What Is Forex Trading? A Complete Guide from A to Z for Beginners

The Essence of Forex Trading

What is forex trading at its core? It is the activity of buying and selling currency pairs to exploit exchange rate differences for profit. For example, you buy 10,000 EUR at an exchange rate of 1.1500, then sell at 1.2500, earning a profit of 1,000 USD from this price difference.

The forex market (Forex or FX) is not a centralized exchange like stocks. It is a global decentralized network where banks, financial institutions, corporations, and individual investors participate in currency trading 24/7.

The scale of this market is enormous — about 5.3 trillion USD traded daily. This figure is many times larger than the total value of all stock exchanges worldwide combined. Therefore, what is forex trading in the modern context — it is an indispensable investment channel.

Currency is the only commodity on the Forex market

Unlike stocks or commodities, on Forex you only trade a single type of asset: currency. But currencies are traded in pairs, such as EUR/USD, GBP/USD, or AUD/USD.

Basic concepts to understand

Base Currency (Price quote currency): This is the currency on the left. If EUR/USD = 1.1500, it means 1 EUR = 1.1500 USD.

Quote Currency (Pricing currency): The currency on the right, used to quote the price.

Major currency pairs dominating the market

Although over 30 currencies are traded, only 7 major pairs account for 85% of the market value:

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

These pairs are favored for their high liquidity, stable volatility, and low transaction costs.

Why trade forex?

Advantage #1: Extremely low transaction costs

Forex trading does not charge management fees, brokerage fees, or income taxes like other investment channels. Brokers’ profits come solely from the spread — the difference between bid and ask prices, usually just a few pips.

Advantage #2: Market operates 24/7

Unlike stocks that open for a few hours, Forex operates continuously from Monday to Friday worldwide. You can trade in the morning, afternoon, evening, or whenever you are free — with 100% flexibility.

Advantage #3: No one can manipulate the market

The daily volume of 5.3 trillion USD is too vast for anyone — even central banks — to control. The market self-regulates based on actual supply and demand.

Advantage #4: The power of leverage

This feature makes Forex attractive. You only need to deposit a small margin, but can control a much larger trading volume. For example, with a margin of 60 USD, you can trade 100,000 EUR (with 200:1 leverage).

However, leverage is a double-edged sword — it can amplify profits quickly but also lead to rapid losses.

Advantage #5: Very low entry barriers

You can start with just a few hundred thousand VND in margin. This amount is unimaginable in real estate or precious metals.

How Forex works — Practical example

Suppose you predict EUR will strengthen against USD in the near future. You decide:

Buy 10,000 EUR at EUR/USD = 1.1500

• Actual cost: 1,000 USD (using 100:1 leverage)
• Actual cash outlay: Only about 60 USD margin (with 200:1 leverage)

Two weeks later, EUR/USD rises to 1.2500

• Sell 10,000 EUR for: 12,500 USD
• Profit: 1,000 USD from about 60 USD margin

This demonstrates the power of leverage — but remember, if your prediction is wrong, losses can be just as fast.

Different types of Forex trading markets

Spot Forex — Spot exchange trading

This is the market where large banks and financial institutions trade. In Vietnam, this market is prohibited for individual investors.

Forex CFDs — Contract for Difference

This is the most common trading type in Vietnam (99% of brokers operate under this model). You do not actually own the currency but speculate on whether the price will go up or down. If correct, you profit from the price difference; if wrong, you lose money.

Important: Only trade on licensed Forex brokers regulated by international authorities like ASIC, FCA, CySEC to ensure asset safety.

Currency Futures & Options

These are derivative instruments like futures contracts or options. In Vietnam, these are not very common.

8 steps to start Forex trading for beginners

Step 1: Master 8 basic terms

Long (Buy): Buy a currency pair when you believe the price will rise.

Short (Sell): Short sell a currency pair when you believe the price will fall.

Leverage (Leverage): A tool that allows trading with a larger volume than your cash. For example: 50:1, 100:1, 500:1.

Margin (Margin): The amount you need in your account to open a trade. It is automatically locked when you place an order.

Pip (Point): The smallest unit of exchange rate movement. If EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.

Spread (Spread): The difference between bid (bid) and ask (ask) prices. Spread is measured in pips.

Lot (Lot): The size of the contract you buy/sell. Sizes include Nano (100 units), Micro (1,000 units), Mini (10,000 units), Standard (100,000 units).

Position (Position): An open trade that has not yet been closed.

Step 2: Understand the types of Forex markets

Besides Spot Forex and CFDs, you should learn about Currency Futures, FX Options, and Currency ETFs — although these are less common in Vietnam.

Step 3: Choose a reputable broker

Criteria:

• Licensed by international authorities (ASIC, FCA, CySEC) — mandatory
• Low transaction fees
• Reasonable brokerage commissions
• User-friendly trading platform
• Good customer support

Step 4: Open an account

Prepare:

• ID card/passport (both sides)
• Email and phone number
• Bank account

Identity verification usually takes 1-2 days.

Step 5: Select currency pairs to trade

Analyze factors such as:

Economic situation: If the US economy weakens, USD may depreciate. You can sell USD to buy the currency of a stronger economy.

Trade balance: Countries exporting many goods tend to have stronger currencies.

Political situation: Elections, monetary policies, central bank interest rates — all influence currency prices.

Step 6: Determine margin

A golden rule: Invest only 2% of your total capital in a single currency pair. If you want to trade 100,000 USD with a 1% margin rate, you only need 1,000 USD.

Step 7: Decide to buy or sell

BUY (Long) if you believe:

• The quote currency will strengthen
• Profits increase with each upward movement
• Losses occur if the price drops

SELL (Short) if you believe:

• The quote currency will weaken
• Profits increase with each downward movement
• Losses occur if the price rises

Step 8: Use risk management orders

Stop Loss (Stop-loss order): Automatically close the trade if the price drops to a certain level, limiting losses.

Take Profit (Take-profit order): Automatically close the trade if the price rises to a certain level, locking in target profits.

Example: EUR/USD is currently 1.1128, and you predict it will rise to 1.2000. You set a limit sell order at 1.2000. When the price hits 1.2000, the order executes automatically.

Step 9: Monitor and stay unemotional

The Forex market fluctuates constantly. Prices go up, down, then up again multiple times. Stay calm, stick to your strategy, and keep learning. Profits come from discipline and knowledge, not luck.

What factors influence currency prices?

Central Banks

Policies like quantitative easing (QE) — pumping money into the economy — tend to decrease currency value. Conversely, raising interest rates usually increases currency value.

Economic news

If a country releases good economic data (GDP growth, lower unemployment), investors will want to invest in that country, increasing demand for its currency and raising its price.

Market sentiment

Trader emotions are also crucial. If traders believe a currency will appreciate, they will buy, which actually pushes the price up.

Geopolitical events

Conflicts, trade policies, or elections can surprise the market.

Forex market regulations and oversight

The Forex market is huge but less centrally regulated. However, each country has its own regulatory authority:

• USA: CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association)
• Europe: ESMA
• Australia: ASIC

When choosing a Forex broker, check which authorities regulate it.

Impressive numbers about the Forex market

• 5.3 trillion USD: Daily trading volume
• 220 billion USD: Trading per hour
• 85%: Share of the 7 major currency pairs
• 90%: Proportion of speculative trading
• 1/3: Share of retail investors (about 1.7 trillion USD/day)

These figures show that Forex is not only a large market but also a democratized one — anyone with a strategy can make money.

Participants in the Forex market

Forex is not just for the wealthy. It includes:

Governments and central banks: Trading to manage national foreign exchange reserves, support the economy.

Large banks: Trading for profit and risk management.

Forex brokers: Providing trading platforms for retail investors.

Retail investors: Account for nearly 1/3 of the volume, about 1.7 trillion USD daily. This group is growing rapidly.

Conclusion: What is forex trading in the modern world?

What is forex trading? It is an opportunity for everyone — regardless of financial background — to participate in the world’s largest market. With low entry costs, high liquidity, and 24/7 operation, Forex has become a favorite investment channel for millions worldwide.

But remember, what is forex trading without a strategy? It’s just gambling. Learn, practice with demo accounts, manage risks carefully, and only trade on reputable platforms. Only then can you truly leverage the opportunities that the Forex market offers.