Forex Foreign Exchange: From A to Z for Beginners

Basic Concepts of the Foreign Exchange Market

In recent years, the foreign exchange market in Vietnam has become one of the most attractive investment options drawing many people’s interest. However, there are still many new investors with misconceptions about what is the foreign exchange market and how it operates.

Foreign exchange or Forex (abbreviated from Foreign Exchange) is not defined by a single meaning. Depending on the context, foreign exchange can refer to:

• Foreign currencies: such as USD (US Dollar), EUR (Euro), AUD (Australian Dollar)
• International payment tools: bank cards, bills of exchange, checks
• International certificates: government bonds, international company stocks
• Cryptocurrencies: Bitcoin, Ethereum, and others
• Gold: precious metals used as currency

However, when talking about foreign exchange trading, it usually refers to a decentralized market where participants can buy, sell, and exchange different currencies with each other. This market operates continuously 24/7 with an average trading volume of about 5.3 trillion USD per day, making it the largest financial market in the world.

What Can Be Traded on the Forex Market

Currency Pair Trading Mechanism

On the foreign exchange market, the main traded asset is currencies. They are traded in pairs, such as EUR/USD. In this pair:

• EUR (Price Quote Currency): the currency on the left, representing its value
• USD (Quoted Currency): the currency on the right, used for comparison

When you see EUR/USD = 1.1500, it means 1 EUR equals 1.1500 USD.

Major Currency Pairs

Although more than 30 major currencies are traded, only a few pairs account for up to 85% of trading volume and have the highest liquidity. These are:

Other Assets That Can Be Traded

Besides currency pairs, reputable trading platforms also offer other investment tools such as stock indices, commodities, gold, and cryptocurrencies.

How Forex Trading Works

Basic Principles

Forex investment is very simple: you predict whether the exchange rate will go up or down, then place buy or sell orders to profit from the price difference.

Real-life example:

Suppose you predict EUR/USD will increase in value over the next two weeks. You decide to buy 10,000 EUR at an exchange rate of 1.1500, costing 11,500 USD. Two weeks later, the rate rises to 1.2500, and you sell 10,000 EUR to receive 12,500 USD. Your profit is 1,000 USD.

Role of Leverage

A special feature of the foreign exchange market is the use of (Leverage). Instead of putting down 11,500 USD, you only need to deposit a small margin (for example, just 60 USD if the platform supports 200x leverage). However, this is a double-edged sword — profits can multiply, but so can losses.

Two Trading Directions

You can BUY (Long) if you believe the exchange rate will rise, or SELL (Short) if you believe it will fall. The forex market allows you to profit from both rising and falling prices.

Advantages of Forex Investment

Low Trading Fees

Unlike other markets, forex trading does not have intermediary fees such as brokerage commissions or high income taxes. The platform only earns profit from the very small bid-ask spread (spread).

Market Open 24/7

Forex operates globally around the clock, allowing you to trade anytime — morning, noon, night, even while sleeping. This is a major advantage for those seeking passive income.

No Market Monopoly

With its enormous scale and diverse participants (banks, companies, governments, individual investors), no single organization — not even central banks — can control or manipulate the foreign exchange market.

Effective Use of Leverage

With a small margin, you can trade large amounts of money. This creates opportunities for high profits but also requires strict risk management.

Low Entry Barriers

You only need a few hundred thousand VND as a margin to start, unlike stocks, real estate, or other investment channels.

8 Steps to Start Forex Trading

Step 1: Master Basic Concepts

First, you need to understand basic terms:

• Long: Buy, predicting the price will rise
• Short: Sell, predicting the price will fall
• Leverage: The ability to trade with more money than you have (e.g., 50:1, 100:1)
• Margin: The amount of money you deposit to open a position
• Pip: The smallest change in the exchange rate (e.g., EUR/USD from 1.2000 to 1.2005 = 5 pips)
• Spread: The difference between the bid and ask prices (bid) and (ask)
• Lot: The volume of currency traded (nano, micro, mini, or standard)

Step 2: Understand Different Trading Forms

There are many ways to trade foreign exchange:

• Spot Forex: Immediate trading, settlement within 2 business days (prohibited in Vietnam)
• Forex CFD: Contract for difference, allows speculation without owning the actual asset (common in Vietnam)
• Currency Futures: Futures contracts with fixed prices
• FX Options: Currency options based on price predictions
• Currency ETFs: Exchange-traded funds tracking currency values

In Vietnam, most platforms use the CFD model, and you should choose those licensed by international regulators like ASIC, FCA, CySEC for safety.

Step 3: Choose a Reputable Trading Platform

Criteria:

• Licensed by an international regulatory authority (mandatory)
• Low trading fees and commissions
• Suitable product offerings
• User-friendly trading platform

Step 4: Open an Account

You will need to provide:

• ID card (front and back)
• Email and phone number
• Bank account information

Step 5: Select Currency Pairs to Trade

Analyze before choosing currency pairs:

Economic situation: If a country’s economy weakens, its currency will depreciate.

Trade balance: Countries exporting many high-demand goods will have stronger currencies.

Political situation: Elections, interest rate policies, and political decisions influence the market.

Step 6: Determine Margin Amount

Golden rule: only invest 2% of total capital in one currency pair. If you want to trade 100,000 USD with a 1% margin requirement, you need 1,000 USD in your account.

Step 7: Decide to Buy or Sell

• BUY if you believe the quote currency will strengthen against the base currency
• SELL if you believe the quote currency will weaken

Step 8: Use Risk Management Orders

Two important order types:

• Stop Loss: Automatically close the trade when losses reach a certain level, helping limit damage
• Take Profit: Automatically close the trade when reaching the target profit level

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 to lock in profit.

( Step 9: Monitor and Adjust

Avoid emotional trading. The forex market fluctuates constantly, but if you stick to your strategy and keep learning, you will see results.

Factors Affecting the Foreign Exchange Market

) Central Bank Policies

Measures of easing or tightening monetary policy by central banks significantly impact currency prices. For example, quantitative easing injecting money into the economy often causes the currency to depreciate.

( Financial News

Positive news about regional economies encourages investors to inject capital, increasing demand for that currency, and pushing its value up.

) Market Sentiment

If most traders believe in a certain trend, they will trade accordingly, persuading others to follow, and changing supply-demand dynamics.

Regulations on the Foreign Exchange Market

The forex market is very large but has few centralized regulations because there is no single supervisory authority. Instead, international organizations oversee to ensure service providers comply with standards. In the US, CFTC ###Commodity Futures Trading Commission### and NFA ###National Futures Association### are responsible for this.

Daily Trading Volume

Every day, about 5 trillion USD are traded in the foreign exchange market worldwide, averaging 220 billion USD per hour. The market mainly involves large organizations, but individual investors account for nearly 1/3 of the volume, approximately 1,700 billion USD daily through trading platforms.

Market Participants

• Governments and central banks: Manage national foreign exchange reserves
• Major commercial banks: Conduct large-volume trades
• Forex brokers: Provide services to investors
• Retail investors: Increasingly active, trading via online platforms

Conclusion

Now you understand what is the foreign exchange market and how it operates. Forex is the largest and most transparent financial market globally, with low entry costs and 24/7 access. With solid foundational knowledge, good analytical skills, and strict risk management, forex trading can become an effective investment channel for you.