What is Forex Foreign Exchange? A Comprehensive Guide for Beginners

Understanding the Forex Market

What is forex? This is the question that tens of thousands of Vietnamese investors ask every year. The foreign exchange market has become an increasingly attractive field, but there are also many misconceptions about this concept.

In a broad sense, forex can refer to currencies such as USD, EUR, AUD or international payment tools like bank cards, bills of exchange. Additionally, forex includes cryptocurrencies, gold, and even international documents like government bonds or international company stocks.

However, when it comes to forex trading, we are talking about a decentralized market where participants can buy, sell, and exchange different currencies. The average daily trading volume reaches up to 5.3 trillion USD, making the forex market the largest trading floor in the world, far surpassing stock or bond markets.

How Forex Trading Works

What is forex from an operational perspective? Simply put, it is buying and selling currency pairs to profit from exchange rate differences. Currency pairs are traded in pairs, for example EUR/USD. The continuous fluctuation of exchange rates—affected by economic and geopolitical factors—creates endless trading opportunities.

In a currency pair, the left currency is called the base currency (base currency) – the unit used for pricing, while the right currency is the quote currency (quote currency). For example, EUR/USD = 1.1500 means 1 EUR = 1.1500 USD.

Major currency pairs are traded in huge volumes, including: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD, and USD/CAD. These pairs account for about 85% of the market value.

Eight Basic Concepts You Must Know

To start forex trading, you need to understand the daily terminology:

Long (mua) means buying a currency with the expectation of selling it at a higher price. Short (bán) is the opposite, selling a currency short, predicting it will decrease in value.

Leverage (đòn bẩy) allows you to trade with a larger volume than your actual capital. For example, with 200:1 leverage, you only need a margin of 60 USD to trade 12,000 USD. However, this is a double-edged sword—it can multiply profits but also losses.

Margin (tiền ký quỹ) is the amount you must deposit with the broker to open and maintain trades. Pip is the smallest change in the exchange rate—if EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.

Spread is the difference between the bid and ask price, measured in pips. This is how brokers earn revenue. Lot is the trading size—from nano (100 units) to standard (100,000 units).

Types of Forex Trading

Spot Forex Market (thị trường hối đoái giao ngay) involves immediate settlement or within 2 business days. This market is mainly participated in by large banks but is prohibited in Vietnam.

Forex CFD (hợp đồng chênh lệch giá) is a contract between two parties on the price difference of an asset without owning the underlying asset. In Vietnam, most trading platforms operate this way. To ensure safety, choose brokers licensed by international regulators like ASIC, FCA, CySEC.

Currency Futures and Currency Options are also trading forms but are less common in Vietnam.

Key Advantages of Forex Trading

Very low trading costs: No management fees or traditional brokerage fees. Brokers only earn from the spread—the difference between buy and sell prices.

24/7 operation: The forex market operates worldwide around the clock, allowing you to trade anytime—morning, evening, or while sleeping.

Immunity to manipulation: The market’s enormous size with countless participants means even central banks cannot control it.

Leverage power: You can deposit a small amount and participate in large trades, potentially earning hundreds of times more.

Low entry barrier: With just a few hundred thousand VND, you can start forex trading—something other investment channels like stocks or real estate cannot offer.

Step-by-Step Guide to Forex Trading

Step 1: Learn and Understand the Market

Before trading, master the 8 basic concepts mentioned above. Learn how to read price charts, understand exchange rates, and know bid-ask spreads.

Step 2: Choose the Right Trading Type

Decide whether you want to trade Spot Forex or Forex CFD. Given current conditions in Vietnam, CFD is the most feasible option. Warning: select reputable brokers with international licenses to protect your account.

Step 3: Open a Trading Account

To open an account, you need to provide basic documents such as ID card, email, phone number, and bank account. Brokers will require identity verification before activating your account.

Step 4: Select Currency Pairs to Trade

Analyze whether the exchange rate of your chosen pair will rise or fall. Consider factors like national economic conditions, trade balance, and political stability. If you believe the US economy will weaken, you can sell USD to buy currencies from stronger economies.

Step 5: Determine Margin Capital

Depending on the broker’s policy, you can trade 100,000 USD with just 1,000 USD margin (1% margin). A reasonable rule is to invest only 2% of your total capital in a single currency pair.

Step 6: Decide to Buy or Sell

Buy (Long) if you believe the bid price will strengthen relative to the quote—profits increase with each pip rise.

Sell (Short) if you believe the bid price will weaken—profits increase with each pip decrease.

Step 7: Use Risk Management Orders

Stop Loss (Stop Loss) automatically closes a trade when the price drops to a certain level, limiting losses. Take Profit (Take Profit) automatically closes a trade when the target profit is reached.

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

Step 8: Monitor and Adjust

The forex market is always volatile. The key is to keep learning, stick to your trading strategy, and avoid emotional trading. Over time, you will see profits from the market.

Factors Affecting the Forex Market

Central banks control the money supply. Their decisions to loosen or tighten monetary policy have a significant impact on currency prices.

Financial news from a country can encourage investment in that country’s currency, increasing demand and value.

Market psychology is equally important. If traders believe a currency will rise, they will buy, creating a self-fulfilling effect.

Regulations and Management Structure

Despite its enormous scale, the forex market has limited regulation. Regulatory bodies in each country ensure that trading providers comply with standards. In the US, CFTC and NFA are responsible for oversight.

Who Participates in Forex?

The forex market includes governments, central banks, large banks, brokers, and retail investors. Retail investors account for nearly 1/3 of daily trading volume—about 1.7 trillion USD.

Important Notes

What is forex—opportunity or risk? The answer depends on your approach. Leverage can multiply profits but also losses. Always use stop-loss orders, don’t trade with all your capital, and only invest what you can afford to lose.

The forex market offers great opportunities for those willing to learn, disciplined, and patient. Start with basic steps, practice on demo accounts before trading with real money.