Have you realized that the whole world economy revolves around the trade of Forex. People, Corporations & Countries are buying and selling currencies every single second of every single day. So isn’t time you learn the mechanics of Forex Trading so that you too can profit off this ever growing market?
I’ve written this guide with the assumption that the readers are relatively new to the Forex market. So bear with me as it pretty much covers the A to Z of Forex Trading.
You can skip to any of the sub-sections using the menu below:
So, let’s get started on your forex trading journey!
What is Forex?
Forex is the abbreviation term of the Foreign Exchange Market, which is a space that comprises all the operations done with currencies. In other words, the Forex market is for a currency the same as the real estate market is for a house. Whenever you have to exchange your money for a foreign currency, you automatically enter the Forex market.
The Forex market was officially founded in 1976, when the majority of the world countries switched from the previous ‘Gold Standard’ to the present Jamaican system, in which the national currencies are no more dependent on gold but are freely floating based on demand. Unlike many other markets in the world, the Foreign Exchange market, or the Forex, is not controlled by any monopoly, government, company, institution, or any other structure. This status of not being monopolized makes it attractive.
Moreover, Forex is by far the largest market in the world, with a daily turnover that exceeds $5 trillion. For comparison, the stock market, the one in which the company shares are traded, can reach $226 billion per day in the best case.
What is Forex Trading?
Forex trading is the process in which a person generates profits based on the price movements of currencies. Let us get back to our real estate example: the same as one can buy a house and sell it later for a higher price, a Forex trader can buy a currency and sell it at a higher price for profits.
In the Foreign Exchange market (Forex), all the currencies in the world can be put together in pairs, and you will find all these pair abbreviations like EUR/USD, GBP/USD, EUR/JPY, and so on.
Quotation = Rate = Price
As of today, the EUR/USD price is 1.0451, but this quotation will change its last 2 or 3 digits within the next hour or even few minutes. The quotation indicates that we can buy one euro for 1.0451 US dollars.
Forex traders try to profit from the currency pairs’ movements. At a practical level, you enter the market by opening a position on an Internet platform, because everything we do today is on the Internet, right? There are two types of positions:
- BUY (also called ‘long position’) is opened when the trader anticipates an increase of the rate (a growth of the base currency);
- SELL (also called ‘short position’) is opened when the trader predicts a decrease of the rate (a growth of the quote currency);
So, in theory, it is not a big deal to trade currency pairs – you just have to click Buy or Sell. Even if it seems easy, you should know that the statistics say that only 5 to 10 percent of traders actually generate profits, because the rest of the market participants seem to lack a serious attitude.
As a Forex trader, if you buy EUR/USD, it suggests that you anticipate the euro will grow in relation to the USD. When you sell EUR/USD, it suggests that you anticipate the USD will increase in relation to euro and the exchange rate will drop.
So, let’s imagine you, as a Forex trader, possess one million dollars and would like to generate some profits based on the Foreign Exchange market. You believe the euro will grow in the next month from 1.0451 to 1.1200. You exchange your million and get 956,800 euro based on the current rate. After 30 days, your forecast turns out to be correct and the EUR/USD price increases to 1.1200. When you make the exchange back again and convert your 956,800 euro, you get $1,071,616, which is $71,616 more than invested. This is a great profit for one month, right?
But, how many Forex traders have $1,000,000 to invest? Since the majority of traders are individuals with an average income like you, there are the Forex brokers that may assist clients to enter the market. eToro is one of these brokers that revolutionized the trading world with its original copy-trading concept.
We will show you how to open a trade on eToro, but first of all, let us understand – why do you need a broker? Besides the fact that the broker comes with the online platform and makes the trading process look easy, it also offers you the leverage, which is like borrowing you a sum of money. If the leverage is 100:1, then with your $1000 investment, you actually enter the market with $100,000, as the rest comes from the broker. Therefore, if your prediction is true, you can generate higher profits and the broker’s hidden ‘credit via leverage’ will return back to them.
How to Trade Forex with eToro
eToro is my forex broker of choice for 3 simple reasons: They have over 4,500,000 active traders world wide, Free Demo Account for Practice & the best performing social trading platform known as Copy Trader.
In order to execute a successful trade with eToro, you will have to:
- Register with the broker
- Open a real account or demo account
- Make a deposit (If you opt for a real account)
- Open the eToro Web-Based platform
- Choose a currency pair and then trade it by buying or selling, depending on your prediction.
So before we get started with the relevant screenshots you can click here to open up eToro in a new window.
Step #1 – When registering the broker, you will have to fill in the blanks by providing your personal info.
Step #2 – Next, you will have to complete your profile with additional personal data and then make a deposit. eToro offers more payment methods, so you can deposit your money by credit/debit card, PayPal, Skrill, Union Pay, and more.
Here is the list of eToro’s payment methods:
Step #3 – Now, you are ready to trade. You can start trading on eToro via Trade Market section or Watchlist (1) section from the left side panel. We will go through the Watchlist (1) as it can be customized by adding currency pairs or markets (2). Once you make it full (there are 42 currency pairs on eToro), choose a pair for trading (3):
Step #4 – We will trade EUR/USD, and we suggest you to trade only the major pairs for the beginning. The major pairs are made from the world’s most traded and most liquid currencies, such as EUR, USD, GBP, JPY, AUD, CHF, and CAD. Once you click EUR/USD on your Watchlist, you will be redirected to another page where you can start trading (1). However, we will make things more complicated and will first open the chart and trade from there (2):
Step #5 – Once we are on the chart page, you can see below the EUR/USD quotation (1) that always fluctuates (2). You can change the chart parameters by choosing a time-frame (3) and by switching to another chart type (4). The time-frame is important because it decides your trading style – like day trading, swing trading or position trading. Once you’re done with this, you can start the proper trading by clicking on Sell (5) or Buy (6).
Step #6 – A new window will pop up and you will execute the trading order. If you expect the rate to go up, you should click on Buy, and if you feel it should decrease in the next few hours, then you should click on Sell. Let’s say we think the EUR/USD rate will go up: we should click on Buy (1), indicate the amount that we are ready to spend for the trade (2), choose a leverage that would boost our investment potential as previously mentioned (3), and finally place a Stop Loss (4) and Take Profit (5) limit. That’s all! You should click below on Set Order and you’re done! Congratulations with your first trade on eToro!
Now, you can go back to the chart or click the portfolio section in the left side menu to monitor your trade.
During our first trade journey, you could note the Stop Loss and Take Profit orders. Do these terms sound weird for you? In fact, these are important risk management methods. Here is their purpose:
The take-profit (TP) is a stop order that decides the price at which the trade will automatically get closed with a predetermined profit. The TP can be placed both before and after the opening of the trade and you can change it without any restrictions. The main purpose of this order is to help you manage the trade without being always present at the computer.
Stop-loss (SL) is the second stop order, but it is applied to limit losses. The use of the stop loss order is the same: to provide you with the possibility to do other activities rather than always monitor the rate.
More about eToro and the bottom line
You may wonder why we placed our trade with eToro since there are so many brokers out there. Well, it is because eToro came in the Forex market with revolutionary concepts like copy trading and is one of the best brokers for both beginners and experienced traders.
Social trading, also called copy trading, is a relatively recent but already popular trading approach among online traders. This concept brings Forex trading to the large public. With the help of eToro’s copy trading, anyone can monitor the trading activities of professionals and copy their trades entirely or only partially. The purpose of social trading is obvious: it helps you to generate profits with the help of more experienced traders.
In order to copy trade on eToro, you just have to click on Copy People in the left side menu (1), start searching based on your relevant parameters (2), and get a decent list of professional traders that can be very inspirational for you.
We hope you will become a profitable trader whatever method you choose, whether you do it on your own or by copying some professional trader using CopyTrader. Just remember eToro offers you both options.
Good luck with your trading journey!