocks or bonds, this market has extremely high liquidity, constantly creating profit opportunities from exchange rate volatility.

2️⃣ What Can You Trade on Forex

The main commodity in the foreign exchange market is currency, traded in pairs.

What is a currency pair?

Example: EUR/USD

Where:

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

If EUR/USD = 1.1500, it means 1 Euro can be exchanged for 1.1500 US Dollars.

Major currency pairs

Although there are over 30 major currencies traded on Forex, the main pairs account for about 85% of the market value:

Besides currencies, reputable Forex brokers also offer trading in other assets such as stock indices, commodities, gold, and cryptocurrencies.

3️⃣ Trading Mechanisms and How to Make Profits

What is forex trading fundamentally?

Forex trading involves exchanging a currency pair to profit from exchange rate differences.

Illustrative example:

You predict that EUR/USD will increase in value. You buy 10,000 Euros at an exchange rate of 1.1500, costing 11,500 USD.

Two weeks later, the rate rises to 1.2500. You sell 10,000 Euros, receiving 12,500 USD.

Profit = 12,500 - 11,500 = 1,000 USD

However, the Forex market offers a powerful tool called leverage (Leverage). With 200:1 leverage, you only need about 60 USD margin to execute this trade.

Note: You can Go Long (Long) or Go Short (Short) on a currency pair. If you expect the pair to decrease in value, you can sell first and buy later to profit from the decline.

4️⃣ Core Concepts Traders Need to Know

Before starting, you should master 8 important concepts:

Long – When you believe a currency will appreciate, you buy it (Long). Profits increase as the rate rises.

Short – When you believe a currency will depreciate, you short sell (Short). Profits increase as the rate falls.

Leverage (Leverage) – A tool that allows you to trade larger volumes than your actual capital. For example, with 50:1 leverage, $1,000 of your own can control $50,000.

Margin (Margin) – The amount of money you must deposit with the broker to open a position. The broker automatically holds this amount from your account.

Pip (Pip) – The smallest change in exchange rate, usually in 10,000 units. For example: EUR/USD from 1.2000 to 1.2005 = 5 pips.

Spread (Spread) – The difference between the bid price (bid) and the ask price (ask). This is the revenue for brokers.

Lot (Lot) – The trading volume unit. Various sizes: Nano (100 units), Micro (1,000 units), Mini (10,000 units), Standard (100,000 units).

Stop Loss & Take Profit – Automatic orders to minimize losses or lock in profits at predetermined levels.

5️⃣ Different Types of Forex Markets

Spot Forex Market (Spot Market)

Trading at agreed prices with immediate settlement or within 2 business days. In Vietnam, this market type is prohibited for retail investors.

Forex CFD (Contract for Difference)

CFD is a contract between two parties on the price difference of an asset without owning the actual asset. In Vietnam, 99% of Forex brokers operate under this model. To ensure safety, choose brokers licensed by international regulators like ASIC, FCA, or CySEC.

Currency Futures (Futures Contract)

Contracts to exchange currencies at a specific future date at a predetermined price. Less common in Vietnam.

Currency Options (Options)

Tools that allow you to predict whether prices will rise or fall relative to a fixed price. Correct predictions yield profits; wrong ones result in losses.

Currency ETFs (Exchange-Traded Funds)

Funds that track the relative value of a currency against USD or other currencies.

6️⃣ Advantages of Forex Investment

Very Low Trading Fees

No management fees, brokerage commissions, or income taxes. Forex brokers earn only from the spread (difference between buy and sell prices).

Market Operates 24/7

Unlike stocks, Forex is active worldwide around the clock. You can trade anytime, day or night.

No One Can Manipulate the Market

With its enormous scale and millions of participants, no organization (even central banks) can control the Forex market.

Power of Leverage

You can deposit a small amount but trade large volumes, creating high profit opportunities. However, leverage is a double-edged sword – it can also magnify losses.

Low Entry Barriers

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

7️⃣ 8 Steps to Start Forex Trading

Step 1: Learn Basic Concepts

Master the 8 concepts listed above: Long, Short, Leverage, Margin, Pip, Spread, Lot, Stop Loss & Take Profit. These are the foundation for understanding trading orders.

Step 2: Identify Suitable Market Type

Various Forex market types exist. In Vietnam, the most common is Forex CFD. Your choice will determine your trading strategy.

Step 3: Choose a Reputable Broker

Criteria:

• Licensed by international authorities (ASIC, FCA, CySEC)
• Low spread fees
• Reasonable commissions
• Simple, stable trading platform
• Good customer support

Step 4: Open a Trading Account

You will need to provide:

• ID card (front and back)
• Email and phone number
• Bank account for deposits/withdrawals

Step 5: Select Currency Pairs to Trade

Analyze whether the rate will rise or fall by considering:

Economic conditions – Weakening economy tends to depreciate the currency.

Trade balance – Export-heavy countries with high demand will earn more foreign currency, increasing the domestic currency’s value.

Political stability – Political stability directly affects investor confidence and currency value.

Step 6: Determine Margin

Depending on broker policies, you can deposit a small margin but trade large volumes. For example, to trade 100,000 USD with 1% margin, you only need to deposit 1,000 USD.

Safety rule: Invest only 2% of your total capital in a single currency pair.

Step 7: Place Buy or Sell Orders

Buy (Long) if you believe the quote currency will strengthen against the base currency:

• Profits increase as the rate rises
• Losses occur if the rate falls

Sell (Short) if you believe the quote currency will weaken:

• Profits increase as the rate falls
• Losses if the rate rises

Step 8: Use Risk Management Orders

Set Stop Loss orders to automatically close trades when losses reach a certain level, minimizing damage.

Set Take Profit orders to automatically close trades when profits reach your target.

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

Step 9: Monitor and Adjust Strategy

Avoid emotional trading. Forex markets fluctuate constantly, but if you stick to your strategy and keep learning, profits will gradually materialize.

8️⃣ Factors Affecting the Forex Market

Central Banks

Central banks control money supply and set interest rates. Quantitative easing (injecting money into the economy) can cause currency depreciation; tightening monetary policy (raising interest rates) can increase currency value.

Financial News

Good economic news from a country will attract investors, increasing demand for its currency and raising its price.

Market Sentiment

If traders believe a currency is heading in a certain direction, they will trade accordingly, influencing demand and price.

9️⃣ Frequently Asked Questions

Q: How is the Forex Market Managed?

A: The Forex market is very large but less regulated than other markets because there is no single governing body. Instead, organizations in each country oversee Forex trading. In the US, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) are responsible for regulation.

Q: How much money is traded daily?

A: About 5 trillion USD daily (average 220 billion USD per hour). Most trading is speculative (accounting for 90% of volume), mainly in USD, EUR, and JPY.

Q: Who participates in the market?

A: Governments, central banks, large banks, Forex brokers, and retail investors. Retail investors account for nearly ⅓ of daily trading volume, approximately 1.7 trillion USD.

🔟 Conclusion

Now you understand what forex investment is, how the Forex market operates, and how to start trading. With the largest scale in the world, low entry costs, and high transparency, Forex is an attractive investment channel for global investors. However, remember that Forex trading also involves risks – good risk management is key to success.