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Your First Trade |
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Get $25 free for opening a real account with eToro. The offer is limited to 20 first applicators.
eToro has developed a cutting edge Forex trading software, catering to novice and veteran traders alike by way of a user friendly trading interface, and various additional features that render the vast world of Forex trading accessible to new traders. eToro easy to use platform makes foreign exchange trading almost entirely intuitive, through its extensive use of trade visualization. eToro platform is also designed to make Forex trading a community oriented experience, with such features as private and public chats, forums and championships. eToroTM : Basic Forex Trading Guide 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 are unclear about any Forex term you come across here, be sure to refer to the glossary of terms on our website. 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? 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 how much you can profit from it. 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 are probably asking yourself: So how am I meant to make any serious money with such a low initial investment?â__ The Forex market has just the thing for you, 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 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 profit. Whether a currency is crashing or soaring, there is profit to be made, 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.
So, how do I produce profits in the Forex market? Cashing in on Price Movements Trading Forex is an exciting adventure. The market is always on the move, and every tiny shift in currency rates can mean a profit of hundreds and even thousands of dollars! Let us 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. These pairs are:
When buying or selling a currency pair, each pair has its own Bid/Ask rate, for example:
This means you could either:
OK, but where's the profit? The currency pair rates are volatile and constantly changing. I'm no professional economist, so how can I know if the rate is going up or down? Pay a visit to the next chapter: Fishing for trends. 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. 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. Since a picture's worth a thousand words, lets look at the following chart:
In a down trend, the price movements form a series of lower peaks and lower valleys:
It's important to note that during some trading days the trend is hard to spot, some trading days show no trend (the price movements form a Range), and of course you're bound to run into the occasional reversal, so this is not a perfectly accurate or 100% reliable indicator for trading. Here is what a trading Range looks like:
It is easier to make money with a trend than with a trading range. While you can still make money 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. 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. 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. 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.
Warning: Speculating on Forex rates involves great amount of risk. Be advised that even the most sophisticated traders can't always predict market movements' directions.
That's all well and good, but how am I supposed to make any money with the rates changing around 0.1% a day? In the Forex market, movements of 0.1% in currency rates can mean profits of hundreds and thousands of dollars. How is that possible? With the use of "Leverage", the Forex traders' best friend and worst enemy. Tactical usage of Leverage If you've been at all exposed to the world of Forex you've probably heard the word â__Leverageâ__ being tossed around. But what exactly is â__Leverageâ__? 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 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 pips 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:
The advantage of trading with Leverage is that while your profits potential is virtually infinite, at eToro your loss is limited to the amount of your initial investment. Once the rate drops below the rate covered by your investment, the trade is automatically closed. That is done through an automatic Stop Loss â_" explained in the next chapter. Remember, Leverage can be a trader's best friend when used carefully, and his worst enemy when used recklessly. It is a great tool for increasing profits, in fact private traders rarely trade without it, but you should always keep in mind that the higher the leverage is â_" the higher the risk level involved.
Now that you're equipped with most of the basic tools, you can open your first trade!
A Simple Trade Example Are you ready? It's time to trade! Here is a to-do list of actions to be taken as you open a trade: - Identify the pair to buy/sell Let's say that after spending some quality time on gazing at the charts of several currencies, you've concluded that:
Now, what is the reasonable decision based on this conclusion? Clearly you can profit by first selling USD and buying EUR, and then buying cheaper USD and sell expensive EUR. We could do this by buying and then selling the EUR/USD currency pair. A reminder - buying is done at 'Ask' price, while selling is done at the â__Bidâ__ price. Imagine that you bought $100 worth of EUR/USD with a leverage of 1:100 at the exchange rate of 1.5461. The details of your trade are:
In plain English, what you've just done is bought 10,000 Units (100X100) of EUR /USD, at the rate of 1.5461 USD per 1EUR. Now, let's assume that at the end of the day, or possibly even a few minutes later, the EUR/USD rate has risen to 1.5538. You sell those 10,000 Euro/USD Units at the new rate of 1.5538 and $177 back. This means that this seemingly insignificant fluctuation in the rate in this specific instant allowed you to cash in $77 from an initial investment of $100. In other words you just made 77% profit on your investment, thanks to the movement in the pair's price rate. On the example trade that we've just seen, your risk was limited to the full amount of your investment, which is only good if you are very certain regarding your decisions. However, as a beginner you shouldn't risk your entire investment, as you are bound to make mistakes.  By learning about special trade order features, you will be able to and minimize your losses. Hedging Risks and Rewards Forex trading is a risky business. This chapter will explain the usage of Stop Loss (SL) and Take Profit (TP) orders. These are used for hedging your risks and rewards, realizing your profits and minimizing your losses. eToro places an automatic Stop Loss order on all your trades to prevent you from losing more than you've invested. If the rate of your open trade drops below what's covered by your investment, the trade is closed by the automatic Stop Loss. This means the maximum amount you can lose on a trade is limited to the initial investment of the trade (with the rare exception of extreme market conditions). Still, there is no reason why you should wait until you lose your entire investment to close the trade. By setting a Stop Loss order you make sure that the value of your trade doesn't drop below a certain level. This way you control the maximum amount that you are willing to lose on a trade, without having to monitor each trade around the clock. Take Profit orders are similar to stop loss orders, only referring to profits. Take Profit orders make sure that once your trade reaches a certain level of profit it will be closed. For instance, imagine that you've opened a long EUR/USD trade at the rate of 1.5400. After a few hours the rate rises to 1.5500, but an hour later drops to 1.5300. Without a Take Profit order, you might miss the rise in the rate, and end up with a loss on your hands. If you had set a Take Profit order, the potential profit of the trade would have been realized, without you having to monitor the trade around the clock. Remember, Stop Loss and Take Profit orders are very simple tools that can make the difference between a successful trading career and a big hole in your pocket. Consider using these orders with every trade that you make. Now that I know how to hedge my risks and rewards, when should I dive in?
In the Forex market, some times are better than others for trading. Read further on The Quest for Volatility. The Quest for Volatility The Forex market is open 24 hours a day, but what are the best times to make a profit? Even though the Forex market is open 24 hours a day with the exception of weekends, not all hours are as equally good for trading. The reason that the Forex market is open 24 hours a day is that it is made up of different sessions around the globe that between them cover 24 hours. Trading Sessions (GMT):
Since the London session is the busiest out of the four, the best times for trading are 8am-9am (GMT) and 13pm-17pm (GMT), because that's when the London session overlaps with other sessions. Abuse the news. Remember, even though you're able to trade 24 hours a day, it's better to plan your trading activity in order to catch the best action for a chance to maximize your profits. how do I know how much to invest in a trade in the first place? Read further on to learn about Money Management techniques. Money Management Is there a secret to becoming a successful trader? There is a method that all successful traders use, and it's no secret. It's called money management. Money management is not some vague industry lingo â_" it simply means the knowledge and skill of managing your Forex trading account. As simple as that may seem, it's the key to a long and successful trading career. And yet it is often forgotten or neglected in the thrill of the trade. We'd like to take this opportunity to lay out some ground rules by which you can effectively manage your account. Don't go looking for the Big Win; it will most likely result in a big loss. Successful trading means consistent trading, where small wins amount to large long term profits. Never assume that all your trades will be profitable, and plan on losses. You should only risk a small percentage of your total account balance on each trade. This simply minimizes your risk, so that even if you end up losing your entire investment on a trade, it doesn't have a critical effect on your account balance. The recommended amount is 25% of your account balance per trade. More aggressive traders go as high as %50, but never higher than that. It is a very important rule to keep, since the lower your account balance drops, the harder it is to rebuild it. Using Limit Orders Size of Trades Practice with Virtual Money And even after you've begun trading with real money, it is the perfect place to try out your trading strategies. There is no point in risking your money to test out a possible theory, when you can do so with the same success minus the risk. After seeing that your strategy is consistently successful with virtual money, you can try it out for real. Remember, money management is very simple to master, but not as simple to keep up. Once you've developed the money management system that works for you, make sure to stick with it and don't let your emotions get in the way of long term profit. Now that your equipped for trading, take your time and start practice your trading skills! |
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