What is Forex? Understanding currency trading from the basics

The foreign exchange market, commonly known as Forex, is one of the largest financial markets in the world in terms of trading volume. In 2024, the average daily trading volume of the global Forex market is approximately $7.5 trillion USD. Due to its high liquidity and the variety of trading instruments available, it opens the door for a wide range of investors to buy, sell, and seek profits with relative ease.

Basic Knowledge Before Starting Forex Trading

What is Forex and what does trading Forex mean?

Forex or Forex trading is the activity of buying and selling foreign currencies, which differs from other assets in that currencies do not have a fixed price themselves but are quoted relative to other currencies. This is called “Currency Pairs” (Currency Pairs)

For example, USD/THB consists of two currencies:

• Base Currency (Base Currency): USD, which appears first
• Quote Currency (Quote Currency): THB, which appears second

When you buy the currency pair USD/THB at 35.00, it means you are using 35 Thai Baht to buy 1 US Dollar. Similarly, buying USD/JPY at 160.00 means you need 160 Yen to exchange for 1 US Dollar.

Advantages of Forex Trading

The popularity of Forex among traders worldwide is due to several reasons:

1. High Liquidity: The Forex market has a large trading volume, making it easy for traders to buy and sell at desired prices and quantities.

2. Flexible Trading Hours: The Forex market operates nearly 24/5, allowing investors to find suitable times for trading.

3. Diverse Trading Options: With many currency pairs, traders can profit in both bullish and bearish markets.

4. Flexible Risk Management Tools: Forex can be used for both speculation and hedging investment portfolios.

5. Leverage Opportunities: Traders can use borrowed funds to increase their trading potential.

Main Factors Affecting the Forex Market

The Forex market is sensitive to changes in economic and political factors, such as:

• Central Bank Policies: Changes in interest rates and money supply can quickly impact exchange rates, especially from major central banks like the US, Japan, and Europe.

• Economic Data: Inflation figures, trade balances, employment data all reflect the strength of a currency.

• International Capital Flows: Political situations, trade policies, and government changes influence the movement of investment funds.

• Global Market Conditions: Changes in stock markets, bond markets, and commodity prices can affect exchange rates.

• Safe-Haven Demand: During economic uncertainty, investors often move funds into safe-haven currencies like the US dollar.

How Beginners Should Approach Forex Trading

Steps to Enter Forex Trading

Step 1: Choose the right currency pair for you

Select currency pairs that align with your strategy and information. Consider:

• Liquidity: Popular pairs have narrower spreads and easier execution.
• Volatility: Choose levels of volatility suitable for your risk tolerance.
• Trading Hours: Each pair has optimal trading times with the highest liquidity.

Step 2: Analyze and open a position

After selecting a currency pair, check current prices and analyze charts by:

• Placing a buy order: When you believe the currency will strengthen.
• Placing a sell order: When you believe the currency will weaken.

Step 3: Set risk management parameters

Use Stop Loss orders to limit losses and Take Profit orders to lock in gains.

Step 4: Monitor and close positions

Keep track of price movements and close positions when your target profit or loss levels are reached.

Step 5: Review and improve

Reflect on each trade to learn from mistakes and refine your trading approach. Repeating this process regularly will help you develop your skills.

Which currency pairs should beginners trade?

For beginners, it’s advisable to choose highly liquid pairs with moderate volatility. Popular options include:

EUR/USD: The most liquid pair with narrow spreads, moderate volatility, suitable for short- and medium-term trading. It moves most during European and US market hours.

USD/JPY: The second most popular pair, with good liquidity and low to moderate volatility. It can be more volatile when the Bank of Japan adjusts policies. It moves quickly during Tokyo and US market hours.

GBP/USD: Highly liquid with higher volatility due to UK-specific factors. Suitable for traders seeking more movement. It is most active during European and US market hours.

Common Forex Trading Styles Used by Retail Investors

1. Spot Market Trading(

This method involves buying actual currencies by selling one currency to buy another and holding until the exchange rate changes to realize profit.

Advantages: Straightforward, no complicated steps.

Disadvantages: Requires full payment upfront, limited currency options, high exchange fees, not ideal for short-term trading.

) 2. Trading Futures Contracts###

This involves trading standardized contracts that are traded on formal markets, such as TFEX in Thailand or CME in the US.

Advantages: High liquidity, easy online order placement, leverage available, tradable almost all day.

Disadvantages: Large contract sizes, high capital requirements, may be a barrier for retail investors.

( 3. Trading CFDs)

This is a derivative trading method that gives rights to profit from the difference between buy and sell prices.

Advantages: High liquidity, tradable nearly 24/5, leverage available, low initial investment, suitable for short-term profit.

Disadvantages: High leverage increases risk, price volatility may force position closures, requires good risk control.

Warnings for Forex Traders

To succeed in Forex trading, be cautious of the following:

Avoid excessive leverage: While high leverage can boost profits, it also increases the risk of rapid losses. Choose leverage appropriate to your volatility tolerance and capital.

Prepare for volatility: Currency prices can fluctuate significantly, especially during central bank meetings or major economic announcements. Set stop-loss points and avoid trading during highly volatile periods.

Don’t trade too frequently: Overtrading can lead to unprofitable opportunities and loss of capital. Trade only according to your plan.

Manage risk properly: No matter how good your strategy, poor risk management can wipe out your account. Always set Stop Loss levels.

Summary

Forex trading is a popular activity among investors worldwide, especially trading CFDs, which offer high flexibility, low capital requirements, and diverse strategies.

The Forex market provides opportunities for traders to seek profits, test new strategies, and diversify their investment portfolios with ease. Understanding the basics, conducting regular analysis, and continuous improvement are key to success in Forex trading.