etoro forex trading guide
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Etoro forex trading guide Etoro, forex trading, forex trading guideTRANSCRIPT
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
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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BASICFOREXTRADINGGUIDE 3
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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BASICFOREXTRADINGGUIDE 4
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.
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BASICFOREXTRADINGGUIDE 5
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
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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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BASICFOREXTRADINGGUIDE 7
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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).
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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.
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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.
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BASICFOREXTRADINGGUIDE 10
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
BASICFOREXTRADINGGUIDE 11
investment.Oncetheratedropsbelowtheratecoveredbyyourinvestment,thetradeisautomaticallyclosed.ThatisdonethroughanautomaticStopLoss–explainedinthenextchapter.
Remember,Leveragecanbeatrader’sbestfriendwhenusedcarefully,andhisworstenemywhenusedrecklessly.Itisagreattoolforincreasingprofits,infactprivatetradersrarelytradewithoutit,butyoushouldalwayskeepinmindthatthehighertheleverageis–thehighertherisklevelinvolved.
Nowthatyou’reequippedwithmostofthebasictools,youcanopenyourfirsttrade!
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BASICFOREXTRADINGGUIDE 12
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.
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Thismeansthatthisseeminglyinsignificantfluctuationintherateallowsyoutocashin$77fromaninitialinvestmentof$100.Inotherwordsyoujustmade77%profitonyourinvestment,thankstothemovementinthepair'squote.Ontheexampletradethatwe’vejustseen,yourriskandrewardwasunlimited,andtheriskwaslimitedwhichisgoodifyouareverycertainregardingyourdecisions.However,asabeginneryoushouldn'ttrustyourselftoomuch,asyouareboundtomakemistakes.Bylearningaboutspecialtradeorderfeatures,youwillbeabletohedgeyourrisks.rephrase
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BASICFOREXTRADINGGUIDE 14
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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BASICFOREXTRADINGGUIDE 15
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
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BASICFOREXTRADINGGUIDE 16
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
BASICFOREXTRADINGGUIDE 17
seeingthatyourstrategyisconsistentlysuccessfulwithvirtualmoney,youcantryitoutforreal.Remember,moneymanagementisverysimpletomaster,butnotassimpletokeepup.Onceyou’vedevelopedthemoneymanagementsystemthatworksforyou,makesuretostickwithitanddon’tletyouremotionsgetinthewayoflongtermprofit,evenifitmeansabsorbingshorttermlosses.
Nowthatyou’reequippedfortrading,takeyourtimeandstartpracticingyourtradingskills.
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