What is Forex Foreign Exchange? A Comprehensive Guide to Forex Investment from Basic to Advanced

Forex - The World’s Largest Decentralized Currency Market

Besides what is Forex? Simply put, it is the currency trading market between different currency pairs (for example EUR/USD, GBP/USD). Every day worldwide, approximately 5.3 trillion USD are traded, making Forex the biggest financial playground on the planet.

Unlike stocks or real estate, Forex is a completely decentralized market - no agency or corporation can control it. This ensures transparency and creates fair opportunities for everyone involved, from central banks to individual investors.

What Can You Trade on the Forex Market?

Main Commodities: Currencies traded in pairs

You will trade major currency pairs such as:

• EUR/USD (Euro / US Dollar)
• USD/JPY (US Dollar / Japanese Yen)
• GBP/USD (British Pound / US Dollar)
• AUD/USD, USD/CHF, NZD/USD, USD/CAD

These currency pairs account for up to 85% of market value and have the highest liquidity, ideal for beginners.

Besides forex, modern trading platforms also offer CFDs on stock indices, commodities, gold, and cryptocurrencies, expanding investment options.

Core Concepts You Must Know

Base Currency (Quote Currency): The currency on the left side of the exchange rate pair, representing its value. For example, EUR/USD = 1.1500 means 1 EUR = 1.1500 USD.

Quote Currency (Pricing Currency): The currency on the right side of the pair, used to price the base currency.

Leverage (Leverage): A tool that allows you to trade with more money than you have. With 200:1 leverage, you only need a $60 margin to control a trade worth thousands of USD.

Margin (Margin): The amount you must deposit with the broker to open and maintain trading positions.

Pip: The smallest decimal change in the exchange rate. If EUR/USD moves from 1.2000 to 1.2005, that’s a 5 pip change.

Spread: The difference between the bid price (bid) and the ask price (ask) - this is how brokers earn profit.

Lot (Lot): The quantity of currency units you buy/sell. Nano (100 units), micro (1,000), mini (10,000), or standard (100,000).

Why Is Forex More Attractive Than Other Investment Channels?

Very Low Trading Fees: No management fees or brokerage commissions like stocks. You only pay the spread - a small difference between buy/sell prices.

Market Open 24/7: Forex operates continuously worldwide, from Monday to Friday. You can trade anytime that suits you - morning, evening, or even while sleeping.

No Market Manipulation: With a daily volume of 5.3 trillion USD, no one - not even central banks - can control prices.

Leverage Power: This is what makes Forex unique. You can invest small amounts but earn hundreds of times more - but also risk equivalent losses. It’s a double-edged sword that requires careful management.

Low Entry Barriers: With just a few hundred thousand VND in margin, you can start trading - something real estate or commodity markets cannot offer.

How to Start Trading Forex?

Step 1: Master the Types of Forex Markets

Spot Forex Market (Immediate Trading): Trade at agreed prices with settlement in 2 days. In Vietnam, this market is prohibited.

Forex CFD (Contract for Difference): Trade via contracts that reflect price differences. 99% of Forex brokers in Vietnam operate this way. Not banned, but choose brokers licensed by international authorities like ASIC, FCA, CySEC.

Currency Futures: Futures contracts with pre-set prices. Not common in Vietnam.

FX Options: Trading based on predicting price increases/decreases. Not common in Vietnam.

Currency ETFs: Funds tracking the relative value of a currency. Not common in Vietnam.

Step 2: Choose a Reputable Broker

Criteria:

• International License (ASIC, FCA, CySEC) - mandatory
• Low trading fees, reasonable brokerage commissions
• User-friendly trading platform
• Good customer support
• Diverse trading products

Step 3: Open an Account

Prepare:

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

Step 4: Select Suitable Currency Pairs

When choosing pairs to trade, consider:

Economic Conditions: If the US faces recession, the dollar weakens. Conversely, a strong economy boosts its currency.

Trade Power: Countries exporting many goods with high demand will receive more foreign currency, stimulating the economy and raising their currency’s value.

Political Context: Elections, monetary policies, or major political events can significantly impact currency prices.

Step 5: Determine Margin (Margin)

Margin is the amount you deposit to control a larger trading position. If you want to trade 100,000 USD with a 1% margin requirement, you only need $1,000.

Golden Rule: Only allocate 2% of your total capital to a single currency pair.

Step 6: Decide to Buy or Sell

BUY (Long) a currency pair if you believe the quote currency will strengthen against the base:

• Profit increases as price rises
• Losses occur if price falls

SELL (Short) a currency pair if you believe the quote currency will weaken:

• Profit increases as price falls
• Losses if price rises

Step 7: Use Risk Management Orders

In Forex, risk management is not optional but mandatory.

Stop Loss (Stop-Loss Order): Automatically closes the trade when the price drops below a set level, limiting losses.

Take Profit (Take-Profit Order): Automatically closes the trade when the price reaches your target profit level.

Example: EUR/USD is currently 1.11128, you predict it will rise to 1.2000 then fall. Place a sell order at 1.2000. When the price hits 1.2000, the sell order executes automatically.

Step 8: Monitor and Adjust

Forex markets fluctuate constantly - prices go up and down. The key is:

• Avoid emotional actions
• Stick to your strategy
• Continuously learn from each trade
• Be patient and wait for results

What Factors Affect Forex Prices?

Central Banks: Monetary policies like quantitative easing (QE) or interest rate hikes directly influence prices. Pumping money into the economy weakens the currency.

Economic News: If a country reports strong economic data (high GDP growth, low unemployment), it will boost its currency, raising its value.

Market Sentiment: If traders believe a currency will rise, they buy, creating capital flows - impacting prices.

How Big Is the Forex Market Really?

• 5.3 trillion USD/day - total trading volume
• 220 billion USD/hour - average per hour
• Retail traders account for ~1/3 of daily volume (about 1.7 trillion USD)
• 90% of volume comes from currency speculators
• Mostly concentrated on USD, EUR, JPY

Who Participates in Forex Trading?

• Governments & Central Banks: Regulate foreign exchange, support the economy
• Large Banks: Trade large volumes, provide liquidity
• Forex Brokers: Connect traders with the market
• Individual Investors: Increasingly participating through trading platforms

Risks to Be Aware Of

Although Forex is attractive, there are real risks:

Leverage Risk: It can multiply profits by 100 times, but also losses. Position management is key.

Market Risk: Prices fluctuate rapidly, especially with major economic news. You can lose your entire margin in an instant.

Psychological Risk: Fear or greed can cause you to violate your strategy. Discipline is money.

Conclusion

Forex is not a “shortcut to wealth” but the largest financial market globally with real opportunities for those with discipline, knowledge, and good risk management.

Start small, keep learning, always use stop loss, and remember: Sustainable profits are better than risky speculation.

Wishing you success in your forex trading journey!