Comprehensive Guide: Forex Investment for Beginners

What Is Forex? Essential Things to Know

In recent years, forex trading has become a popular choice for investors in Vietnam. However, many people still have misconceptions about the basic concepts. Let’s clarify.

Forex (Forex or FX) simply refers to different types of currencies traded on the global market. This term can refer to:

• Foreign currencies: USD, EUR, AUD, and other currencies
• International payment tools: international credit cards, bills of exchange, checks
• International certificates: bonds, foreign company stocks
• Digital currencies: Bitcoin, Ethereum, and other cryptocurrencies
• Precious metals: gold is also considered a form of forex

When talking about the foreign exchange market, we are referring to a decentralized trading place where traders can buy, sell, and exchange different currencies. The purpose can be import-export, risk hedging, or - in the case of individual investors - to profit from exchange rate fluctuations.

Market Size of Forex

The forex market is the largest in the world with an average daily trading volume of 5.3 trillion USD. This clearly shows why forex trading attracts many investors - its high liquidity creates countless profit opportunities.

What Do You Trade on the Forex Market?

The main traded commodity is currency, and they are traded in pairs. For example: EUR/USD.

Understanding Currency Pairs

Each currency pair consists of:

• Base currency (base currency): the currency on the left side of the pair, showing its value relative to the other currency
• Quote currency (quote currency): the currency on the right side of the pair

For example: if EUR/USD = 1.1500, it means 1 EUR can be exchanged for 1.1500 USD.

Major Currency Pairs

Although over 30 currencies are traded on the market, only some pairs account for 85% of the market value. These pairs include:

EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD

The currencies forming these pairs come from major economies such as the US (USD), the European Union (EUR), Japan (JPY), the United Kingdom (GBP), Australia (AUD), Switzerland (CHF), New Zealand (NZD), and Canada (CAD).

How Does Forex Investment Work?

Basic Principles

Forex investment can be simply understood: you predict whether a currency pair will go up or down, then place an order and profit from the exchange rate difference.

You have two options:

• Long (Buy): if you believe the currency pair will increase in value
• Short (Sell short): if you believe the currency pair will decrease in value

Illustrative Example

Suppose you predict EUR/USD will rise:

• You use 11,500 USD to buy 10,000 EUR at an exchange rate of 1.1500
• Two weeks later, you sell 10,000 EUR at an exchange rate of 1.2500, receiving 12,500 USD
• Profit: 1,000 USD

Leverage Power

A special feature of forex trading is leverage. Instead of spending 11,500 USD, you only need to provide a small part (margin) - possibly just from 60 USD - and the trading platform will fund the rest. Leverage can go up to 200:1 or higher, allowing you to trade much larger amounts.

5 Main Advantages of Forex Investment

1. Very Low Trading Costs

Unlike stocks or real estate, forex trading involves very few intermediaries. The broker only earns profit from the spread (the difference between the bid and ask prices), which is usually very small.

2. Market Operates 24/7

Forex operates continuously worldwide, suitable for those who want to trade according to their own schedule - morning, afternoon, evening, or any time.

3. No One Can Manipulate the Market

With a huge scale and a large number of participants (from governments, banks to individual investors), no agency or organization can control or manipulate the entire market.

4. Low Entry Barriers

You can start forex investment with just a few hundred thousand VND in margin, which is not possible in many other financial markets.

5. Leverage Magnifies Profit Opportunities

Leverage tools allow you to trade amounts much larger than your initial capital. However, remember it’s a double-edged sword - profits can be magnified, but so can losses.

5 Essential Steps to Start Forex Investment

Step 1: Learn Basic Concepts

Before engaging in forex trading, master the terminology:

• Long: buy expecting the price to rise
• Short: sell expecting the price to fall
• Leverage (Leverage): trading with a larger amount than your own capital, e.g., 50:1, 100:1
• Margin: the required deposit to open and maintain a trade
• Pip: the smallest change in the exchange rate (usually 0.0001 USD)
• Spread: the difference between the bid (bid) and ask (ask) prices
• Lot: trade size - from nano (100 units) to standard (100,000 units)

Step 2: Understand Different Market Types

There are many types of forex markets:

• Spot Forex: immediate trading with settlement within 2 business days (prohibited in Vietnam)
• Forex CFD: contract for difference (popular and accepted in Vietnam if through licensed international brokers)
• Currency Futures: currency futures contracts (less common in Vietnam)
• FX Options: options on prices (less common in Vietnam)
• Currency ETFs: currency exchange-traded funds (less common in Vietnam)

Step 3: Choose a Reputable Broker

The most important criterion: the broker must be licensed by international regulatory organizations. Additionally, consider trading fees, platform quality, and customer support.

Step 4: Open an Account

Simple process:

• Provide ID documents (identity card)
• Verify email and phone number
• Link bank account
• Complete identity verification survey

Step 5: Start Trading

After opening an account, you should:

• Select the currency pair to trade
• Analyze whether the rate will go up or down
• Decide lot size and margin level
• Place buy or sell orders
• Set stop loss (stop loss) and take profit (take profit)

Factors Affecting the Forex Market

Central Banks

Money supply is controlled by central banks. Their decisions on interest rates, monetary easing or tightening have a profound impact on currency values.

Financial and Economic News

If a country has good economic news (growth in GDP, increased employment…), investors will want to pour capital into that country, increasing demand for its currency.

Market Sentiment

Traders’ perception of the currency’s direction also influences the market. If most believe a currency will rise, they will buy, creating real demand and pushing the price up.

Key Numbers You Cannot Ignore

To better understand the scale and importance of the forex market:

• 5.3 trillion USD traded daily, averaging 220 billion USD per hour
• 90% of trading volume is speculation (speculation)
• 85% of market value is concentrated in 7 major currency pairs
• 30% of daily trading volume is by retail investors (about 1.7 trillion USD)
• Participants include: governments, large banks, forex brokers, and individual investors

Important Risk Management Tools

Stop Loss Orders (Stop Loss)

Automatically close the trade when the price hits your maximum acceptable loss level. This is the most important protective tool.

Take Profit Orders (Take Profit)

Automatically close the trade when reaching your target profit level, helping lock in gains.

Real Example

You buy EUR/USD at 1.1128, expecting it to rise to 1.2000. You can set a take profit order at 1.2000 from the start. When the price hits 1.2000, the system will automatically sell and lock in your profit.

Final Advice

Forex investment is not a quick game. The market is constantly volatile, and emotions should not guide you. Instead:

• Continue learning and updating your knowledge
• Stick to your planned strategy
• Do not over-invest - a useful rule is to risk only 2% of your capital on a single trade
• Be patient and wait for results

With thorough preparation, solid knowledge, and disciplined trading, the forex market can become an effective and highly profitable investment channel.