What Is the Forex Market? All the Things Vietnamese Investors Need to Know

1. What is Forex? The Nature of the Global Foreign Exchange Market

What is forex is a question that many Vietnamese investors still wonder about. The foreign exchange market (Forex) is the largest playground worldwide, where investors trade different currency pairs. Unlike stock or real estate markets, forex is a decentralized (OTC) market with no official exchanges in each country.

Market Size and Liquidity of Forex

The foreign exchange market is the most liquid market in the world. According to statistics from 2020, the average daily trading volume in this market reached about 6.6 trillion USD. This figure shows that forex cannot be manipulated by any organization due to its enormous size and the vast number of participants.

Main Players in the Forex Market

Previously, forex was mainly the playground of large financial institutions, central banks, and import-export companies. They used foreign exchange trading to hedge against currency risk, prevent inflation, or store value during political instability.

However, as the investment demand of individual investors increased and international trade developed strongly, forex has gradually become a popular investment tool to diversify portfolios. Although the trading volume of individual investors is still low compared to financial organizations, the attraction from high liquidity and continuous price volatility of the foreign exchange market is increasingly drawing more individuals to participate.

2. Most Traded Currency Pairs on Forex

Not all currency pairs have the same trading volume. According to the Bank for International Settlements (BIS) survey in 2019, the top traded currencies on the foreign exchange market are:

EUR/USD leading with over 24% of daily trading volume. This is the most preferred currency pair on forex, mainly influenced by the interest rate decisions of the European Central Bank (ECB) and the Federal Reserve (FED).

Next is USD/JPY (13.2%) influenced by the interest rate decisions of the Bank of Japan (BoJ) and the FED, and GBP/USD (9.6%) reflecting the economic situation of the UK and the US.

Top 10 Most Popular Currency Pairs

Besides the top three currency pairs, the list of the 10 most traded currency pairs includes:

• AUD/USD (5.4%) - affected by Australia’s mineral export situation
• USD/CAD (4.4%) - closely related to oil prices as Canada is a major oil exporter
• USD/CNY (4.1%) - reflecting the economic competition between the US and China
• USD/CHF (3.5%) - heavily traded during global economic instability
• USD/HKD (3.3%) - Hong Kong dollar pegged to USD
• EUR/GBP (2.0%) - influenced by the economic relationship between the UK and the European Union
• USD/KRW (1.9%) - rising with South Korea’s economic development

3. Economic Factors Affecting Forex

To better understand what is forex in real-world context, investors need to grasp the main economic factors influencing the fluctuations of the foreign exchange market:

Central bank interest rate decisions are the most critical factor. Interest rates are considered the price of money – increasing rates will raise the currency’s value, while decreasing rates will lower it. Information about interest rate changes impacts immediately and strongly on the price movements of currency pairs.

Gross Domestic Product (GDP) also directly affects currency value. When GDP falls below expectations, the currency tends to depreciate. Conversely, when GDP exceeds expectations, the currency tends to appreciate.

Consumer Price Index (CPI) and inflation are indirect measures of currency value. High CPI or inflation often leads to central banks raising interest rates to control the situation.

Unemployment rate is an indirect but important indicator. Rising employment puts upward pressure on interest rates, as the central bank needs to balance inflation and growth. The two most watched statistics are the US ADP and NFP (Nonfarm Payrolls), released monthly.

Announcements from the US Federal Open Market Committee (FOMC) also have a significant impact. Each month, the FOMC meets to set the open market interest rate and comment on economic conditions. These meetings can cause considerable market volatility – for example, on March 18, 2015, the EUR/USD surged 400 pips within minutes after a negative outlook for the USD following a meeting.

4. Legal Status of Forex Trading in Vietnam

Forex in Vietnam: Legal or Illegal?

This is a question many Vietnamese investors care about. Currently, the Vietnamese government tightly controls foreign exchange reserves, so only licensed banks are allowed to conduct foreign exchange transactions. Forex trading through online platforms has not yet been legalized in Vietnam, and no Forex broker is licensed by Vietnamese authorities.

However, this does not mean forex trading is illegal. Individual investors are fully permitted to engage in foreign exchange trading as an investment tool. The difference is: you cannot trade through a “licensed” Vietnamese broker because Vietnam does not license any Forex brokerage companies.

To trade forex safely and legally, Vietnamese investors should choose reputable international brokers licensed by regulatory authorities in countries that permit forex trading.

Tax Issues in Forex Trading

According to current Vietnamese law, foreign exchange trading is not yet permitted, and there is no license for forex brokerage in Vietnam. Currently, Vietnam has no clear policy on forex trading, so the issue of personal income tax from this activity has not been raised.

However, note that this is a legally undefined area, so participating in forex trading involves certain risks.

5. Forex Trading Hours: When Is the Best Time?

The forex market operates 24 hours a day, 5 days a week, but liquidity and volatility vary depending on the time of day:

Each currency pair exhibits different volatility at different times. For example, the AUD will be more volatile when the Sydney session is active, while European currency pairs are more active when London opens. This allows traders to almost continuously trade during the day if desired.

6. Should You Trade Forex? Things to Consider

Forex is the largest and most liquid financial market in the world. All economic information can impact and create profit opportunities. These characteristics make forex very attractive to investors seeking profit opportunities.

However, before deciding to participate, Vietnamese investors should note:

Legal considerations: Although forex trading is not illegal, the legal framework in Vietnam remains unclear. You should carefully select reputable brokers licensed in countries that permit forex trading.

Criteria for choosing a broker:

• Reputation and information security
• Reasonable transaction costs
• Convenient deposit and withdrawal procedures
• Stable trading platform
• Fast order execution
• Professional customer service

Risk management: Always set stop-loss and take-profit levels before opening positions. Do not trade with money you cannot afford to lose.

The forex market offers huge opportunities but also involves high risks. Success in forex requires deep knowledge, analytical skills, and good psychology. You can participate as an individual investor through reputable international brokers, as long as you comply with legal regulations.