Getting Started with Basic Forex Trading: From Theory to Practice

What Is Forex and Why Is It the Biggest Market in the World?

The foreign exchange market (Forex/FX) is not a new concept, but today it has become the preferred choice of millions of investors worldwide. So, what exactly is forex trading?

Simply put, forex is the buying and selling of different currencies - you can exchange EUR for USD, or vice versa. This market operates 24/7, with an average daily trading volume of $5.3 trillion. This figure demonstrates the enormous scale of the forex market compared to any stock exchange or other markets.

The main difference between forex and other investment tools is that this market is decentralized. No one can manipulate it, even central banks are just a small part of the system.

Types of Currencies and Currency Pairs You Need to Understand

All transactions in Forex involve currency pairs. For example, EUR/USD means you buy Euro and sell USD (or vice versa).

In the EUR/USD pair:

• EUR is called the (base currency) - on the left
• USD is called the (quote currency) - on the right

If the exchange rate for EUR/USD is 1.1500, it means 1 Euro = 1.1500 USD.

Major Currency Pairs to Watch

Although over 30 currencies are traded, 7 major pairs account for 85% of the market volume:

• EUR/USD (Euro - US Dollar)
• USD/JPY (US Dollar - Japanese Yen)
• GBP/USD (British Pound - US Dollar)
• USD/CHF (US Dollar - Swiss Franc)
• AUD/USD (Australian Dollar - US Dollar)
• NZD/USD (New Zealand Dollar - US Dollar)
• USD/CAD (US Dollar - Canadian Dollar)

Reputable trading platforms also offer opportunities to trade other assets like stock indices, commodities, gold, and cryptocurrencies.

How Does Forex Profit Work?

Learning basic forex starts with understanding how to make money. You profit by exploiting exchange rate differences.

Practical Example

Suppose you predict EUR/USD will rise:

1. You buy 10,000 Euros at an exchange rate of 1.1500 → spend 11,500 USD
2. Two weeks later, the rate rises to 1.2500
3. You sell 10,000 Euros and receive 12,500 USD
4. Profit: $1,000

But this is the “normal” way of trading. In reality, you don’t need to spend the full amount of 11,500 USD because trading platforms offer leverage (leverage). With 200:1 leverage, you only need about 60 USD in margin to execute the same trade!

Basic Concepts You Must Master

When learning basic forex, you need to understand these terms:

Long (Buy): You believe the price will increase, so you buy currency to sell at a higher price later.

Short (Sell/Short): You believe the price will decrease, so you sell currency to buy back at a lower price.

Leverage (Leverage): A tool that allows trading with more money than you have. For example, 50:1 or 100:1 leverage.

Margin (Margin): The minimum amount you need to deposit to open a trade. The platform automatically locks this amount.

Pip: The smallest unit of price change. If EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.

Spread: The difference between the bid price (bid) and the offer price (offer). This is the profit for the broker, measured in pips.

Lot: The volume of currency you trade. Nano (100 units), Micro (1,000), Mini (10,000), or Standard (100,000).

Advantages of Choosing Forex as an Investment Channel

Lowest Costs Compared to Other Instruments

No management fees or brokerage fees like stocks. The broker earns only from the spread—the small difference between buy and sell prices.

Market Opens 24/7

No waiting for opening hours. Forex operates all day and night, from Asia → Europe → North America. You can trade at any convenient time.

The Power of Leverage

A double-edged sword, but if used correctly, you can turn $100 into $1,000+ profit. No other investment tool offers this possibility.

Easy to Get Started

You only need a few hundred thousand VND to begin, much lower than stocks, real estate, or precious commodities.

No One Can Control the Market

The daily volume of $5.3 trillion makes it impossible for the forex market to be manipulated. Prices are determined by actual supply and demand.

Types of Forex Markets You Need to Know

Spot Forex Market (Immediate Delivery Market)

Trades are settled immediately or within 2 business days. This is the main market for banks and financial institutions. In Vietnam, this market is prohibited.

Forex CFDs (Contract for Difference)

You don’t actually own the currency, only trade on the price difference. This is used by 99% of Vietnamese investors. Note: choose a licensed broker by ASIC, FCA, or CySEC for safety.

Currency Futures (Futures Contracts)

Agreement today for trading at a fixed future date at a pre-agreed price. Not common in Vietnam.

FX Options (Forex Options)

Predict whether prices will rise or fall relative to the fixed level at expiration. Correct prediction earns profit, wrong prediction results in loss. Rare in Vietnam.

Currency ETFs (Exchange-Traded Funds)

Track the relative value of a currency. Not common in Vietnam.

8 Steps to Start Your Forex Trading Journey

Step 1: Master 8 Basic Concepts

Listed above (Long, Short, Leverage, Margin, Pip, Spread, Lot). When learning basic forex, these are essential fundamentals.

Step 2: Understand Market Types

Decide which type you want to trade: Spot, CFD, Futures, Options, or ETF. Most investors choose CFD for flexibility.

Step 3: Choose a Reputable Broker

Mandatory criteria: licensed by international authorities. Then consider:

• Low trading fees
• Competitive commissions
• Diverse trading products
• User-friendly trading platform

Step 4: Open an Account

Prepare:

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

Step 5: Choose the Currency Pairs to Trade

Analyze whether the exchange rate will rise or fall based on:

Economic Conditions: If the US economy weakens, USD will depreciate. You can sell USD to buy currencies of stronger economies.

Trade Balance: Countries with high exports will receive more foreign currency, increasing their currency’s value.

Political Situation: Elections, interest rate changes, or economic policies impact currencies.

Step 6: Determine Margin

Golden rule: only invest up to 2% of your capital in one currency pair.

Example: To trade 100,000 USD with 1% margin, you only need to deposit 1,000 USD. Profits or losses are deducted or added to this margin amount.

Step 7: Decide to Buy or Sell

BUY (Long) when you believe the base currency will strengthen relative to the quote currency:

• Profit increases as exchange rate rises
• Loss occurs if exchange rate falls

SELL (Short) when you think the base currency will weaken:

• Profit increases as exchange rate falls
• Loss if exchange rate rises

Step 8: Set Risk Management Orders

Set Stop Loss (stop-loss order) and Take Profit (take-profit order):

Stop Loss: An automatic order that closes the trade when the price drops to a certain level, minimizing losses.

Take Profit: An automatic order that closes the trade when the price reaches the targeted profit level.

Example: EUR/USD is at 1.11128. You predict it will rise to 1.2000 then fall. Place a Take Profit order to sell at 1.2000 → automatically locking in profit.

Step 9: Monitor and Be Patient

Forex markets go up and down. The key is not to be emotional, stick to your strategy. Keep learning and improving. Profits will come when you stay consistent.

What Factors Affect Forex Prices?

Central Banks

They control the money supply. Quantitative easing (QE)—injecting money into the economy—can lower currency value.

Financial News

Good economic news attracts investment, increasing local currency demand → currency appreciation. If supply doesn’t increase proportionally, supply-demand gaps push prices up.

Market Sentiment

If traders believe a currency will rise, they will buy, convincing others to do the same. Optimism/pessimism can create price trends.

How Is the Forex Market Regulated?

The forex market is enormous but has few regulations because there is no overseeing authority 24/7. Instead:

• USA: CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association) oversee
• 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)

Market Size and What Those Numbers Tell Us

• Daily trading volume: $5.3 trillion
• Average per hour: $220 billion
• Retail investors: nearly ⅓ of volume, about $1.7 trillion daily

Most trading is speculative (about 90%), mainly in USD, EUR, and JPY.

Who Are the Participants in the Forex Market?

Governments & Central Banks: Manage national foreign exchange reserves

Large Banks: Trade huge volumes

Forex Brokers: Provide platforms for investors

Retail Investors (Retail): Growing rapidly, account for ⅓ of volume

Conclusion: Ready to Start?

The forex market is not just for big institutions. You can also learn basic forex and participate with small capital. With low entry costs, 24/7 operation, and no manipulation, forex is one of the most effective investment channels.

The key is:

• Study theory thoroughly before trading
• Start with small amounts
• Always use Stop Loss
• Keep emotions out of trading
• Choose a reputable broker with international licenses

Success in forex is not about luck but perseverance, learning, and following a strategy. Start today!