What Is Forex Trading? A Comprehensive Guide for Beginners

Market Overview of the Foreign Exchange Market

In recent years, forex trading has become an investment field that many Vietnamese investors are interested in. However, many people still feel confused when learning about “what is forex trading” and how to effectively enter this market.

Forex (Forex or FX) is a decentralized trading space where participants can buy, sell, and exchange currency pairs to profit from exchange rate fluctuations. This market operates with an average daily trading volume of up to 5.3 trillion USD, far exceeding the scale of any other financial market worldwide.

What makes forex trading attractive is its 24/7 availability and low entry costs, allowing anyone to start with a small capital.

Basic Definitions and Concepts

Foreign Exchange and Trading Instruments

In a broad sense, forex can include:

• Actual foreign currencies: USD, EUR, GBP, JPY, CHF, AUD, NZD, CAD
• International payment tools: bank cards, bills of exchange, checks
• International certificates: government bonds, foreign company stocks
• Cryptocurrencies: Bitcoin, Ethereum, and other digital currencies
• Precious commodities: gold is also considered a form of forex

However, in the context of the modern market, when referring to forex trading, we mean buying and selling currency pairs on specialized platforms to leverage price movements for profit.

Major Currency Pairs and Trading Mechanisms

Out of more than 30 currencies traded in the market, only 7 major pairs account for 85% of global trading volume: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, USD/CAD.

Each currency pair includes:

• Base currency (quoted currency): the currency on the left, representing the reference value
• Quote currency (pricing currency): the currency on the right, used to value the base currency

For example, if EUR/USD = 1.1500, it means 1 EUR equals 1.15 USD.

How Forex Trading Works

What Is Forex Investment in Practice?

What is forex investment if not a form of predicting and betting on exchange rate changes? You choose a currency pair, analyze trends, and decide to buy or sell based on your forecast.

Buy scenario (Long position):

• You believe EUR will strengthen against USD in the future
• Order: Buy 10,000 EUR at 1.1500, costing 11,500 USD
• Two weeks later: Sell 10,000 EUR at 1.2500, receiving 12,500 USD
• Profit: 1,000 USD from the exchange rate difference

Sell scenario (Short position):

• You predict a currency will weaken
• You short sell first, then buy back at a lower price

Leverage Power

The most prominent feature of forex trading is the use of (leverage). Instead of paying the full 11,500 USD to buy 10,000 EUR, you only need to deposit a small margin, for example, 60 USD with 200:1 leverage.

This allows:

• Earning profits many times the margin amount
• Participating in large trades with small capital
• Optimizing returns

However, leverage is a double-edged sword—losses are also amplified proportionally.

Key Advantages of Forex Trading

Extremely Low Costs

Unlike stocks or real estate, forex trading does not incur management fees, brokerage commissions, or high taxes. Forex brokers only earn from the spread (the difference between bid and ask prices), which is usually very small for major currency pairs.

24/7 Market Operation

The forex market is active five days a week, from East to West: Tokyo, London, New York. This allows:

• Trading at any time
• Flexibility to combine with daily work
• Capturing opportunities from global events

Market Not Subject to Manipulation

With a scale of 5.3 trillion USD/day, no organization, even central banks, can control or manipulate the market. This ensures high fairness and transparency.

Opportunities for Small Investors

You can start with a few hundred thousand VND in margin, something impossible in stocks, futures, or real estate.

Types of Forex Markets

Spot Forex Market

Trading of spot exchange rates, settled within 2 business days. This is the main market for banks and financial institutions but is limited in Vietnam.

Forex CFD (Contract for Difference)

A contract between two parties on the price difference of currencies. CFDs allow investment in various assets without owning them physically. This is the most popular form (99%) in Vietnam.

Currency Futures

Futures contracts with predetermined price and settlement date. Less common in Vietnam.

Currency Options

Options that give the right to predict whether prices will rise or fall. Suitable for investors who want to limit risks.

Currency ETFs

Funds tracking the relative value of currencies against USD or other currencies.

8 Steps to Start Forex Trading

Step 1: Master Basic Terms

Before trading, you need to understand these concepts:

• Long: Buy, expecting the price to rise. Profit when the rate increases.
• Short: Short sell, expecting the price to fall. Profit when the rate decreases.
• Leverage: Trading ratio, such as 50:1, 100:1, 200:1.
• Margin: The required deposit to open and maintain a trade.
• Pip: The smallest decimal point, representing price movement. For example: EUR/USD from 1.2000 to 1.2005 = 5 pips.
• Spread: The difference between bid and ask prices, measured in pips.
• Lot: Trading volume—nano (100 units), micro (1,000), mini (10,000), standard (100,000).

Step 2: Choose the Suitable Market Type

Determine whether you want to trade CFDs or other types. For retail investors in Vietnam, CFD is the most common choice.

Step 3: Select a Reputable Forex Broker

Criteria:

• Licensed by international regulatory bodies (ASIC, FCA, CySEC)
• Low trading fees and commissions
• Stable trading platform
• Good customer support

Step 4: Open an Account

Prepare:

• ID card/CCCD
• Email and phone number
• Bank account
• Complete identity verification survey

Step 5: Choose Currency Pairs and Analyze

Consider factors:

Economic situation: If the US economy weakens, USD will depreciate. Buy currencies of stronger economies.

Trade balance: Countries with high exports create high demand for their currencies, increasing their value.

Political situation: Elections, interest rate policies, central bank decisions all impact exchange rates.

Step 6: Determine Margin Amount

Golden rule: Only deposit 2% of your account as margin for a currency pair. For example, to trade 100,000 USD with 1% margin, you only need 1,000 USD.

Step 7: Place Buy or Sell Orders

• BUY (Long) if you believe the base currency will strengthen
• SELL (Short) if you expect the base currency to weaken

Step 8: Use Risk Management Orders

Stop Loss: Automatically close the trade when losses reach a set level.

• Example: Buy EUR/USD at 1.1100, set Stop Loss at 1.1050. If price drops to 1.1050, the order closes automatically.

Take Profit: Automatically close the trade when profit reaches the target.

• Example: Buy EUR/USD at 1.1100, set Take Profit at 1.1200. When price reaches 1.1200, profit is locked in.

Note: Do not act emotionally when the market fluctuates. Stick to your strategy and continue learning to improve your skills.

Factors Affecting the Market

Central Banks and Monetary Policies

Decisions by central banks on interest rates, quantitative easing, or tightening monetary policy greatly influence currency prices. Quantitative easing usually weakens the currency, while tightening increases its value.

Economic News and Macroeconomic Data

Employment reports, CPI, GDP, trade balance—all directly impact currency demand. Positive news about an economy often causes its currency to appreciate.

Market Sentiment

Trader confidence in trends can build a decision. If too many believe in one direction, they will trade accordingly, creating strong supply and demand forces.

Geopolitical Events

Conflicts, trade negotiations, or policy decisions can cause significant volatility and create trading opportunities.

Frequently Asked Questions About Forex Investment

How is the forex market regulated?

The forex market has no centralized regulatory authority 24/7. Instead, each country has its own supervisory organizations. In the US, CFTC and NFA oversee. In Vietnam, choose brokers licensed by ASIC (Australia), FCA (UK), or CySEC (Cyprus).

What is the daily trading volume?

An average of 5.3 trillion USD/day is traded in the global forex market, equivalent to about 220 billion USD per hour.

Who are the main participants?

• Governments and central banks (regulate)
• Major banks (provide liquidity)
• Forex brokers (intermediaries)
• Retail investors (account for about ⅓ of trading volume)

Retail investors participate in approximately 1.7 trillion USD of daily trades through brokers.

Conclusion

Now you understand clearly that forex investment is—an opportunity to profit from currency fluctuations in a transparent, low-cost, 24/7 open market.

The forex market is the largest financial playground worldwide, offering equal opportunities for investors of all sizes. With solid strategies, good risk management, and continuous learning, you can become a successful forex trader.

The journey begins with choosing a reputable broker, continuous education, and practicing on a demo account before trading live.