What is Foreign Exchange? A Comprehensive Guide to the Forex Market and How to Start Investing

Basic Concepts of Forex

In recent years, foreign exchange trading has become a popular choice for many Vietnamese investors. However, there are still many people confused about this concept.

Forex (Foreign Exchange or Forex) is not just a simple concept. Broadly defined, forex can include:

● Foreign currencies: USD, EUR, AUD, and other international currencies ● International payment tools: bank cards, bills of exchange, money transfer checks ● International securities: government bonds, foreign stocks ● Digital assets: Bitcoin, Ethereum, and other cryptocurrencies ● Valuable assets: gold, precious metals

However, when mentioning the Forex market, we usually refer to a decentralized trading platform where investors can buy, sell, and exchange currency pairs for import-export purposes, risk hedging, or profit from exchange rate differences.

The Forex Market - Global Financial Power

The Forex market is the largest trading platform in the world, with an average daily volume reaching 5.3 trillion USD. This figure shows that the foreign exchange market is extremely dynamic compared to any other financial market—whether stocks, bonds, or commodities.

Forex trading serves various purposes depending on the participant group:

• Central banks: manage foreign currency reserves, adjust national economies
• Businesses: support import-export activities, hedge against exchange rate risks
• Individual investors: leverage exchange rate fluctuations for profit

What Can Be Traded on the Forex Market

The main asset in Forex trading is currency, traded in pairs.

For example, with the EUR/USD pair:

• EUR (Euro) is the base currency - the unit on the left
• USD (US Dollar) is the quote currency - the unit on the right

The exchange rate between two currencies always fluctuates based on many factors: economic conditions, geopolitical events, monetary policies. These fluctuations create continuous trading opportunities for all investors.

Major Currency Pairs in the Market

Although more than 30 major currencies are traded, some key currency pairs account for up to 85% of the market value and have the highest liquidity:

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

These currencies represent the world’s strongest economies and are often traded in large volumes.

Besides Forex - Other Assets

In addition to currency pairs, many reputable trading platforms offer additional assets such as:

• Global stock indices
• Commodities (oil, natural gas)
• Gold and precious metals
• Cryptocurrencies

How Forex Investment Works

Forex trading involves buying and selling currency pairs to profit from exchange rate differences.

Basic process:

1. Analyze and predict whether the exchange rate will rise or fall
2. Place buy or sell orders for currency pairs
3. Wait for the exchange rate to change as predicted
4. Close the trade to realize profit or cut losses

Real Example of Trading

Suppose you predict EUR/USD will rise:

• You buy 10,000 Euros at an exchange rate of 1.1500, costing 11,500 USD
• Two weeks later, the rate increases to 1.2500
• You sell 10,000 Euros, receiving 12,500 USD
• Profit: 1,000 USD

Leverage Tool (Leverage): The special feature of Forex is that you don’t need to put out the entire 11,500 USD. With 200:1 leverage, you only need a margin of about 60 USD to execute this trade. This mechanism allows amplifying profits but also increases risks.

Why Forex Is Attractive to Investors

Extremely Low Trading Costs

Unlike other investment channels like stocks or real estate, forex trading has very low fees. Forex platforms only charge the spread (the difference between buy and sell prices), with no separate management or brokerage fees.

24/7 Market Operation(

Forex never closes. You can trade in the morning, noon, afternoon, evening, or even while sleeping. This suits all schedules, from those who want to trade after hours to busy professionals.

) Market Cannot Be Manipulated

Due to its enormous scale with millions of traders worldwide, no agency or organization ###including central banks( can control or manipulate the Forex market. Prices are always determined by actual supply and demand.

) Power of Leverage

With leverage, you can earn profits many times your initial margin. For example, a margin of 100 USD but trading 10,000 USD, with a 5% profit, you earn 500 USD ###equivalent to 500% return on margin(.

) Low Entry Barriers

You can start with just a few hundred thousand VND as margin. This is impossible in other markets like stocks, real estate, or commodities.

9 Steps to Start Forex Trading

Step 1: Master 8 Basic Terms

Before starting, you need to understand common trading terms:

● Long ###Buy(: Buying a currency expecting its price to rise. Profits increase when the rate goes up.

● Short )Sell(: Short selling a currency expecting its price to fall. Profits increase when the rate drops.

● Leverage )Leverage(: Trading with a larger amount of money than your capital. For example, 100:1 leverage allows trading 100,000 USD with only 1,000 USD margin.

● Margin )Margin(: The amount you must deposit with the broker to open and maintain a trade. The broker automatically locks this amount when you place an order.

● Pip: A decimal point - indicates the smallest change in the exchange rate. For example, EUR/USD moves from 1.2000 to 1.2005 = 5 pips.

● Spread: The difference between the bid )Bid( and ask )Ask( prices, measured in pips. This is the trading fee of the broker.

● Lot )Lot(: The quantity of currency you buy/sell. Various sizes: Nano )100 units(, Micro )1,000(, Mini )10,000(, Standard )100,000(.

● Slippage: The difference between the expected price and the actual execution price, often occurring in volatile markets.

) Step 2: Understand Types of Forex Markets

Spot Forex Market ###Immediate Settlement Market(: Trading at agreed prices with immediate or two-day settlement. This is the market of banks and large financial institutions. In Vietnam, this type of market is prohibited.

Forex CFD )Contract for Difference(: A contract that pays the difference in price of an asset without owning the actual asset. This is the most common method in Vietnam )99% of Forex platforms(. CFD trading is not prohibited, but you should choose platforms licensed by international regulators like ASIC, FCA, or CySEC.

Currency Futures )Futures Contract(: An agreement to buy/sell a currency at a future date at a predetermined price. Less common in Vietnam.

Currency Options )FX Options(: Allow trading based on predictions whether the price will rise or fall relative to a fixed price at the end of the trade. Not common in Vietnam.

Currency ETFs: Exchange-traded funds tracking the relative value of a currency against USD. Not common in Vietnam.

) Step 3: Choose a Reputable Trading Platform

Criteria for choosing a platform:

• Trustworthiness: Must have licenses from international regulatory agencies
• Costs: Low spread fees, competitive brokerage commissions
• Products: Diverse currency pairs and trading assets
• Platform: Stable, user-friendly trading software
• Support: Good customer service

Step 4: Open a Trading Account

To open an account, you need to provide:

• ID card / Passport ###both sides(
• Email and phone number
• Bank account information
• Identity verification

) Step 5: Choose Currency Pairs to Trade

After opening an account, select currency pairs and analyze whether the rate will rise or fall. Factors to consider:

Economic Conditions: If the US economy weakens, the USD will depreciate. You can sell USD to exchange for a stronger economy’s currency.

Trade Position: Countries exporting many goods with high demand will receive more foreign currency, boosting economic growth and increasing their currency value.

Political Situation: Elections, policy changes, or political events can significantly impact the Forex market.

Step 6: Determine Margin

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

Important note: Only invest about 2% of your total funds in a single currency pair. This helps manage risks effectively.

Step 7: Decide to Buy or Sell

After selecting a currency pair, you need to decide on a strategy:

BUY ###Long( if you believe the base currency will strengthen against the quote currency:

• Profits increase with each upward movement of the rate
• Losses occur if the rate falls

SELL )Short( if you believe the base currency will weaken:

• Profits increase with each downward movement of the rate
• Losses occur if the rate rises

) Step 8: Use Risk Management Orders

Orders are automatic trading instructions triggered when the price reaches your specified level:

Stop Loss Order ###Dừng Lỗ(: Close the trade at a lower price than the current market to minimize losses when the market moves against you.

Take Profit Order )Chốt Lời(: Close the trade at a higher price to lock in desired profits.

Example: EUR/USD is currently 1.11128. You predict it will rise to 1.2000 then fall. You set a sell order at 1.2000 )Take Profit(. When the price hits 1.2000, the order automatically executes and records profit.

) Step 9: Monitor and Manage Trades

The most important point is not to be emotional. Forex markets fluctuate constantly, prices go up and down. You need to:

• Continue learning and updating knowledge
• Stick to your trading strategy
• Avoid panic during market volatility
• Maintain disciplined risk management

Factors Affecting the Forex Market

Central Banks

Central banks control the money supply through policies:

• Quantitative Easing ###QE(: Pump money into the economy, causing the currency to depreciate
• Tightening monetary policy: Reduce supply, causing currency appreciation
• Interest rate adjustments: Higher interest rates attract investment, increasing currency value

) Economic News

Positive economic news encourages investors to inject capital into the country, increasing currency demand. When demand rises and supply remains unchanged, the currency price increases.

Market Sentiment

If traders believe a currency is heading in a certain direction, they will trade accordingly and persuade others, creating a domino effect that influences demand.

Regulations and Supervision of the Forex Market

Although the Forex market is enormous, there are very few global regulations because there is no single governing body. Instead, countries have their own organizations overseeing:

• USA: CFTC ###Commodity Futures Trading Commission( and NFA )National Futures Association(
• EU: ESMA )European Securities and Markets Authority(
• Australia: ASIC )Australian Securities and Investments Commission(
• UK: FCA )Financial Conduct Authority(
• Cyprus: CySEC )Cyprus Securities and Exchange Commission(

Forex Market Data

• Daily trading volume: About 5 trillion USD
• Hourly trading volume: Average 220 billion USD
• Market composition: Mostly institutions, corporations, governments, and speculators
• Speculators: Account for about 90% of trading volume
• Major currencies: US Dollar, Euro, and Yen constitute most of the market
• Retail investors: Make up nearly 1/3 of trading volume )about 1.7 trillion USD daily(

Participants in the Forex Market

Government & Central Banks: Manage foreign currency reserves, regulate the economy

Large Banks: Conduct large-volume trades, provide liquidity to the market

Multinational Companies: Hedge against exchange rate risks, support international business activities

Forex Brokers: Provide trading platforms for retail investors

Individual Investors: Trade to profit from exchange rate differences

Summary

Forex trading has become an effective investment channel for millions worldwide. With advantages like low costs, 24/7 market, low entry barriers, and leverage power, Forex opens opportunities for anyone with knowledge and discipline.

However, it is also a high-risk market. Before starting, make sure you have:

• A clear understanding of basic concepts
• Chosen a reputable broker
• A well-defined risk management plan
• Acceptance that losses are part of the learning process

Start small, keep learning, and develop your trading skills—the key to success in the foreign exchange market.