What is Foreign Exchange? 5 Things You Need to Know Before Starting Forex Trading in 2025

Not Everyone Understands Forex Trading Correctly

In recent years, forex investment (Forex) has become one of the hottest financial sectors in Vietnam. Every day, tens of thousands of people search for information about what a forex trading platform is, how to get started, and whether it is possible to make money. But in reality, most people still have many misconceptions about this market.

Forex – also known as the foreign exchange market – is a decentralized market where individuals, organizations, banks, and governments trade currencies. Daily trading volume on the forex platform reaches $5.3 trillion, a figure dozens of times larger than the stock market. So why does so much money gather here?

Forex Is Not Just Currencies

The concept of “forex” initially sounds simple – just foreign currencies like USD, EUR, JPY,… But it also includes many other things:

International payment tools such as bank cards, money transfer checks, bills of exchange – items that help you transact between countries.

International certificates and assets like government bonds, international company stocks, or even gold.

Cryptocurrencies like Bitcoin, Ethereum – decentralized currencies that many investors consider part of the forex market.

However, when it comes to forex trading, people often refer to buying and selling currency pairs (for example EUR/USD) with the sole purpose: to exploit exchange rate fluctuations for profit.

How Does Forex Trading Work?

Suppose you predict that the Euro will strengthen against the US dollar in the future. You use $11,500 to buy 10,000 EUR at an exchange rate of EUR/USD = 1.1500. Two weeks later, the rate rises to 1.2500, and you sell 10,000 EUR and receive $12,500. Your net profit is $1,000.

What’s special about forex platforms is that you don’t need to have the full $11,500 to make this trade. Thanks to the leverage (leverage) tool, platforms can support you trading with ratios up to 200:1. This means you only need to deposit about $60 as margin to open a trade worth $11,500.

However, leverage is a double-edged sword – it can help you earn many times the profit, but it can also cause you to lose money faster if the market moves against your prediction.

4 Main Advantages When Investing in Forex

1. Extremely low transaction fees

Unlike stocks or real estate, forex eliminates most intermediary costs such as asset management fees, brokerage fees. Brokers only earn from the spread (the difference between buy and sell prices), and this fee is usually very small.

2. Market operates 24/7

Forex has no closing hours. You can trade in the morning, afternoon, evening, or even while sleeping. This suits those who want to trade as an additional investment channel without affecting their main job.

3. No one can manipulate the market

With a daily volume of $5 trillion, even central banks cannot control it. The market is too large and too dispersed among thousands of participants.

4. Fewer barriers to entry

You can start with just a few hundred thousand VND. No other market allows you to do this.

Major Currency Pairs in the Market

Although over 30 currencies are traded on forex, 7 major currency pairs account for up to 85% of trading volume:

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

These pairs have high liquidity, predictable volatility, making them ideal for both beginners and experienced traders.

8 Steps to Start Your First Forex Trade

Step 1: Master Basic Concepts

Before trading, you need to understand:

• Long (Buy): You believe the currency will appreciate, so you buy and wait to sell at a higher price.
• Short (Sell): You believe the currency will depreciate, so you sell first and buy back at a lower price.
• Leverage (Leverage): The ability to trade with more money than you have. For example, 100:1 leverage means if you have 1 USD, you can trade 100 USD.
• Margin (Margin): The amount you must deposit into your account to open a trade.
• Pip: The smallest change in exchange rate. If EUR/USD moves from 1.2000 to 1.2005, that’s 5 pips.
• Spread: The difference between the bid and ask price. This is the main income for brokers.
• Lot (Lot): The size of a trade – from nano (100 units) to standard lot (100,000 units).

Step 2: Understand Different Types of Forex Trading

Spot Forex – Immediate trading with settlement in 2 days. In Vietnam, this type is prohibited.

Forex CFD – Contract for Difference. You do not own the actual currency but only speculate on the price going up or down. This is the most common type in Vietnam, accounting for 99% of forex platforms. You should choose a platform licensed by international regulators like ASIC, FCA, CySEC to ensure safety.

Currency Futures – Futures contracts with specific settlement dates. Less common in Vietnam.

FX Options – Currency options. You predict whether the price will rise or fall relative to a fixed level. Less common in Vietnam.

Currency ETFs – Exchange-traded funds tracking currency prices. Less common in Vietnam.

Step 3: Choose a Reputable Forex Broker

Criteria for selecting a forex broker are very important:

• Reputation: Must be licensed by international regulatory agencies (ASIC, FCA, CySEC,…)
• Transaction fees and commissions: As low as possible
• Trading products: Diverse, matching your needs
• Trading platform: Simple, user-friendly, stable
• Customer support: Fast, professional

Step 4: Open an Account

You need to provide basic personal information and bank account details for the platform to verify your identity.

Step 5: Choose Currency Pairs to Trade

Analyze whether the exchange rate will rise or fall based on:

• Economic conditions: If the national economy is strong, the currency will appreciate.
• Trade balance: If the country exports a lot, the currency will appreciate.
• Political situation: Elections, interest rate policies, inflation levels all influence.

Step 6: Determine Margin

A safe rule is to invest only 2% of your margin in a specific currency pair. For example, if you want to trade $100,000 with a 1% margin requirement, you need $1,000 in your account.

Step 7: Place Buy or Sell Orders

• Buy (Long): If you believe the quote will strengthen.
• Sell (Short): If you believe the quote will weaken.

Step 8: Use Risk Management Orders

• Stop Loss: Close the trade if the price drops to a certain loss level. Helps limit damage.
• Take Profit: Close the trade if the price rises to a target profit level. Helps lock in gains.

Example: EUR/USD is at 1.1128, you predict it will rise to 1.2000 then fall. You set a Take Profit order at 1.2000 to automatically sell when the price hits.

What Factors Affect the Forex Market?

Central Banks

Quantitative easing (in money) policies will cause the currency to depreciate. Tightening (interest rate hikes) will cause the currency to appreciate.

Financial News

Good news (GDP growth, unemployment reduction) encourages investors to put money in, increasing currency demand and raising its value.

Market Sentiment

If most traders believe a currency will rise, they will buy, creating a domino effect that increases the currency’s value.

Who Participates in the Forex Market?

• Governments and central banks: Manage foreign exchange, support the national economy.
• Large banks: Trade with enormous volumes.
• Forex brokers: Provide platforms for investors.
• Retail investors: Account for nearly ⅓ of trading volume, approximately 1.7 trillion USD daily.

How Is the Forex Market Regulated?

Despite its enormous size, forex has very few regulations because there is no centralized authority overseeing it 24/7. In the US, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) are responsible for regulation. Other countries have similar agencies.

This means you must proactively choose a licensed forex platform from international authorities to protect your interests.

In Summary

What is forex? It is the world’s largest currency trading market, operating 24/7 with a daily volume of $5.3 trillion. With advantages like low fees, low barriers to entry, and high profit opportunities, forex attracts millions of investors worldwide.

However, to succeed, you need to:

1. Deeply learn about concepts and trading tools
2. Choose a reputable, safe forex platform
3. Have a strict risk management plan
4. Follow disciplined trading, avoid emotional decisions
5. Continuously learn and improve your strategies

The forex market is not a shortcut to quick wealth, but a legitimate investment tool for those willing to invest time in learning and developing skills.