FinancialTradingMadeSimple

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.

ClickheretoopenafreeeToroPracticeaccountandjointheForex
markettoday!

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

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,for
example:

Pair
Bid
Ask
EUR/USD
1.5420 1.5422

BASICFOREXTRADINGGUIDE 6

Thismeansyoucouldeither:

BuythepairattheAskrate
or
SellthepairattheBidrate

Whichmeans:
Whichmeans:

Buy1EUR/Sell$1.5422
Sell1EUR/Buy$1.5420

OK,butwherestheopportunityforprofit?

Thecurrencypairratesarevolatileandconstantlychanging.
Onewaytoprofitisbybuyingapair,thensellingitatahigherrate.
Thesecondwayisbysellingthepair,thenbuyingitatalowerrate.

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markettoday!

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).

BASICFOREXTRADINGGUIDE 8

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.

BASICFOREXTRADINGGUIDE 13

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.Thismeansthemaximumamountyoucanloseonatradeisalmostalways
limitedtotheinitialinvestmentofthetrade.

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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riskstoday!

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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theForexmarkettoday!

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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theForexmarkettoday!