What is Forex? A Comprehensive Guide to the Forex Market for Beginners

Understanding the Concept of Foreign Exchange and the Forex Market

In recent years, the foreign exchange trading industry has experienced remarkable growth in Vietnam, attracting the interest of tens of thousands of investors. However, many people still confuse this concept due to a lack of accurate and reliable information.

What Is Foreign Exchange?

According to Wikipedia, foreign exchange can have many meanings depending on the context:

Forms of foreign exchange include:

• Foreign currencies such as USD, EUR, AUD
• International payment tools: bank cards, bills of exchange, money transfer checks
• International certificates: government bonds, international company stocks
• Decentralized cryptocurrencies: Bitcoin, Ethereum
• Gold and precious metals
• Domestic currency used in international transactions

In the context of financial trading, the foreign exchange market (Forex, FX) is understood as a decentralized currency trading system where participants can buy, sell, and exchange different currencies for purposes such as import-export, hedging risks, or making profits.

What Does Forex Trading Mean?

Forex trading is the activity of buying and selling currency pairs. The objectives of each market participant vary:

• Central banks participate to manage foreign reserves and support the national economy
• Individual investors mainly participate to capitalize on currency exchange rate fluctuations for profit

With an average daily trading volume of 5.3 trillion USD, the Forex market is extremely dynamic and much larger than other markets like stocks or bonds. The continuous fluctuations in exchange rates create countless trading opportunities for investors.

Assets Traded on the Forex Market

Currencies Traded in Pairs

The main commodity in the foreign exchange market is currency, traded in pairs. For example: EUR/USD – where EUR is the Euro of the EU and USD is the US dollar.

Because the exchange rate between these two currencies constantly fluctuates depending on various economic and political factors, this creates continuous trading opportunities for anyone willing to participate and profit.

Basic Concepts of Exchange Rates

Base Currency (Quote Currency): The currency on the left side of the currency pair, representing its value relative to the other currency. For example, if EUR/USD is 1.1500, it means 1 EUR equals 1.1500 USD.

Quote Currency (Counter Currency): The currency on the right side of the pair, also called the counter currency or pip currency.

Major Currency Pairs in the Market

Although over 30 major currencies are traded on the Forex market, only a few currency pairs account for about 85% of the market value with very high liquidity. These are called major currency pairs:

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

The currencies forming these pairs include:

• USD (United States) – US dollar
• EUR (European Union) – Euro
• JPY (Japan) – Yen
• GBP (United Kingdom) – Pound Sterling
• CHF (Switzerland) – Franc
• CAD (Canada) – Canadian dollar
• AUD (Australia) – Australian dollar
• NZD (New Zealand) – New Zealand dollar

Other Assets Besides Forex

Reputable forex trading platforms offer a variety of tradable assets besides Forex, including stock indices, commodities, gold, and cryptocurrencies, providing diverse investment opportunities for traders.

How Forex Investment Works

Basic Principles

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

Suppose you predict that the EUR/USD pair will increase in value in the future. You will:

1. Place a buy order for the EUR/USD pair at the current price
2. Wait for the exchange rate to rise
3. Sell at a higher price to make a profit

Important note: You can buy or sell currency pairs (in both directions). If your prediction is opposite, you can perform a short sell: sell first, then buy later.

Real Trading Example

You use 11,500 USD to buy 10,000 Euros at the EUR/USD rate = 1.1500

Two weeks later, you sell 10,000 Euros at the rate of 1.2500, receiving 12,500 USD

Result: Profit = 1,000 USD

However, the Forex market has a very important tool called leverage. With leverage up to 200 times, you only need to deposit about 60 USD margin to execute this trade instead of 11,500 USD.

Trading Summary Table

Key Advantages of Forex Trading

Extremely Low Trading Costs

The forex market eliminates most intermediary costs such as asset management fees, brokerage fees, and income taxes. Brokers only earn profits from the spread (the difference between bid and ask prices), which is a very small fee.

24/7 Global Operation

The Forex market operates continuously worldwide, open from Monday to Sunday. This suits traders who want to trade as an additional investment channel, as they can control their time: morning, noon, evening, or even while sleeping.

Market Cannot Be Manipulated

Due to its enormous scale and the large number of participants from all over the world, no single organization, institution, or even central bank can control or manipulate this market.

Leverage Power

You can deposit a small amount of money but still participate in trading much larger currency volumes, thus earning profits hundreds of times your initial margin. However, leverage is a double-edged sword and must be used carefully.

Low Entry Barriers

You can start with a few hundred thousand VND in margin, which other markets like stocks, commodities, or real estate cannot offer.

8 Steps to Start Forex Trading

Step 1: Master 8 Basic Concepts

First, you need to understand the terms used in trading:

Long (Buy): When you buy a currency expecting to sell it at a higher price. Profits increase as the market rises.

Short (Sell): When you short sell a currency expecting it to decrease in value. Profits increase as the market falls.

Leverage (Leverage): Trading with a larger amount of money than your capital. Leverage is expressed as ratios like 50:1, 100:1, or 500:1. For example, with 1,000 USD and 500:1 leverage, you can trade 500,000 USD.

Margin (Margin): The amount of money you need to deposit with the broker to open and maintain a trade. The broker automatically deducts it from your account.

Pip (Point): The smallest change in the exchange rate of a currency pair, usually measured to the ten-thousandth. For example, if EUR/USD changes from 1.2000 to 1.2005, that is a 5 pip change.

Spread (Spread): The difference between the bid price (bid) and the ask price (offer), measured in pips. This is how brokers earn their profit.

Lot (Lot): The trading size measured in units of currency. You can trade: nano (100 units), micro (1,000 units), mini (10,000 units), or standard lot (100,000 units).

Point Value (Value of a Point): The dollar value of each movement in the exchange rate.

Step 2: Understand Types of Forex Markets

Spot Forex Market (Spot Market): Trading at the agreed price with immediate settlement or within 2 business days. This is the main market for banks and financial institutions. In Vietnam, this type of market is limited.

Forex CFD (CFD Contract): An agreement between two parties on the price difference of an asset without owning the actual asset. CFDs allow easy speculation across various markets. In Vietnam, 99% of Forex platforms operate as CFDs.

Currency Futures (Currency Futures): Contracts to exchange one currency for another at a specific future date at a pre-agreed price. This type is not common in Vietnam.

Currency Options (FX Options): Tools that give the right (but not obligation) to buy or sell an asset at a fixed price at expiration. This type is also not common in Vietnam.

Currency ETFs (Exchange-Traded Funds): Funds that track the relative value of a currency against the US dollar or a basket of currencies. This type is not common in Vietnam.

Conclusion: In Vietnam, you can trade Forex through CFDs on reputable, licensed platforms regulated by international authorities.

Step 3: Choose a Reputable Forex Broker

A suitable forex broker is evaluated based on many criteria:

• Trustworthiness: Must be licensed by international regulatory agencies
• Low trading fees and competitive commissions
• Diverse trading products
• User-friendly and stable trading platform

Step 4: Open a Forex Account

To open an account, you need to provide:

• ID card/passport (both sides)
• Email and phone number
• Bank account information

The broker will verify your identity through the KYC process.

Step 5: Select Currency Pairs to Trade

After opening an account, analyze and choose suitable currency pairs. Consider factors such as:

Economic Conditions: If you believe the US economy will weaken, this will negatively impact the dollar. You might sell USD to buy the currency of a stronger economy.

Trade Balance: If a country has high export demand, it will earn more foreign currency, boosting its economy and increasing its currency value.

Political Situation: Political events like elections also influence the market. If the elected candidate supports tight monetary policy with high interest rates, the currency may appreciate.

Step 6: Determine Margin

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

Risk Management Rule: You should only invest 2% of your margin in a specific currency pair to avoid excessive risk.

Step 7: Decide to Buy or Sell

BUY a currency pair if you believe the bid price will strengthen relative to the quote:

• Profits increase with each upward movement of the rate
• You will incur losses if the rate decreases after placing the order

SELL a currency pair if you believe the bid price will weaken:

• Profits increase with each downward movement of the rate
• You will incur losses if the rate increases after placing the order

Step 8: Use Risk Management Orders

Orders are automated trading instructions executed when the price reaches a predetermined level. There are two main types:

Stop Loss Order (Stop Loss): Closes the trade at a lower price to limit losses. An essential tool for risk management in volatile markets.

Take Profit Order (Take Profit): Closes the trade at a higher price to lock in profits.

Real Example: The EUR/USD pair is currently at 1.11128, and you predict it will rise to 1.2000 then fall. You place a sell limit order at 1.2000. When the price hits 1.2000, the order executes automatically, generating profit.

Step 9: Monitor Profits and Losses

It is crucial not to be overly emotional. The forex market is highly volatile, with prices constantly fluctuating. You should:

• Continue researching and learning
• Stick to your trading strategy
• Be patient and wait for the results to realize profits

Factors Affecting the Forex Market

Central Banks

The money supply is controlled by central banks, which implement policies that significantly influence currency prices. For example, quantitative easing (injecting money into the economy) often causes the currency to depreciate.

Financial News

Commercial banks and investors prefer to invest in economies with strong prospects. Positive news about a region encourages investment and increases demand for that region’s currency, leading to currency appreciation (unless there is a parallel increase in supply).

Market Sentiment

Trader psychology, often linked to news, plays a vital role in currency prices. If traders believe a currency will move in a certain direction, they will trade accordingly and may influence others, affecting supply and demand.

Regulations and Oversight of the Forex Market

The forex market is enormous but has limited regulation because there is no single authority overseeing it 24/7. Instead, many organizations worldwide regulate domestic forex activities to ensure providers adhere to certain standards.

Daily Trading Volume

Globally, about 5 trillion USD are traded daily in the forex market, averaging around 220 billion USD per hour. This market mainly involves institutions, corporations, governments, and currency speculators.

Speculators account for about 90% of trading volume, mostly focusing on the US dollar, Euro, and Yen.

Main Participants in the Forex Market

The main groups include:

Governments and Central Banks: Manage foreign reserves and support economic policies.

Large Banks: Participate to provide liquidity and manage foreign exchange risk.

Forex Brokers: Offer platforms and tools for investors.

Retail Investors: Make up nearly ⅓ of daily forex trading volume. With a market size of 5 trillion USD daily, this means about 1.7 trillion USD are traded by retail investors through brokers.

Conclusion

The forex market is the largest financial investment market worldwide. With transparency, low entry costs, and continuous trading opportunities, Forex is an effective investment channel for investors around the globe. Understanding what forex is, how the foreign exchange market operates, and appropriate trading strategies will help you start this investment journey confidently and safely.