What is Forex? Understand currency trading from the basics

The foreign exchange market (Forex) is the largest financial market in the world, with an average daily trading volume of approximately 7.5 trillion US dollars. With immense liquidity and a wide variety of trading instruments, the Forex market is highly accessible for retail traders seeking profit.

This article will explore in detail how to trade Forex, from basic knowledge to how to start trading in practice.

Forex Trading Basics You Need to Know

What does Forex mean?

Forex trading refers to buying and selling currency pairs (Currency Pairs). For example, EUR/USD or USD/JPY. The first currency (Base Currency) is the one being bought, while the second (Quote Currency) is the one being sold.

When a trader buys EUR/USD at 1.10, it means purchasing 1 EUR by paying 1.10 USD. Profit or loss occurs when exchange rates fluctuate.

Besides trading actual currencies (Spot Trading), traders can also trade Forex through other instruments such as futures contracts or contracts for difference (CFDs), which offer greater flexibility and leverage.

Advantages of Trading Forex

Forex trading is popular for several reasons:

1. High liquidity - Enables quick opening and closing of positions at desired prices
2. Market open 24/5 - From Monday to Friday almost all day, providing flexibility in trading times
3. Directional trading - Profits can be made in both rising and falling markets
4. Low initial capital - Especially when using CFDs with leverage
5. Leverage benefits - Can amplify purchasing power and profits (but also increases risk)

Factors Affecting Forex Exchange Rate Fluctuations

Trading currencies requires understanding what drives volatility:

Central Bank Policies - Setting interest rates and money supply by central banks significantly impact currency values, especially those of the US, Japan, and Europe.

Economic Data - Indicators such as inflation rates, employment figures, current account balances influence economic strength and currency value.

International Capital Flows - Political changes, trade policies, or internal political stability can support or divert investment out of a country.

Global Market Conditions - Volatility in commodities, oil prices, and stock markets all interconnectedly affect currency rates.

Crisis Risks - “Safe-haven” currencies like the US dollar and Japanese yen tend to attract more demand during high-risk periods.

Different Ways to Trade Forex

1. Trading Actual Currencies (Spot Market)

This is the straightforward method—buy one currency and sell another in real terms. If the exchange rate moves favorably, you realize a profit.

Advantages - Simple, no leverage needed

Disadvantages - Full amount must be paid upfront, high transaction fees, limited currency options, not suitable for short-term trading

2. Trading Futures Contracts

Futures are standardized contracts traded on formal markets, such as the Thai TFEX or Chicago (CME).

Advantages - Good liquidity, can use leverage, tradable almost all day

Disadvantages - Large contract sizes require high capital, may not be accessible to retail investors

3. Trading CFDs (Contracts for Difference)

CFDs give the right to profit from price differences without owning the underlying asset.

Advantages - Very low initial capital, high leverage, tradable nearly 24/5 on many currency pairs, highly flexible

Disadvantages - High risk from leverage, possible forced liquidation, suitable for risk-managed traders only

Choosing Forex Pairs Suitable for Beginners

###Criteria for Selecting Currency Pairs

Liquidity - Choose pairs with high trading volume, narrow spreads, and predictable price movements.

Volatility - Too low volatility makes timing difficult; too high makes risk hard to control. Find a balance.

Trading Hours - Different pairs have optimal liquidity during specific times, e.g., EUR/USD moves well during European and US market hours.

Fundamental Factors - Follow economic news, as Forex markets react quickly to new information.

Popular Pairs for Beginners

EUR/USD - Highest liquidity, moderate volatility, suitable for short- and medium-term trading.

USD/JPY - Good liquidity, low to moderate volatility, can be more volatile when Japanese central bank announces policies.

GBP/USD - Good liquidity, high volatility due to UK-specific factors.

Steps for Beginners to Trade Forex

1. Choose a currency pair and understand market conditions

Start by selecting a currency pair that matches your trading style. Study current market conditions and potential drivers.

2. Check prices and analyze

Use trading platforms providing real-time price data and analysis tools like technical charts and indicators to forecast direction.

3. Place buy/sell orders

Buy order - When expecting the currency to strengthen. If the price rises, profit; if it falls, loss.

Sell order - When expecting the currency to weaken. If the price drops, profit; if it rises, loss.

4. Set automatic close points

Use Stop Loss orders to close positions if the price moves against you beyond a set level, and Take Profit orders to lock in gains at your target.

5. Monitor margin levels

Keep track of changes in (Margin Level) to avoid forced liquidation.

6. Review results and improve

After closing a trade, review your trading to identify strengths and areas for improvement. Trading involves continuous learning and repetition of successful strategies.

Risks to Watch Out for in Forex Trading

Excessive Leverage

Leverage amplifies both gains and losses. Using high leverage without proper risk control can quickly wipe out your capital.

Choose leverage based on:

• Expected volatility of the currency pair
• Your investment size
• Your risk tolerance

Unprepared for Sudden Volatility

Forex reacts instantly to news, especially central bank announcements, economic data, or political events. Sudden volatility can push prices far from expected levels.

Mitigate by:

• Always setting Stop Loss
• Avoid trading during major news releases
• Use appropriate leverage, not too high

Overtrading

Trying to profit from every price movement often leads to losses. Not every moment is suitable for trading.

Better approaches:

• Trade only planned setups
• Stick to well-researched trading systems
• Remember that what works once can be repeated

Summary

Trading Forex is not complicated if you understand the basics and have a clear trading plan. The Forex market offers opportunities for profit from volatility, testing strategies, or diversifying your portfolio.

Key points:

1. Continuous learning - Markets constantly change; stay updated
2. Risk management - Always control your risks regardless of your method
3. Discipline - Follow your trading plan; avoid emotional decisions
4. Avoid emotional trading - Letting emotions drive decisions can harm profits
5. Repeat proven methods - Consistency and discipline are the foundation of success

With good understanding and proper planning, you can confidently start trading in the Forex market.