BasicForexTradingGuide

Aboutthisguide
IfthisisyourfirsttimecomingacrosstheonlineForexmarket,thenyouvecometotheright place. Thisguidewillprovideyouwiththebasicknowledge,toolsandtechniquesanoviceForex tradershouldhaveasyoutakeyourfirststepsinthefascinatingworldofForex. Manyofthetradingconceptsintroducedhereareexplainedingreaterdetailinlater chaptersoftheguide. IfyouareunclearaboutanyForextermyoucomeacrosshere,besuretorefertothe glossaryofterms
Publishedby www.eToro.comTradingPlatform

BASICFOREXTRADINGGUIDE 2

Index
Usethefollowingindextonavigateyourwayaroundtheguide. Intro:WhyForex? ............................................................................................. 3 Profitability........................................................................................................ 4 CashinginonPriceMovements ......................................................................... 5 TheTrendisYourFriend .................................................................................... 7 TacticalusageofLeverage................................................................................ 10 ASimpleTradeExample................................................................................... 12 HedgingRisksandRewards.............................................................................. 14 TheQuestforVolatility ................................................................................... 15 MoneyManagement........................................................................................ 16 OpenfreePracticeeToroaccount!

BASICFOREXTRADINGGUIDE 3

Intro:WhyForex?

Ifyouarereadingthisguide,youhavemostlikelytakensomesortofinterestin theForexmarket.ButwhatdoestheForexmarkethavetoofferyou? AccessibilityItsnowonderthattheForexmarkethasthetrading volumeof3trillionadayallanyoneneedstotakepartintheactionisa computerwithaninternetconnection. 24HourMarketTheForexmarketisopen24hoursaday,sothatyoucan berighttheretradingwheneveryouhearafinancialscoop.Noneedto biteyourfingernailswaitingfortheopeningbell. NarrowFocusUnlikethestockmarket,asmallermarketwithtensof thousandsofstockstochoosefrom,theForexmarketrevolvesaround moreorlesseightmajorcurrencies.Anarrowchoicemeansnoroomsfor confusion,soeventhoughthemarketishuge,itsquiteeasytogetaclear pictureofwhatshappening. LiquidityTheforeignexchangemarketisthelargestfinancialmarketin theworldwithadailyturnoverofjustover$3trillion!Nowapartfrom beingareallycoolstatistic,thesheermassivescopeoftheForexmarketis alsooneofitsbiggestadvantages.Theenormousvolumeofdailytrades makesitthemostliquidmarketintheworld,whichbasicallymeansthat undernormalmarketconditionsyoucanbuyandsellcurrencyasyou please.Youcanneverbeinajamforcurrencytobuyorstuckwith currencythatyoucantunload. TheMarketCantBeCorneredThecolossalsizeoftheForexmarketalso makessurethatnoonecancornerthemarket.Evenbanksdonthave enoughpulltoreallycontrolthemarketforalongperiodoftime,which makesitagreatplaceforthelittleguytomakeamove.

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BASICFOREXTRADINGGUIDE 4

Profitability
Itdoesnttakeafinancialgeniustofigureoutthatthebiggestattractionofany market,oranyfinancialventureforthatmatter,istheopportunityofprofit.Inthe Forexmarket,profitabilityisexpressedinanumberofways. Firstofall,justtosettherecordstraight,youdonthavetobeamillionaireto tradeForex.Unlikemostfinancialmarkets,theForexmarketallowsyoutostart tradingwithrelativelylowinitialcapital.AteToro,youcanstarttradingForexwith aslittleas$25! Rightaboutnowyoureprobablyaskingyourself:WhatchancedoIhaveof profitingwithsuchalowinitialinvestment?TheForexmarketdoesntrequire largeinitialinvestmentsbecauseitallowsyoutouseleveragedtrading.Leveraged tradingletsyouopenpositionsfortensofthousandsofdollarswhileinvesting sumsassmallas$25.ThismeansthatForextradinghastheprofit(andloss) potentialoftensandevenhundredsofpercentaday! WhatisalsouniqueabouttheForexmarketisthatanysortofmovementisan opportunitytotrade.Whetheracurrencyiscrashingorsoaring,thereisalways roomforspeculation,sinceyoualwayshavetheoptionofbuyingorsellingthe currencyofyourchoice.Unlikethestockmarket,youarenotlimitedto speculatingonrisingstocks,andafallingmarketisjustasgoodforbusinessasa risingmarket. Havingsaidallthat,itisimportanttorememberthatasprofitableastheForex marketis,itstillcarriesalltherisksinvolvedwithfinancialtrading.Youshould alwaysbeawareoftherisk,andneverriskmoneythatyoucantaffordtolose. Havingsaidallthat,itisimportanttorememberthatasprofitableastheForex marketis,itstillcarriesalltherisksinvolvedwithfinancialtrading.Youshould alwaysbeawareoftherisk,andneverriskmoneythatyoucantaffordtolose.

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BASICFOREXTRADINGGUIDE 5

CashinginonPriceMovements
TradingForexisexcitingbusiness.Themarketisalwaysonthemove,andevery tinyshiftincurrencyratescanmeanprofitsandlossesofhundredsandeven thousandsofdollars! Letsdemonstratehowthatcanhappen: Ingeneral,theeightmosttradedcurrenciesontheForexmarketare: USD U.S.Dollar EUR Euro GBP BritishPound JPY JapaneseYen CAD CanadianDollar CHF SwissFranc NZD NewZealandDollar AUD AustralianDollar Forextradingisalwaysdoneinpairs,sinceanytradeinvolvesthesimultaneous buyingofacurrencyandsellingofanothercurrency.Thetradingrevolvesaround 18maincurrencypairs.Thesepairsare: USD/CAD EUR/JPY EUR/USD USD/CHF GBP/USD NZD/USD AUD/USD USD/JPY EUR/CAD EUR/AUD EUR/CHF EUR/GBP AUD/CAD GBP/CHF GBP/JPY CHF/JPY AUD/JPY AUD/NZD

Whenbuyingorsellingacurrencypair,eachpairhasitsownBid/Askrate,for example: Pair Bid Ask EUR/USD 1.5420 1.5422

BASICFOREXTRADINGGUIDE 6

OK,butwherestheopportunityforprofit? Thecurrencypairratesarevolatileandconstantlychanging. Onewaytoprofitisbybuyingapair,thensellingitatahigherrate. Thesecondwayisbysellingthepair,thenbuyingitatalowerrate. markettoday!

Thismeansyoucouldeither: BuythepairattheAskrate or SellthepairattheBidrate Whichmeans: Whichmeans: Buy1EUR/Sell$1.5422 Sell1EUR/Buy$1.5420

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BASICFOREXTRADINGGUIDE 7

TheTrendisYourFriend
Trendanalysisisbasedontheideathatwhathashappenedinthepastgives tradersanideaofwhatwillhappeninthefuture. Althoughthismayseemprettybasic,beingabletoidentifywhenapairisina trendandwhenitisn'twillhelpyoutoincreaseyourchancestoprofit consistentlyintheForexmarket. Whenyoucanidentifyatrend,youcanestimatewhatdirectiontherateofa currencypairisgoingtogoin.Youshouldexploitthedirectionofthetrendyou identifybyplacingatradeinthatdirection. Ifitsanuptrend,meaningthattherateisincreasing,buyingthecurrencypairwill giveyouabetterprobabilityforprofit.Ifitsadowntrend,meaningthattherate isdecreasing,sellingthecurrencypairwillgiveyouabetterchanceofmaking money. HowdoIidentifyatrend?Whatarethecharacteristicsofatrend? Thesimplestwaytoidentifyatrendisthroughthedistinctpatternsthattheprice forms.Thesecantellyouifthemarketismovinginanuptrendordowntrend. IdentifyingaForexTrend WhenatrendistakingplaceinaForexpair,thepricemovementsstarttoform peaksandvalleysinthechartofthatpair,whichareeasilyidentified. Inanuptrend,thepricemovementsformaseriesofhigherpeaksandhigher valleys. (HigherHighsandHigherLows.) Sinceapicturesworthathousandwords,letslookatthefollowingchart: Thischartsuggeststhatthetradershouldbuythecurrencypair(andclosethe tradebysellingatprofitaftertheraterises).

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Inadowntrend,thepricemovementsformaseriesoflowerpeaksandlower valleys: (LowerHighsandLowerLows)

Thischartsuggeststhatthetradershouldsellthecurrencypair(andclosethe tradebybuyingatprofitaftertheratedeclines) Itsimportanttonotethatduringsometradingdaysthetrendishardto spot,sometradingdaysshownotrend(thepricemovementsforma Range),andofcourseyoureboundtorunintotheoccasionalreversal,so thisisnotaperfectlyaccurateor100%reliableindicatorfortrading. HereiswhatatradingRangelookslike:

Itiseasiertomakepredictionswithatrendthanwithatradingrange.Whileyou canstillprofitintradingranges,youhavetobemorenimbleonyourfeet,and readytojumpinandoutofthemarketsatalltimes.Needlesstosay,thismakes thetraderslifealottougherandtheriskforlossgreater. Tradingrangescanbereallymessyandunpredictable,whichiswhyyoushould alwayslookfortradingtrends.Itsagoodideatostayoutalltogetherduringa range,andgetbackinonlywhenthemarketsstarttotrendagain. Asageneralstrategy,itisbesttotradewiththetrendratherthanagainstit, meaningthatifthegeneraltrendofthemarketisheadedup,youshouldbevery cautiousabouttakinganypositionsthatrelyonthetrendgoingintheopposite direction.

BASICFOREXTRADINGGUIDE 9

Thetrendspottingstrategyassumesthatthepresentdirectionofthepricerate willcontinueintothefuture.Itcanbeusedinthreemaintimeframes:short, intermediateandlongterm,withthetrendsbeingdifferentforeach. Forexample,heresapossiblescenariointheForexmarket: Overthelast12monthsthetrendfortheEUR/USDisanuptrend,overthelast30 daysthetrendisadowntrend,andoverthelast24Hours(intraday)trendisan uptrend. Regardlessofthechosentimeframe,traderswillremainintheirpositionuntil theybelievethetrendhasreversed. Sothegoalistospotatrendthatyoubelieveinandtradeaccordingtoit. Needlesstosay,youwillneedtomonitorthetrade,incaseyouweremistaken andthetrendvanishesorreverses.Thenit'stimetocutyourlossesbyclosingthe losingtradeorbyreversingclosingthetradeandopeningafollowing,opposite trade. Warning:SpeculatingonForexratesinvolvesgreatamountofrisk.Beadvisedthat eventhemostsophisticatedtraderscan'talwayspredictmarketmovements' directions. ClickheretoopenafreeeToroPracticeaccountandjointheForex markettoday!

BASICFOREXTRADINGGUIDE 10

TacticalusageofLeverage
IfyouvebeenatallexposedtotheworldofForexyouveprobablyheardthe wordLeveragebeingtossedaround.ButwhatexactlyisLeverage? LeverageisaveryimportantpartofForextrading,anditscriticalthatyouknow exactlyhowitworksandhowtouseit.ItisthetermForextradersusetoreferto theratioofinvestedamountrelatedtothetrade'sactualvalue. Forexbrokersusuallyprovidetheircustomerswiththeoptiontotradeon borrowedcapital,sothattradersdonthavetoinvesttensofthousandsofdollars forthechancetomakeanyrealprofit.Whenyoutradeataleverageof1:100,or X100,itmeansthatforevery$1thatyouinvestinthemarket,thebrokerinvests $100.Asaresult,youcancontrolanamountof$10,000byinvesting$100.eToro providestraderswiththeopportunityoftradingatupto1:400leverage. Itprobablywontsurpriseyouwhenwesaythatwithgreateropportunityfor profitcomesgreaterrisk.Justlikeslightfluctuationsincurrencyratescanmake yousignificantamountsofmoney,itcanalsocauseyoutoloseyourmoneyvery quickly.Thehighertheleverage,thelargertheprofitthatyoustandtomakeand thequickeryoumightloseyourinvestment.Aleverageof1:400canmakeyou moremoneythanaleverageof1:100,butitalsoputsyourinitialinvestmentat morerisk. Ifyoutradewithaleverageof1:100themarketwouldhavetomove100pips againstyouforyourpositiontobewipedout.Ontheotherhand,ifyoutradewith aleverageof1:400themarketwouldonlyhavetomove25pointsagainstyoufor yourpositiontobewipedout. Werecommendfirstopeningapositionwithalow1:100Leverage,andonlyonce youseethatyouvehitastrongtrend,consideropeningonewitha1:400 leverage. TheRatiobetweenMinimalLotSize,TradeSizeandLeverage Fundamentally,theminimallotsizeforatradeis$10,000,thustheleverage limitationsaresetaccordingtotheamountyouchoosetotrade:
Trade Size 25 50 100 Minimal Leverage 400 200 100 Lot 10,000 10,000 10,000

TheadvantageoftradingwithLeverageisthatwhileyourprofitspotentialis virtuallyinfinite,ateToroyourlossislimitedtotheamountofyourinitial

BASICFOREXTRADINGGUIDE 11

investment.Oncetheratedropsbelowtheratecoveredbyyourinvestment,the tradeisautomaticallyclosed.ThatisdonethroughanautomaticStopLoss explainedinthenextchapter. Remember,Leveragecanbeatradersbestfriendwhenusedcarefully, andhisworstenemywhenusedrecklessly.Itisagreattoolforincreasing profits,infactprivatetradersrarelytradewithoutit,butyoushould alwayskeepinmindthatthehighertheleverageisthehighertherisk levelinvolved. Nowthatyoureequippedwithmostofthebasictools,youcanopenyourfirst trade!

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BASICFOREXTRADINGGUIDE 12

ASimpleTradeExample
Areyouready?It'stimetotrade! Hereisatodolistofactionstobetakenasyouopenatrade: Identifythepairtobuy/sell Decideontheinitialinvestmentamount Choosetheappropriateleverage Considerapplyingtradelimits(coveredinthenextchapter) Opentrade Letssaythatafterspendingsomequalitytimeongazingatthechartsofseveral currencies,youveconcludedthat: 1) TheEURistrendingup 2) TheUSDistrendingdown Now,whatisthereasonabledecisionbasedonthisconclusion? ClearlyyoucanprofitbyfirstsellingUSDandbuyingEUR,andthenbuying cheaperUSDandsellexpensiveEUR. WecoulddothisbybuyingandthensellingtheEUR/USDcurrencypair. Areminderbuyingisdoneat'Ask'price,whilesellingisdoneattheBidprice. Imaginethatyoubought$100worthofEUR/USDwithaleverageof1:100atthe exchangerateof1.5461.Thedetailsofyourtradeare: Investment $100 Leverage 1:100 Unitssold 10,000 EUR/USD(Ask) 1.5461 InplainEnglish,whatyouvejustdoneisbought(100X100=)10,000UnitsofEUR /USD,whichatthatspecificraterepresents1.5461USDper1EUR. Now,letsassumethatattheendoftheday,orpossiblyevenafewminuteslater, theEUR/USDratehasrisento1.5538.Yousellthose10,000Euro/USDUnitsat thenewrateof1.5538andget$177back.

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Thismeansthatthisseeminglyinsignificantfluctuationintherateallowsyouto cashin$77fromaninitialinvestmentof$100. Inotherwordsyoujustmade77%profitonyourinvestment,thankstothe movementinthepair'squote. Ontheexampletradethatwevejustseen,yourriskandrewardwasunlimited, andtheriskwaslimitedwhichisgoodifyouareverycertainregardingyour decisions. However,asabeginneryoushouldn'ttrustyourselftoomuch,asyouarebound tomakemistakes.Bylearningaboutspecialtradeorderfeatures,youwillbeable tohedgeyourrisks.rephrase

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BASICFOREXTRADINGGUIDE 14

HedgingRisksandRewards
Forextradingisariskybusiness.ThischapterwillexplaintheusageofStopLoss (SL)andTakeProfit(TP)orders.Theseareusedforhedgingyourrisksand rewards,realizingyourprofitsandminimizingyourlosses. eToroplacesanautomaticStopLossorderonallyourtradestopreventyoufrom losingmorethanyouveinvested.Iftherateofyouropentradedropsbelow whatscoveredbyyourinvestment,thetradeisclosedbytheautomaticStop Loss.This means the maximum amount you can lose on a trade is almost always limited to the initial investment of the trade. Still,thereisnoreasonwhyyoushouldwaituntilyouloseyourentireinvestment toclosethetrade.BysettingaStopLossorderyoumakesurethatthevalueof yourtradedoesntdropbelowacertainlevel.Thiswayyoucontrolthemaximum amountthatyouarewillingtoloseonatrade,withouthavingtomonitoreach tradearoundtheclock. TakeProfitordersaresimilartostoplossorders,onlyreferringtoprofits.Take Profitordersmakesurethatonceyourtradereachesacertainlevelofprofititwill beclosed. Forinstance,imaginethatyouveopenedaLongEUR/USDtradeforattherateof 1.5400.Afterafewhourstheraterisesto1.5500,butanhourlaterdropsto 1.5300.WithoutaTakeProfitorder,youmightmisstheriseintherate,andend upwithalossonyourhands. IfyouhadsetaTakeProfitorder,thepotentialprofitofthetradewouldhave beenrealized,withoutyouhavingtomonitorthetradearoundtheclock. Remember,StopLossandTakeProfitordersareverysimpletoolsthatcan makethedifferencebetweenasuccessfultradingcareerandabigholein yourpocket.Considerusingtheseorderswitheverytradethatyoumake.

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BASICFOREXTRADINGGUIDE 15

TheQuestforVolatility
TheForexmarketisopen24hoursaday,butwhatarethebesttimestomakea profit? EventhoughtheForexmarketisopen24hoursadaywiththeexceptionof weekends,notallhoursareasequallygoodfortrading.ThereasonthattheForex marketisopen24hoursadayisthatitismadeupofdifferentsessionsaround theglobethatbetweenthemcover24hours. Themoremarketsareactiveatthesametime,themoretradesarebeing executed,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

Sydney Tokyo

London

NewYork

SincetheLondonsessionisthebusiestoutofthefour,thebesttimesfortrading are8am9am(GMT)and13pm17pm(GMT),becausethatswhentheLondon sessionoverlapswithothersessions.

Abusethenews. Asfornewsreports,thesearetimestobecareful.Manyprofitabletradesare mademomentspriortoorshortlyaftermajoreconomicalannouncements.You cangainafortuneaswellasloseoneifyourenotsureofwhatyouredoing.This iswhyitsimportanttostayontopofwhatshappeningintheinternational financearena.Marketsentimentbecomescrucialatthesetimes,sincetraders basicallystampedetothemarketaroundthetimeofthereport.eToromakessure togiveyouaheadsupwheneveranythingmajorisgoingdown. Remember,eventhoughyoureabletotrade24hoursaday,itsbettertoplan yourtradingactivityinordertocatchthebestactionforachancetomaximize yourprofitsandminimizeyourlosses

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BASICFOREXTRADINGGUIDE 16

MoneyManagement
Isthereasecrettobecomingasuccessfultrader? Thereisamethodthatallsuccessfultradersuse,anditsnosecret.Itscalled moneymanagement. Moneymanagementisnotsomevagueindustrylingoitsimplymeansthe knowledgeandskillofmanagingyourForextradingaccount.Assimpleasthat mayseem,itsthekeytoalongandsuccessfultradingcareer.Andyetitisoften forgottenorneglectedinthethrillofthetrade.Wedliketotakethisopportunity tolayoutsomegroundrulesbywhichyoucaneffectivelymanageyouraccount. DontgolookingfortheBigWin;itwillmostlikelyresultinabigloss.Successful tradingmeansconsistenttrading,wheresmallwinsamounttolargelongterm profits.Neverassumethatallyourtradeswillbeprofitable,andplanonlosses. Youshouldonlyriskasmallpercentageofyourtotalaccountbalanceoneach trade.Thissimplyminimizesyourrisk,sothatevenifyouenduplosingyour entireinvestmentonatrade,itdoesnthaveacriticaleffectonyouraccount balance.Therecommendedamountis2%ofyouraccountbalancepertrade. Moreaggressivetradersgoashighas5%,butneverhigherthanthat.Itisavery importantruletokeep,sincetheloweryouraccountbalancedrops,theharderit istorebuildit. UsingLimitOrders LearntousetheStopLossandTakeProfitorderseffectively.Theseordersprotect yourinvestmentandrealizeyourprofits.Theyareverysimpletoolsthatcanmake allthedifferencetoyouraccountbalance. SizeofTrades Youaresuggestedtoopensmalltrades,becauseinthecaseofalosingtrade,you canthenopentheoppositetradewithabiggerinvestmentorhigherleverage, thuscompensatingforlosses. PracticewithVirtualMoney Usevirtualmoneymodeforpractice.OneoftheuniquefeaturesofeToroisthat ourplatformprovidesyouwithapracticeenvironment.Virtualmoneymode worksexactlythesameasrealtradingmodeandusesthesamerealtimerates, withthesmalldifferenceofnoriskinvolved.Werecommendusingthepractice modetogettoknowtheplatformandgainForextradingexperience. Andevenafteryouvebeguntradingwithrealmoney,itistheperfectplacetotry outyourtradingstrategies.Thereisnopointinriskingyourmoneytotestouta possibletheory,whenyoucandosowiththesamesuccessminustherisk.After

BASICFOREXTRADINGGUIDE 17

seeingthatyourstrategyisconsistentlysuccessfulwithvirtualmoney,youcantry itoutforreal. Remember,moneymanagementisverysimpletomaster,butnotassimpleto keepup.Onceyouvedevelopedthemoneymanagementsystemthatworksfor you,makesuretostickwithitanddontletyouremotionsgetinthewayoflong termprofit,evenifitmeansabsorbingshorttermlosses. Nowthatyoureequippedfortrading,takeyourtimeandstartpracticingyour tradingskills.

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