A Step-by-Step Guide to Understanding the Forex Market: A Detailed Guide for Beginners

What Is Forex Trading? Understanding the Basic Concepts

What is Forex trading? This is a question asked daily by tens of thousands of people in Vietnam. In recent years, the foreign exchange market (Forex/FX) has increasingly attracted investors’ attention, but there are still many misconceptions about its nature.

The term “foreign exchange” or “Forex” does not refer to a single concept. It encompasses many different meanings: it can be foreign currencies (USD, EUR, AUD), international payment tools (cheques, bills), international certificates (bonds, stocks), cryptocurrencies (Bitcoin, Ethereum), or even gold.

But when mentioning forex trading or the foreign exchange market, people usually refer to the decentralized market where traders buy, sell, and exchange currency pairs. This is a playground where organizations, banks, investment funds, and individuals can participate for import-export purposes, hedging risks, or making profits from exchange rate fluctuations.

Massive Scale: Why Is Forex Important

The numbers say it all: every day, $5.3 trillion is traded on the global foreign exchange market. This is why Forex is the largest financial market in the world, far surpassing stocks, bonds, or any other markets.

With this scale, the Forex market operates 24/7 worldwide, from when Tokyo opens until the US market closes. This means you can trade at any time, even if you have other commitments.

Major Currency Pairs and How Forex Trading Works

In the Forex market, you don’t buy and sell currencies individually but by pairs. For example, EUR/USD, where EUR (Euro) is the base currency (Base Currency) and USD (US Dollar) is the quote currency (Quote Currency).

The exchange rate between these two currencies constantly changes based on economic demand, political events, decisions by central banks, and market sentiment. These fluctuations are opportunities for you to make profits.

Currently, the main currency pairs include: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD. These pairs account for up to 85% of daily trading volume due to high liquidity.

How Forex Trading Works: Buy or Sell?

What is Forex trading fundamentally? It’s very simple: you predict the direction of the exchange rate and place corresponding orders.

If you predict the rate will rise: you place a LONG order (Long). When the price actually increases, you sell and profit from the difference.

If you predict the rate will fall: you place a SHORT order (Short). When the price decreases, you buy back and earn from the difference.

Real Example of Forex Trading

Suppose EUR/USD is currently 1.1500. You believe the Euro will strengthen, so you decide to buy 10,000 EUR with a capital of 11,500 USD.

Two weeks later, the rate rises to 1.2500 as you predicted. You sell 10,000 EUR at this rate, receiving 12,500 USD.

Result: A profit of 1,000 USD from a single trade.

But that’s not all. In the Forex market, you can use leverage (Leverage) up to 200 times. This means you only need to deposit about 60 USD margin instead of 11,500 USD to execute the trade. That’s the power of leverage — but it’s a double-edged sword because losses can also be magnified.

Important Terms You Must Know

Before trading forex, you need to understand these basic concepts:

Long: Buying action, expecting the price to rise so you can sell at a higher level.

Short: Short selling, predicting the price will fall so you can buy back at a lower level.

Leverage (Leverage): A tool that allows you to trade larger amounts than your actual capital. For example, 100:1 leverage means you only need $1 to control $100 in the market.

Margin (Margin): The amount the broker requires you to deposit to open and maintain a trading position.

Pip: The smallest unit of exchange rate movement. 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) of a currency pair. This is how brokers earn profit.

Lot (Lot): The quantity of currency units you trade. Different sizes include: nano (100 units), micro (1,000 units), mini (10,000 units), or standard lot (100,000 units).

Advantages of Forex Trading Compared to Other Investment Forms

Extremely Low Trading Fees

Unlike stocks or real estate, forex trading does not involve complex fees like asset management fees or high taxes. Brokers only earn from the spread — the small difference between buy and sell prices.

Continuous Market Operation

Forex operates 24/5 worldwide. You are not restricted by fixed trading hours like stocks, and you have full freedom to choose when to participate.

No One Can Manipulate the Market

With a daily volume of $5.3 trillion and countless participants, no individual or organization (even central banks) can control or manipulate the entire market. This transparency protects traders.

Easy Entry Barriers

You can start forex trading with very small capital — just a few hundred thousand VND. This is not possible with stocks or real estate.

Power of Leverage

You can control large sums of money with only a small portion of your actual capital. This opens opportunities for significant profits but also involves high risks if not managed properly.

Types of Forex Markets You Can Trade

Spot Forex Market - Immediate Settlement Market

This is the market where transactions are executed at agreed-upon rates, settled immediately or within 2 business days. Usually used by banks and financial institutions. In Vietnam, this type of market is not permitted.

Forex CFD - Contract for Difference

CFD is an agreement between two parties on the difference in value of an asset. You don’t need to own the actual currency but only predict the price direction.

In Vietnam, 99% of Forex brokers operate via CFDs. Although not illegal, there are no specific regulations, so it’s advisable to choose brokers licensed by international authorities like ASIC, FCA, or CySEC for safety.

Currency Futures - Currency Forward Contracts

These are contracts to exchange one currency for another at a specific future date at a predetermined price. This type is not common in Vietnam.

Currency Options - Currency Options

FX Options allow you to trade based on predictions of whether the price will rise or fall relative to a fixed level at the end of the transaction. This type is also not common in Vietnam.

Step-by-Step Guide to Start Forex Trading

Step 1: Learn Basic Concepts

First, you need to understand the terms and mechanisms of the market. This will help you place orders accurately and manage risks more effectively.

Step 2: Choose the Suitable Market Type

In Vietnam, CFD Forex is the main choice. Understand different market types and select the method that aligns with your goals.

Step 3: Select a Reputable Broker

This is a crucial step. Choose a broker licensed by an international regulatory body, with reasonable trading fees, user-friendly interface, and comprehensive analysis tools.

Step 4: Open an Account

You will need to provide personal information, ID photo, email, phone number, and bank account details. This process usually takes a few minutes to a few hours depending on the broker.

Step 5: Choose Currency Pairs to Trade

After opening an account, select the currency pairs you want to trade. When making decisions, consider factors such as:

Economic situation: If you believe the US economy will weaken, USD may depreciate. Conversely, if a country’s economy is booming, its currency may appreciate.

Trade balance: If a country exports many popular goods, it will receive more foreign currency, increasing its currency’s value.

Political situation: Political events like elections or policy changes also influence currency prices.

Step 6: Determine Margin Amount

This is the amount you will deposit to open a position. The general rule is to invest only 2% of your total account in a single currency pair to avoid losing too much if the trade goes against you.

Step 7: Decide to Buy or Sell

Once you’ve chosen a currency pair, decide whether to LONG or SHORT.

If you buy: Profit increases as the rate rises, but you lose if the rate falls.

If you sell: Profit increases as the rate falls, but you lose if the rate rises.

( Step 8: Add Risk Management Orders

This is a critical step many beginners overlook. Always set Stop Loss )stop-loss order( to limit losses, and Take Profit )take-profit order### to lock in gains.

Stop Loss: An automatic order that closes your trade when the rate drops to a certain level, helping you avoid large losses.

Take Profit: An automatic order that closes your trade when the rate reaches your target level.

For example: If EUR/USD is currently 1.1128 and you expect it to rise to 1.2000, you can set a take-profit order at 1.2000. When the price hits this level, the order executes automatically.

( Step 9: Monitor and Adjust

After placing orders, keep an eye on market developments. But remember: avoid emotional trading. The Forex market will have local fluctuations, and the key is to stick to your planned strategy. Over time and with experience, you will see profits gradually accumulate.

Main Factors Affecting the Forex Market

) Central Banks

Central banks control the money supply and implement monetary policies that deeply influence currency prices. For example, quantitative easing (QE) will inject money into the economy, reducing the currency’s value.

Economic News

Commercial banks and investors prefer to invest in economies with strong prospects. Good news from a region will stimulate demand for its currency, increasing its value.

Market Sentiment

Trader psychology is also very important. If most believe a currency will appreciate, they will buy, which indeed will push the price up. Conversely, pessimistic sentiment can cause a decline.

Regulations and Market Oversight

Despite its enormous scale, the Forex market has few regulations because there is no single overseeing authority. Instead, international organizations like CFTC (Commodity Futures Trading Commission) and NFA ###National Futures Association### in the US supervise brokers to ensure compliance with standards.

Number of Participants in Forex Trading

The Forex market is not only for large corporations. Individual investors account for nearly one-third of daily trading volume, about 1.7 trillion USD. This demonstrates that forex trading is entirely feasible for those starting with small capital.

Conclusion

What is Forex trading? It is the world’s largest financial market, where you can profit from currency exchange rate fluctuations. With low transaction fees, 24/7 operation, low entry barriers, and leverage power, Forex has become a popular investment channel for millions worldwide.

However, remember that forex trading also involves risks. Before starting, learn thoroughly, choose a reputable broker, and always manage risks seriously. By doing these, you will have a solid foundation to become a successful trader.