BasicForexTradingGuide

AboutthisguideIfthisisyourfirsttimecomingacrosstheonlineForexmarket,thenyou’vecometotherightplace.

Thisguidewillprovideyouwiththebasicknowledge,toolsandtechniquesanoviceForextradershouldhaveasyoutakeyourfirststepsinthefascinatingworldofForex.

Manyofthetradingconceptsintroducedhereareexplainedingreaterdetailinlaterchaptersoftheguide.

IfyouareunclearaboutanyForextermyoucomeacrosshere,besuretorefertotheglossaryofterms

BasicForexTradingGuide

P u b l i s h e d b y w w w . e T o r o . c o m T r a d i n g P l a t f o r m

FinancialTradingMadeSimple

http://www.etoro.com/

http://www.etoro.com/what-is-forex/forex-lingo.aspx

BASICFOREXTRADINGGUIDE 2

IndexUsethefollowingindextonavigateyourwayaroundtheguide.

Intro:WhyForex? ............................................................................................. 3

Profitability........................................................................................................ 4

CashinginonPriceMovements ......................................................................... 5

TheTrendisYourFriend .................................................................................... 7

TacticalusageofLeverage................................................................................ 10

ASimpleTradeExample................................................................................... 12

HedgingRisksandRewards.............................................................................. 14

TheQuestforVolatility ................................................................................... 15

MoneyManagement........................................................................................ 16

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Intro:WhyForex?Ifyouarereadingthisguide,youhavemostlikelytakensomesortofinterestintheForexmarket.ButwhatdoestheForexmarkethavetoofferyou?

Accessibility–It’snowonderthattheForexmarkethasthetradingvolumeof3trillionaday‐allanyoneneedstotakepartintheactionisacomputerwithaninternetconnection.

24HourMarket‐TheForexmarketisopen24hoursaday,sothatyoucanberighttheretradingwheneveryouhearafinancialscoop.Noneedtobiteyourfingernailswaitingfortheopeningbell.

NarrowFocus–Unlikethestockmarket,asmallermarketwithtensofthousandsofstockstochoosefrom,theForexmarketrevolvesaroundmoreorlesseightmajorcurrencies.Anarrowchoicemeansnoroomsforconfusion,soeventhoughthemarketishuge,it’squiteeasytogetaclearpictureofwhat’shappening.

Liquidity‐Theforeignexchangemarketisthelargestfinancialmarketintheworldwithadailyturnoverofjustover$3trillion!Nowapartfrombeingareallycoolstatistic,thesheermassivescopeoftheForexmarketisalsooneofitsbiggestadvantages.Theenormousvolumeofdailytradesmakesitthemostliquidmarketintheworld,whichbasicallymeansthatundernormalmarketconditionsyoucanbuyandsellcurrencyasyouplease.Youcanneverbeinajamforcurrencytobuyorstuckwithcurrencythatyoucan’tunload.

TheMarketCan’tBeCornered‐ThecolossalsizeoftheForexmarketalsomakessurethatnoonecancornerthemarket.Evenbanksdon’thaveenoughpulltoreallycontrolthemarketforalongperiodoftime,whichmakesitagreatplaceforthelittleguytomakeamove.

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ProfitabilityItdoesn’ttakeafinancialgeniustofigureoutthatthebiggestattractionofanymarket,oranyfinancialventureforthatmatter,istheopportunityofprofit.IntheForexmarket,profitabilityisexpressedinanumberofways.Firstofall,justtosettherecordstraight,youdon’thavetobeamillionairetotradeForex.Unlikemostfinancialmarkets,theForexmarketallowsyoutostarttradingwithrelativelylowinitialcapital.AteToro,youcanstarttradingForexwithaslittleas$25!Rightaboutnowyou’reprobablyaskingyourself:“WhatchancedoIhaveofprofitingwithsuchalowinitialinvestment?”TheForexmarketdoesn’trequirelargeinitialinvestmentsbecauseitallowsyoutouseleveragedtrading.Leveragedtradingletsyouopenpositionsfortensofthousandsofdollarswhileinvestingsumsassmallas$25.ThismeansthatForextradinghastheprofit(andloss)potentialoftensandevenhundredsofpercentaday!WhatisalsouniqueabouttheForexmarketisthatanysortofmovementisanopportunitytotrade.Whetheracurrencyiscrashingorsoaring,thereisalwaysroomforspeculation,sinceyoualwayshavetheoptionofbuyingorsellingthecurrencyofyourchoice.Unlikethestockmarket,youarenotlimitedtospeculatingonrisingstocks,andafallingmarketisjustasgoodforbusinessasarisingmarket.Havingsaidallthat,itisimportanttorememberthatasprofitableastheForexmarketis,itstillcarriesalltherisksinvolvedwithfinancialtrading.Youshouldalwaysbeawareoftherisk,andneverriskmoneythatyoucan’taffordtolose.Havingsaidallthat,itisimportanttorememberthatasprofitableastheForexmarketis,itstillcarriesalltherisksinvolvedwithfinancialtrading.Youshouldalwaysbeawareoftherisk,andneverriskmoneythatyoucan’taffordtolose.




CashinginonPriceMovementsTradingForexisexcitingbusiness.Themarketisalwaysonthemove,andeverytinyshiftincurrencyratescanmeanprofitsandlossesofhundredsandeventhousandsofdollars!Let’sdemonstratehowthatcanhappen:Ingeneral,theeightmosttradedcurrenciesontheForexmarketare:

USD U.S.DollarEUR EuroGBP BritishPoundJPY JapaneseYenCAD CanadianDollarCHF SwissFrancNZD NewZealandDollarAUD AustralianDollar

Forextradingisalwaysdoneinpairs,sinceanytradeinvolvesthesimultaneousbuyingofacurrencyandsellingofanothercurrency.Thetradingrevolvesaround18maincurrencypairs.Thesepairsare:

USD/CAD EUR/JPY

EUR/USD EUR/CHF

USD/CHF EUR/GBP

GBP/USD AUD/CAD

NZD/USD GBP/CHF

AUD/USD GBP/JPY

USD/JPY CHF/JPY

EUR/CAD AUD/JPY

EUR/AUD AUD/NZD

Whenbuyingorsellingacurrencypair,eachpairhasitsownBid/Askrate,forexample:

Pair Bid AskEUR/USD 1.5420 1.5422


Thismeansyoucouldeither:

BuythepairattheAskrate

Whichmeans:

Buy1EUR/Sell$1.5422

‐or‐

SellthepairattheBidrate

Whichmeans:

Sell1EUR/Buy$1.5420

OK,butwhere’stheopportunityforprofit?Thecurrencypairratesarevolatileandconstantlychanging.Onewaytoprofitisbybuyingapair,thensellingitatahigherrate.Thesecondwayisbysellingthepair,thenbuyingitatalowerrate.




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TheTrendisYourFriendTrendanalysisisbasedontheideathatwhathashappenedinthepastgivestradersanideaofwhatwillhappeninthefuture.Althoughthismayseemprettybasic,beingabletoidentifywhenapairisinatrendandwhenitisn'twillhelpyoutoincreaseyourchancestoprofitconsistentlyintheForexmarket.Whenyoucanidentifyatrend,youcanestimatewhatdirectiontherateofacurrencypairisgoingtogoin.Youshouldexploitthedirectionofthetrendyouidentifybyplacingatradeinthatdirection.Ifit’sanuptrend,meaningthattherateisincreasing,buyingthecurrencypairwillgiveyouabetterprobabilityforprofit.Ifit’sadowntrend,meaningthattherateisdecreasing,sellingthecurrencypairwillgiveyouabetterchanceofmakingmoney.HowdoIidentifyatrend?Whatarethecharacteristicsofatrend?Thesimplestwaytoidentifyatrendisthroughthedistinctpatternsthatthepriceforms.Thesecantellyouifthemarketismovinginanuptrendordowntrend.IdentifyingaForexTrendWhenatrendistakingplaceinaForexpair,thepricemovementsstarttoformpeaksandvalleysinthechartofthatpair,whichareeasilyidentified.Inanuptrend,thepricemovementsformaseriesofhigherpeaksandhighervalleys.(HigherHighsandHigherLows.)Sinceapicture’sworthathousandwords,letslookatthefollowingchart:

Thischartsuggeststhatthetradershouldbuythecurrencypair(andclosethetradebysellingatprofitaftertheraterises).


Inadowntrend,thepricemovementsformaseriesoflowerpeaksandlowervalleys:(LowerHighsandLowerLows)

Thischartsuggeststhatthetradershouldsellthecurrencypair(andclosethetradebybuyingatprofitaftertheratedeclines)

It’simportanttonotethatduringsometradingdaysthetrendishardtospot,sometradingdaysshownotrend(thepricemovementsformaRange),andofcourseyou’reboundtorunintotheoccasionalreversal,sothisisnotaperfectlyaccurateor100%reliableindicatorfortrading.

HereiswhatatradingRangelookslike:

Itiseasiertomakepredictionswithatrendthanwithatradingrange.Whileyoucanstillprofitintradingranges,youhavetobemorenimbleonyourfeet,andreadytojumpinandoutofthemarketsatalltimes.Needlesstosay,thismakesthetrader’slifealottougherandtheriskforlossgreater.Tradingrangescanbereallymessyandunpredictable,whichiswhyyoushouldalwayslookfortradingtrends.It’sagoodideatostayoutalltogetherduringarange,andgetbackinonlywhenthemarketsstarttotrendagain.Asageneralstrategy,itisbesttotradewiththetrendratherthanagainstit,meaningthatifthegeneraltrendofthemarketisheadedup,youshouldbeverycautiousabouttakinganypositionsthatrelyonthetrendgoingintheoppositedirection.


Thetrendspottingstrategyassumesthatthepresentdirectionofthepriceratewillcontinueintothefuture.Itcanbeusedinthreemaintime‐frames:short,intermediateandlong‐term,withthetrendsbeingdifferentforeach.Forexample,here’sapossiblescenariointheForexmarket:Overthelast12monthsthetrendfortheEUR/USDisanuptrend,overthelast30daysthetrendisadowntrend,andoverthelast24Hours(intra‐day)trendisanuptrend.Regardlessofthechosentimeframe,traderswillremainintheirpositionuntiltheybelievethetrendhasreversed.Sothegoalistospotatrendthatyoubelieveinandtradeaccordingtoit.Needlesstosay,youwillneedtomonitorthetrade,incaseyouweremistakenandthetrendvanishesorreverses.Thenit'stimetocutyourlossesbyclosingthelosingtradeorbyreversing‐closingthetradeandopeningafollowing,oppositetrade.Warning:SpeculatingonForexratesinvolvesgreatamountofrisk.Beadvisedthateventhemostsophisticatedtraderscan'talwayspredictmarketmovements'directions.




TacticalusageofLeverageIfyou’vebeenatallexposedtotheworldofForexyou’veprobablyheardtheword“Leverage”beingtossedaround.Butwhatexactlyis“Leverage”?LeverageisaveryimportantpartofForextrading,andit’scriticalthatyouknowexactlyhowitworksandhowtouseit.ItisthetermForextradersusetorefertotheratioofinvestedamountrelatedtothetrade'sactualvalue.Forexbrokersusuallyprovidetheircustomerswiththeoptiontotradeonborrowedcapital,sothattradersdon’thavetoinvesttensofthousandsofdollarsforthechancetomakeanyrealprofit.Whenyoutradeataleverageof1:100,orX100,itmeansthatforevery$1thatyouinvestinthemarket,thebrokerinvests$100.Asaresult,youcancontrolanamountof$10,000byinvesting$100.eToroprovidestraderswiththeopportunityoftradingatupto1:400leverage.Itprobablywon’tsurpriseyouwhenwesaythatwithgreateropportunityforprofitcomesgreaterrisk.Justlikeslightfluctuationsincurrencyratescanmakeyousignificantamountsofmoney,itcanalsocauseyoutoloseyourmoneyveryquickly.Thehighertheleverage,thelargertheprofitthatyoustandtomakeandthequickeryoumightloseyourinvestment.Aleverageof1:400canmakeyoumoremoneythanaleverageof1:100,butitalsoputsyourinitialinvestmentatmorerisk.Ifyoutradewithaleverageof1:100themarketwouldhavetomove100pipsagainstyouforyourpositiontobewipedout.Ontheotherhand,ifyoutradewithaleverageof1:400themarketwouldonlyhavetomove25pointsagainstyouforyourpositiontobewipedout.Werecommendfirstopeningapositionwithalow1:100Leverage,andonlyonceyouseethatyou’vehitastrongtrend,consideropeningonewitha1:400leverage.TheRatiobetweenMinimalLotSize,TradeSizeandLeverageFundamentally,theminimallotsizeforatradeis$10,000,thustheleveragelimitationsaresetaccordingtotheamountyouchoosetotrade:

TradeSize

MinimalLeverage Lot

25 400 10,00050 200 10,000100 100 10,000

TheadvantageoftradingwithLeverageisthatwhileyourprofitspotentialisvirtuallyinfinite,ateToroyourlossislimitedtotheamountofyourinitial


investment.Oncetheratedropsbelowtheratecoveredbyyourinvestment,thetradeisautomaticallyclosed.ThatisdonethroughanautomaticStopLoss–explainedinthenextchapter.

Remember,Leveragecanbeatrader’sbestfriendwhenusedcarefully,andhisworstenemywhenusedrecklessly.Itisagreattoolforincreasingprofits,infactprivatetradersrarelytradewithoutit,butyoushouldalwayskeepinmindthatthehighertheleverageis–thehighertherisklevelinvolved.

Nowthatyou’reequippedwithmostofthebasictools,youcanopenyourfirsttrade!

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ASimpleTradeExampleAreyouready?It'stimetotrade!Hereisato‐dolistofactionstobetakenasyouopenatrade:‐Identifythepairtobuy/sell‐Decideontheinitialinvestmentamount‐Choosetheappropriateleverage‐Considerapplyingtradelimits(coveredinthenextchapter)‐OpentradeLet’ssaythatafterspendingsomequalitytimeongazingatthechartsofseveralcurrencies,you’veconcludedthat:

1) TheEURistrendingup2) TheUSDistrendingdown

Now,whatisthereasonabledecisionbasedonthisconclusion?ClearlyyoucanprofitbyfirstsellingUSDandbuyingEUR,andthenbuyingcheaperUSDandsellexpensiveEUR.WecoulddothisbybuyingandthensellingtheEUR/USDcurrencypair.Areminder‐buyingisdoneat'Ask'price,whilesellingisdoneatthe“Bid”price.Imaginethatyoubought$100worthofEUR/USDwithaleverageof1:100attheexchangerateof1.5461.Thedetailsofyourtradeare:Investment $100Leverage 1:100Unitssold 10,000EUR/USD(Ask) 1.5461InplainEnglish,whatyou’vejustdoneisbought(100X100=)10,000UnitsofEUR/USD,whichatthatspecificraterepresents1.5461USDper1EUR.Now,let’sassumethatattheendoftheday,orpossiblyevenafewminuteslater,theEUR/USDratehasrisento1.5538.Yousellthose10,000Euro/USDUnitsatthenewrateof1.5538andget$177back.


Thismeansthatthisseeminglyinsignificantfluctuationintherateallowsyoutocashin$77fromaninitialinvestmentof$100.Inotherwordsyoujustmade77%profitonyourinvestment,thankstothemovementinthepair'squote.Ontheexampletradethatwe’vejustseen,yourriskandrewardwasunlimited,andtheriskwaslimitedwhichisgoodifyouareverycertainregardingyourdecisions.However,asabeginneryoushouldn'ttrustyourselftoomuch,asyouareboundtomakemistakes.Bylearningaboutspecialtradeorderfeatures,youwillbeabletohedgeyourrisks.rephrase

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HedgingRisksandRewardsForextradingisariskybusiness.ThischapterwillexplaintheusageofStopLoss(SL)andTakeProfit(TP)orders.Theseareusedforhedgingyourrisksandrewards,realizingyourprofitsandminimizingyourlosses.eToroplacesanautomaticStopLossorderonallyourtradestopreventyoufromlosingmorethanyou’veinvested.Iftherateofyouropentradedropsbelowwhat’scoveredbyyourinvestment,thetradeisclosedbytheautomaticStopLoss.Thismeansthemaximumamountyoucanloseonatradeisalmostalwayslimitedtotheinitialinvestmentofthetrade. Still,thereisnoreasonwhyyoushouldwaituntilyouloseyourentireinvestmenttoclosethetrade.BysettingaStopLossorderyoumakesurethatthevalueofyourtradedoesn’tdropbelowacertainlevel.Thiswayyoucontrolthemaximumamountthatyouarewillingtoloseonatrade,withouthavingtomonitoreachtradearoundtheclock.TakeProfitordersaresimilartostoplossorders,onlyreferringtoprofits.TakeProfitordersmakesurethatonceyourtradereachesacertainlevelofprofititwillbeclosed.Forinstance,imaginethatyou’veopenedaLongEUR/USDtradeforattherateof1.5400.Afterafewhourstheraterisesto1.5500,butanhourlaterdropsto1.5300.WithoutaTakeProfitorder,youmightmisstheriseintherate,andendupwithalossonyourhands.IfyouhadsetaTakeProfitorder,thepotentialprofitofthetradewouldhavebeenrealized,withoutyouhavingtomonitorthetradearoundtheclock.

Remember,StopLossandTakeProfitordersareverysimpletoolsthatcanmakethedifferencebetweenasuccessfultradingcareerandabigholeinyourpocket.Considerusingtheseorderswitheverytradethatyoumake.

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TheQuestforVolatilityTheForexmarketisopen24hoursaday,butwhatarethebesttimestomakeaprofit?EventhoughtheForexmarketisopen24hoursadaywiththeexceptionofweekends,notallhoursareasequallygoodfortrading.ThereasonthattheForexmarketisopen24hoursadayisthatitismadeupofdifferentsessionsaroundtheglobethatbetweenthemcover24hours.Themoremarketsareactiveatthesametime,themoretradesarebeingexecuted,andthemoreactionforyoutocashinon.TradingSessions(GMT):1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

London NewYork

Sydney Tokyo

SincetheLondonsessionisthebusiestoutofthefour,thebesttimesfortradingare8am‐9am(GMT)and13pm‐17pm(GMT),becausethat’swhentheLondonsessionoverlapswithothersessions.Abusethenews.Asfornewsreports,thesearetimestobecareful.Manyprofitabletradesaremademomentspriortoorshortlyaftermajoreconomicalannouncements.Youcangainafortuneaswellasloseoneifyou’renotsureofwhatyou’redoing.Thisiswhyit’simportanttostayontopofwhat’shappeningintheinternationalfinancearena.Marketsentimentbecomescrucialatthesetimes,sincetradersbasicallystampedetothemarketaroundthetimeofthereport.eToromakessuretogiveyouaheadsupwheneveranythingmajorisgoingdown.Remember,eventhoughyou’reabletotrade24hoursaday,it’sbettertoplanyourtradingactivityinordertocatchthebestactionforachancetomaximizeyourprofitsandminimizeyourlosses




MoneyManagement

Isthereasecrettobecomingasuccessfultrader?Thereisamethodthatallsuccessfultradersuse,andit’snosecret.It’scalledmoneymanagement.Moneymanagementisnotsomevagueindustrylingo–itsimplymeanstheknowledgeandskillofmanagingyourForextradingaccount.Assimpleasthatmayseem,it’sthekeytoalongandsuccessfultradingcareer.Andyetitisoftenforgottenorneglectedinthethrillofthetrade.We’dliketotakethisopportunitytolayoutsomegroundrulesbywhichyoucaneffectivelymanageyouraccount.Don’tgolookingfortheBigWin;itwillmostlikelyresultinabigloss.Successfultradingmeansconsistenttrading,wheresmallwinsamounttolargelongtermprofits.Neverassumethatallyourtradeswillbeprofitable,andplanonlosses.Youshouldonlyriskasmallpercentageofyourtotalaccountbalanceoneachtrade.Thissimplyminimizesyourrisk,sothatevenifyouenduplosingyourentireinvestmentonatrade,itdoesn’thaveacriticaleffectonyouraccountbalance.Therecommendedamountis2%ofyouraccountbalancepertrade.Moreaggressivetradersgoashighas5%,butneverhigherthanthat.Itisaveryimportantruletokeep,sincetheloweryouraccountbalancedrops,theharderitistorebuildit.UsingLimitOrdersLearntousetheStopLossandTakeProfitorderseffectively.Theseordersprotectyourinvestmentandrealizeyourprofits.Theyareverysimpletoolsthatcanmakeallthedifferencetoyouraccountbalance.SizeofTradesYouaresuggestedtoopensmalltrades,becauseinthecaseofalosingtrade,youcanthenopentheoppositetradewithabiggerinvestmentorhigherleverage,thuscompensatingforlosses.PracticewithVirtualMoneyUsevirtualmoneymodeforpractice.OneoftheuniquefeaturesofeToroisthatourplatformprovidesyouwithapracticeenvironment.Virtualmoneymodeworksexactlythesameasrealtradingmodeandusesthesamerealtimerates,withthesmalldifferenceofnoriskinvolved.WerecommendusingthepracticemodetogettoknowtheplatformandgainForextradingexperience.Andevenafteryou’vebeguntradingwithrealmoney,itistheperfectplacetotryoutyourtradingstrategies.Thereisnopointinriskingyourmoneytotestoutapossibletheory,whenyoucandosowiththesamesuccessminustherisk.After


seeingthatyourstrategyisconsistentlysuccessfulwithvirtualmoney,youcantryitoutforreal.Remember,moneymanagementisverysimpletomaster,butnotassimpletokeepup.Onceyou’vedevelopedthemoneymanagementsystemthatworksforyou,makesuretostickwithitanddon’tletyouremotionsgetinthewayoflongtermprofit,evenifitmeansabsorbingshorttermlosses.

Nowthatyou’reequippedfortrading,takeyourtimeandstartpracticingyourtradingskills.



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BasicForexTradingGuide