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About this guide
If this is your first time coming across the online Forex market, then you’ve come to the right place.
This guide will provide you with the basic knowledge, tools and techniques a novice Forex
trader should have as you take your first steps in the fascinating world of Forex. Many of the trading concepts introduced here are explained in greater detail in later chapters of the guide. If you unclear
about any Forex term you come across here, be sure to refer to the
Intro: Why Forex?
If you are reading this guide, you have most likely taken some sort of interest in
the Forex market. But what does the Forex market have to offer you?
Accessibility – It’s no wonder that the Forex market has the trading
volume of 3 trillion a day ‐ all anyone needs to take part in the action is a
computer with an internet connection.
24 Hour Market ‐ The Forex market is open 24 hours a day, so that you can
be right there trading whenever you hear a financial scoop. No need to
bite your fingernails waiting for the opening bell.
Narrow Focus – Unlike the stock market, a smaller market with tens of
thousands of stocks to choose from, the Forex market revolves around
more or less eight major currencies. A narrow choice means no rooms for
confusion, so even though the market is huge, it’s quite easy to get a clear
picture of what’s happening.
Liquidity ‐ The foreign exchange market is the largest financial market in
the world with a daily turnover of just over $3 trillion! Now apart from
being a really cool statistic, the sheer massive scope of the Forex market is
also one of its biggest advantages. The enormous volume of daily trades
makes it the most liquid market in the world, which basically means that
under normal market conditions you can buy and sell currency as you
please. You can never be in a jam for currency to buy or stuck with
currency that you can’t unload.
The Market Can’t Be Cornered ‐ The colossal size of the Forex market also
makes sure that no one can corner the market. Even banks don’t have
enough pull to really control the market for a long period of time, which makes it a great place for the little guy to make a move.
Profitability
It doesn’t take a financial genius to figure out that the biggest attraction of any
market, or any financial venture for that matter, is the opportunity of profit. In the
Forex market, profitability is expressed in a number of ways.
First of all, just to set the record straight, you don’t have to be a millionaire to
trade Forex. Unlike most financial markets, the Forex market allows you to start
trading with relatively low initial capital. At eToro, you can start trading Forex with
as little as $25!
Right about now you’re probably asking yourself: “What chance do I have of
profiting with such a low initial investment?” The Forex market doesn’t require
large initial investments because it allows you to use leveraged trading. Leveraged
trading lets you open positions for tens of thousands of dollars while investing
sums as small as $25. This means that Forex trading has the profit (and loss)
potential of tens and even hundreds of percent a day!
What is also unique about the Forex market is that any sort of movement is an
opportunity to trade. Whether a currency is crashing or soaring, there is always
room for speculation, since you always have the option of buying or selling the
currency of your choice. Unlike the stock market, you are not limited to
speculating on rising stocks, and a falling market is just as good for business as a
rising market.
Having said all that, it is important to remember that as profitable as the Forex
market is, it still carries all the risks involved with financial trading. You should
always be aware of the risk, and never risk money that you can’t afford to lose.
Cashing in on Price Movements
Trading Forex is exciting business. The market is always on the move, and every
tiny shift in currency rates can mean profits and losses of hundreds and even
thousands of dollars!
Let’s demonstrate how that can happen:
In general, the eight most traded currencies on the Forex market are:
Forex trading is always done in pairs, since any trade involves the simultaneous
buying of a currency and selling of another currency. The trading revolves around
18 main currency pairs.
OK, but where’s the opportunity for profit?
The currency pair rates are volatile and constantly changing.
One way to profit is by buying a pair, then selling it at a higher rate.
The second way is by selling the pair, then buying it at a lower rate
The Trend is Your Friend
Trend analysis is based on the idea that what has happened in the past gives
traders an idea of what will happen in the future.
Although this may seem pretty basic, being able to identify when a pair is in a
trend and when it isn't will help you to increase your chances to profit
consistently in the Forex market.
When you can identify a trend, you can estimate what direction the rate of a
currency pair is going to go in. You should exploit the direction of the trend you
identify by placing a trade in that direction.
If it’s an uptrend, meaning that the rate is increasing, buying the currency pair will
give you a better probability for profit. If it’s a downtrend, meaning that the rate
is decreasing, selling the currency pair will give you a better chance of making
money.
How do I identify a trend? What are the characteristics of a trend?
The simplest way to identify a trend is through the distinct patterns that the price
forms. These can tell you if the market is moving in an uptrend or downtrend.
Identifying a Forex Trend
When a trend is taking place in a Forex pair, the price movements start to form
peaks and valleys in the chart of that pair, which are easily identified.
In an uptrend, the price movements form a series of higher peaks and higher
valleys.
(Higher Highs and Higher Lows.)
Since a picture’s worth a thousand words, lets look at the following chart:
This chart suggests that the trader should buy the currency pair (and close the
trade by selling at profit after the rate rises).
It is easier to make predictions with a trend than with a trading range. While you
can still profit in trading ranges, you have to be more nimble on your feet, and
ready to jump in and out of the markets at all times. Needless to say, this makes
the trader’s life a lot tougher and the risk for loss greater.
Trading ranges can be really messy and unpredictable, which is why you should
always look for trading trends. It’s a good idea to stay out all together during a
range, and get back in only when the markets start to trend again.
As a general strategy, it is best to trade with the trend rather than against it,
meaning that if the general trend of the market is headed up, you should be very
cautious about taking any positions that rely on the trend going in the opposite
direction.
BASIC FOREX TRADING GUIDE
The trend spotting strategy assumes that the present direction of the price rate
will continue into the future. It can be used in three main time‐frames: short,
intermediate and long‐term, with the trends being different for each.
For example, here’s a possible scenario in the Forex market:
Over the last 12 months the trend for the EUR/USD is an uptrend, over the last 30
days the trend is a downtrend, and over the last 24 Hours (intra‐day) trend is an
uptrend.
Regardless of the chosen time frame, traders will remain in their position until
they believe the trend has reversed.
So the goal is to spot a trend that you believe in and trade according to it.
Needless to say, you will need to monitor the trade, in case you were mistaken
and the trend vanishes or reverses. Then it's time to cut your losses by closing the
losing trade or by reversing ‐ closing the trade and opening a following, opposite trade
Tactical usage of Leverage
If you’ve been at all exposed to the world of Forex you’ve probably heard the
word “Leverage” being tossed around. But what exactly is “Leverage”?
Leverage is a very important part of Forex trading, and it’s critical that you know
exactly how it works and how to use it. It is the term Forex traders use to refer to
the ratio of invested amount related to the trade's actual value.
Forex brokers usually provide their customers with the option to trade on
borrowed capital, so that traders don’t have to invest tens of thousands of dollars
for the chance to make any real profit. When you trade at a leverage of 1:100, or
X100, it means that for every $1 that you invest in the market, the broker invests
$100. As a result, you can control an amount of $10,000 by investing $100. eToro
provides traders with the opportunity of trading at up to 1:400 leverage.
It probably won’t surprise you when we say that with greater opportunity for
profit comes greater risk. Just like slight fluctuations in currency rates can make
you significant amounts of money, it can also cause you to lose your money very
quickly. The higher the leverage, the larger the profit that you stand to make and
the quicker you might lose your investment. A leverage of 1:400 can make you
more money than a leverage of 1:100, but it also puts your initial investment at
more risk.
If you trade with a leverage of 1:100 the market would have to move 100 pips
against you for your position to be wiped out. On the other hand, if you trade with
a leverage of 1:400 the market would only have to move 25 points against you for
your position to be wiped out.
We recommend first opening a position with a low 1:100 Leverage, and only once
you see that you’ve hit a strong trend, consider opening one with a 1:400
leverage.
The Ratio between Minimal Lot Size, Trade Size and Leverage
Fundamentally, the minimal lot size for a trade is $10,000, thus the leverage
limitations are set according to the amount you choose to trade
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