Comprehensive Guide to Forex Trading - From Theory to Practice

What Is Forex? Everything You Need to Know

In recent years, the foreign exchange market has become a popular investment tool in Vietnam. However, many people still have misconceptions about its basic definition.

Basic Concepts:

Forex (also called Forex or FX) is not just about currencies like USD or EUR, but also includes:

• Foreign currencies: international currencies such as US dollar, Euro, Japanese Yen
• International payment tools: checks, international transfers, international credit cards
• International certificates: government bonds, multinational company stocks
• Digital assets: Bitcoin, Ethereum, and other cryptocurrencies
• Gold and precious metals: considered forex in international transactions

How Does the Forex Market Work?

The forex market is a decentralized place where participants can buy, sell, and exchange different currencies. Its attractiveness comes from:

• Daily trading volume reaching up to 5.3 trillion USD
• Continuous operation 24/7 worldwide
• No one can manipulate or control this market

As a retail investor, your goal is to leverage exchange rate fluctuations to profit from price differences.

Basic Forex Knowledge Everyone New Should Know

To trade Forex successfully, you need to understand these basic terms:

Currency Pairs:

Forex trading always occurs in pairs, such as EUR/USD, GBP/USD. In each pair:

• Base Currency (Long): the currency on the left, representing its value relative to the other currency
• Quote Currency (Short): the currency on the right

Example: EUR/USD = 1.1500 means 1 EUR = 1.1500 USD

8 Other Important Concepts:

Main Currency Pairs in the Market:

Although over 30 currencies are traded, 8 major pairs account for 85% of the market value:

EUR/USD (Euro - USD), USD/JPY (USD - Yen), GBP/USD (GBP - USD), AUD/USD (AUD - USD), USD/CHF (USD - Swiss Franc), NZD/USD (NZD - USD), USD/CAD (USD - CAD)

Different Types of Forex Trading

Spot Forex Market (Immediate Delivery Market)

• Trades at agreed prices with settlement in 2 days
• Mainly used by banks and financial institutions
• In Vietnam: prohibited

Forex CFD (Contract for Difference)

• Trading based on price differences without owning the actual asset
• Allows speculation across various markets
• In Vietnam: 99% of Forex platforms operate this way, not prohibited but without specific regulations - choose platforms licensed by international authorities (ASIC, FCA, CySEC)

Currency Futures

• Futures contracts with fixed price and settlement date
• In Vietnam: not popular

Currency Options

• Tools to predict price increase or decrease
• In Vietnam: not popular

Currency ETFs

• Exchange-traded funds tracking currency value against USD or other currencies
• In Vietnam: not popular

Opportunities and Advantages of Forex Trading

Very Low Trading Costs

Unlike stocks or real estate, Forex significantly reduces intermediary costs such as:

• Asset management fees
• Brokerage fees
• Income taxes

Brokers only earn from the spread (difference between bid and ask prices), which is very small.

Market Operates Continuously

Forex operates 24/7 worldwide, allowing you to:

• Trade at any time of day
• Balance work and investment
• Choose your own trading hours freely

No One Can Control the Market

With its enormous scale and many participants (banks, governments, companies, investors), no one—even central banks—can manipulate or distort the market.

Power of Leverage

This is a unique feature of Forex:

• You only need to deposit a small margin but can trade large sums
• Example: with 60 USD margin, you can trade 11,500 USD (200:1 leverage)
• Potential to earn hundreds of times your margin

Note: Leverage is a double-edged sword—it can generate high profits but also cause significant losses.

Low Entry Barriers

• You only need a few hundred thousand VND to start
• No large capital requirements like stocks or real estate
• Can open an account within minutes

9 Steps to Start Forex Trading

Step 1: Learn Basic Forex Knowledge

Before starting, master the 8 concepts listed above (Long, Short, Leverage, Margin, Pip, Spread, Lot, Stop Loss). This knowledge will help you understand trading orders clearly.

Step 2: Understand Types of Forex Markets

Identify the trading type that suits you best. In Vietnam, Forex CFD is the main and legal choice (as long as you select a licensed platform).

Step 3: Choose a Reputable Trading Platform

Criteria:

• Top priority: Licensed by international authorities (ASIC, FCA, CySEC)
• Costs: Low trading fees, competitive brokerage commissions
• Products: Diverse currency pairs and assets
• Platform: User-friendly interface

Step 4: Open a Trading Account

Prepare:

• ID card/CCCD (front and back)
• Email and phone number
• Bank account

Identity verification usually takes from a few minutes to several hours.

Step 5: Select Currency Pairs to Trade

Analyze and predict exchange rates based on:

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

Trade Balance: Countries exporting many goods with high demand will increase foreign currency income, raising their currency value.

Political Situation: Elections or policy changes affecting interest rates can significantly impact currency prices.

Step 6: Determine Margin Amount

Depending on the platform:

• If you want to trade 100,000 USD with a 1% margin requirement, you need 1,000 USD
• Safety rule: Invest only 2% of your total capital in one currency pair

Step 7: Decide to Buy or Sell

Buy (Long):

• When you believe the bid price will strengthen relative to the quote
• Profit increases as exchange rate rises
• Loss occurs if exchange rate falls

Sell (Short):

• When you believe the bid price will weaken
• Profit increases as exchange rate falls
• Loss occurs if exchange rate rises

Real Example:

You have 11,500 USD, buy 10,000 EUR at EUR/USD = 1.1500. After two weeks, sell 10,000 EUR at 1.2500, earning 12,500 USD. Profit: 1,000 USD.

With 200:1 leverage, you only need a margin of about 60 USD instead of 11,500 USD!

Step 8: Set Risk Management Orders

Automatic orders are instructions to execute trades at a future time when prices reach your set levels.

Stop Loss (Stop Loss):

• Automatically closes trades when losses reach a specified level
• Helps minimize losses
• Mandatory in Forex due to high volatility

Take Profit (Take Profit):

• Automatically closes trades when profits reach your target
• Locks in your desired gains

Example: EUR/USD is currently 1.11128. You expect it to rise to 1.2000 then fall. Place a limit sell order at 1.2000 to automatically lock in profit.

Step 9: Monitor and Adjust

• Avoid overly emotional reactions during market volatility
• Continue researching and follow your trading strategy
• Record transactions to learn from experience
• Be patient and wait for results

Main Factors Affecting the Forex Market

Central Bank Policies

• Central banks control the money supply
• Quantitative easing (QE) can cause currency depreciation
• Raising interest rates usually increases currency value

Financial News

• Investors seek opportunities in promising economies
• Positive news about a country increases demand for its currency
• Supply and demand gaps directly impact prices

Market Sentiment

• Trader psychology can change price trends
• If traders believe in an upward trend, they will trade accordingly
• Collective actions can create herd effects (herding effect)

Regulations on the Forex Market

Although the Forex market is enormous, regulations are quite limited:

• No global supervisory agency — the decentralized 24/7 market makes this difficult
• Local regulations: In the US, CFTC and NFA are the main regulators
• International licensing: Reputable platforms are licensed by FCA (UK), ASIC (Australia), CySEC (Cyprus) to protect investors

Daily Trading Volume

• Total volume: ~5.3 trillion USD/day
• Average per hour: ~220 billion USD
• Participants: Mainly institutions, corporations, governments
• Speculation: Accounts for ~90% of trading volume
• Focus on: USD, EUR, JPY

Market Participants

1. Governments & Central Banks - manage foreign exchange, stabilize economy
2. Large Banks - trade large volumes
3. Forex Brokers - provide platforms for investors
4. Retail Investors - account for about ⅓ of trading volume (around 1.7 trillion USD/day)

Conclusion

Forex is the largest global financial investment market. With high transparency, low entry costs, and 24/7 trading capability, Forex offers opportunities to earn money for anyone with basic forex knowledge and good risk management.

Your journey begins with learning, choosing reputable brokers, and following a pre-planned trading strategy. Success doesn’t come overnight, but with patience and discipline, you will see positive results.