What is Forex Trading? Everything You Need to Know About the Foreign Exchange Market

Forex - The Huge Financial Market You Might Not Know

If you’ve ever heard of what is forex trading but haven’t understood it clearly, today we will explore one of the most vibrant financial markets in the world.

Basic Concepts of Forex

Forex (Forex or FX) is not a strange concept. It appears daily in our lives — when you travel abroad, import goods from another country, or when international companies conduct economic transactions.

Simply put, forex is the activity of buying and selling, exchanging different currencies. But not only for ordinary individuals, it also involves central banks, multinational corporations, and millions of investors worldwide.

In a broad sense, forex can include:

• Foreign currencies: USD, EUR, GBP, JPY…
• International payment tools: credit cards, bills of exchange, certificates…
• International securities: government bonds, foreign stocks…
• Digital assets: Bitcoin, Ethereum, and other cryptocurrencies
• Precious metals: gold and silver

However, when talking about forex trading, we usually refer to a decentralized market where traders buy and sell currency pairs to profit from exchange rate fluctuations.

The Massive Scale of the Market

To get an idea of the size of the forex market, know that about 5 trillion USD are traded daily worldwide. This number is many times larger than the stock market. With an average trading volume of 220 billion USD per hour, the forex market operates continuously 24/7, with no breaks.

How Does Forex Trading Work?

Currency Pair Mechanism

When you trade forex, you always deal with two currencies simultaneously, called a currency pair. The most typical example is EUR/USD:

• EUR (Euro of the Eurozone)
• USD (US dollar)

If EUR/USD is quoted at 1.1500, it means 1 Euro equals 1.15 USD.

The forex market is not static — the exchange rate between two currencies constantly changes, depending on many factors: economic conditions, monetary policies, geopolitical events, published data… This volatility creates profit opportunities for traders.

The Main Currency Pairs Dominate the Market

Although over 30 currencies are traded on the forex market, only a few major pairs account for about 85% of the market value:

• EUR/USD
• USD/JPY (US dollar - Japanese Yen)
• GBP/USD (British Pound - US dollar)
• USD/CHF (US dollar - Swiss Franc)
• AUD/USD (Australian dollar - US dollar)
• NZD/USD (New Zealand dollar - US dollar)
• USD/CAD (US dollar - Canadian dollar)

These currency pairs have high liquidity, meaning you can buy or sell easily without difficulty finding a counterparty.

How to Start Forex Trading?

Step 1: Master 8 Basic Concepts

Before placing any trade, you need to understand these fundamental terms:

Long (Buy): You believe the currency price will rise. You buy the currency and expect to sell at a higher price. Your profit increases as the market goes up.

Short (Sell): You believe the currency price will fall. You short sell the currency and expect to buy back at a lower price. Your profit increases as the market declines.

Leverage (Leverage): A powerful tool that allows you to control a much larger amount of money than your actual margin. For example, with 100:1 leverage, you only need 100 USD to control 10,000 USD. However, it’s a double-edged sword — it can also magnify your losses.

Margin (Margin): The amount of money you deposit with the broker to open a trade. It is held as collateral to cover potential losses.

Pip: The smallest unit of price movement. For most currency pairs, 1 pip = 0.0001. If EUR/USD moves from 1.2000 to 1.2005, that’s a 5 pip increase.

Spread: The difference between the bid price (bid) and the ask price (ask). This is how brokers earn money. Spread is usually measured in pips.

Lot (Lot): Your trade size. Can be Nano lot (100 units), Micro lot (1,000 units), Mini lot (10,000 units), or Standard lot (100,000 units).

Stop Loss and Take Profit: Stop loss automatically closes your trade when the market moves against you beyond a certain point. Take profit automatically locks in gains when your target is reached.

Step 2: Understand Different Types of Forex Markets

Spot Forex Market: Trading at current prices, settlement within 1-2 business days. This is where banks and large financial institutions trade, but it’s not available for retail investors in Vietnam.

Forex CFD (Contract for Difference): A contract that pays the difference between opening and closing prices. You do not own the actual currency, only speculate on its price movement. This form is popular in Vietnam and not prohibited. However, you should choose brokers licensed by international regulators like ASIC (Australia), FCA (UK), or CySEC (Cyprus) for safety.

Currency Futures: Futures contracts to exchange currencies at a predetermined price on a future date. Not common in Vietnam.

Currency Options: The right (but not obligation) to buy or sell currency at a certain price before expiration. Not common in Vietnam.

Step 3: Choose a Reputable Broker

The top criterion is trustworthiness — the broker must be licensed by an international regulatory authority. Other criteria include:

• Low trading fees
• Competitive commissions
• Diverse trading products
• User-friendly trading platform
• Quality customer support

Step 4: Open a Trading Account

To open an account, you need to provide:

• ID card or passport
• Email address and phone number
• Bank account information
• Complete a risk profile survey

Step 5: Select Currency Pairs to Trade

Once your account is set up, analyze which currency pairs will rise or fall. Consider:

National economic situation: If you believe the US economy will weaken, USD will depreciate. Conversely, if a country has strong economic prospects, its currency may appreciate.

Trade balance: Countries exporting high-demand goods will have strong inflows, increasing their currency value.

Political stability: Political stability or upcoming elections can influence currency prices, especially if new monetary policies are expected.

Step 6: Determine Margin

Depending on the broker’s policy, you can deposit a small margin but still control large trades. The general rule is to risk only 2% of your account per trade for effective risk management.

Step 7: Decide to Buy or Sell

After choosing a currency pair, determine:

Buy (Long) if you believe the quote currency will strengthen against the base currency. Profits increase with each upward movement of the exchange rate.

Sell (Short) if you believe the quote currency will weaken against the base currency. Profits increase with each downward movement of the exchange rate.

Step 8: Set Risk Management Orders

Stop Loss: Automatically closes your trade if the market moves against you beyond a set point, preventing further losses.

Take Profit: Automatically locks in profits when the price reaches your predetermined target.

For example: If EUR/USD is at 1.1128 and you believe it will rise to 1.2000, you can place a buy order at 1.1128 with a Take Profit at 1.2000. When the price hits 1.2000, the order executes automatically, securing profit.

Step 9: Monitor Your Trades

The forex market is constantly volatile. Do not let emotions guide your decisions. Keep records of all trades, learn from mistakes, and continuously improve your strategy.

Why Do Many People Choose Forex Trading?

Very Low Trading Fees

Unlike other markets (stocks, real estate), forex trading reduces intermediary costs. Brokers only earn from the spread — the difference between bid and ask prices — which is usually very small.

24/7 Global Operation

The forex market never closes. It operates from Sunday evening to Friday evening (New York time). You can trade at any time that suits your schedule — early morning, late evening, or even while traveling.

No Market Manipulation

With a daily volume of 5 trillion USD, even central banks cannot manipulate or control the market. This makes forex a more transparent and fair market.

The Power of Leverage

You can control much larger amounts than your cash. With 100:1 leverage, 100 USD can control 10,000 USD. But be careful — leverage can also magnify your losses.

Low Entry Barriers

You can start with just a few hundred thousand VND as margin. Most brokers have very low minimum requirements, making forex an accessible investment channel.

Factors Affecting Forex Prices

Central Banks and Monetary Policies

Central banks control the money supply. When they loosen monetary policy (increase money supply), currency prices tend to fall. Conversely, when they tighten (reduce money supply), currency prices tend to rise.

Financial News and Economic Data

Announcements on GDP growth, inflation, employment, etc., influence investor sentiment. If a country releases strong economic data, investors will want to put money into that country, increasing demand for its currency and raising its value.

Market Sentiment

Market sentiment — the confidence of traders — can be an independent decisive factor. If most traders believe a currency will rise, they will buy it, and this demand will push the price up.

Regulations and Oversight

The forex market is very large but less regulated compared to other markets. However, each country has supervisory agencies to ensure fairness.

In the US, the main agencies are:

• CFTC (Commodity Futures Trading Commission)
• NFA (National Futures Association)

When choosing a broker, check if they are licensed by recognized regulatory bodies.

Participants in the Forex Market

Governments and Central Banks: Participate to manage foreign exchange reserves and implement monetary policy.

Large Banks: Earn from spreads and predict exchange rate movements.

Multinational Companies: Trade forex to hedge currency risks from international operations.

Fund Managers: Manage investors’ funds.

Retail Investors: Individuals like you and me, participating through online trading platforms. Retail investors account for about 1/3 of daily trading volume, roughly 1.7 trillion USD!

Conclusion

If you’ve wondered “what is forex trading,” now you have a complete answer. From basic concepts to steps to trade, from advantages to risks, the forex market is a huge investment opportunity for anyone willing to learn.

Most importantly, start with solid knowledge, manage risks carefully, and choose a reputable broker. Forex is not a quick path to wealth, but a legitimate investment channel when approached properly.

Keep learning, practice on demo accounts first, and only start real trading when you are truly ready. Wishing you success on your forex investment journey!