An investment operation is one

which, upon thorough analysis,

promises safety of principal
and an adequate return
Benjamin Graham

Benjamin Graham was the father of “value

investing”, Warren Buffett’s teacher in Columbia
University and mentor at the beginning of Buffett’s
professional journey.
The Ultimate Guide to CFD Trading by AvaTrade
Copyright © 2020 by AvaTrade

All rights reserved. No part of this publication may be reproduced, distributed,

or transmitted in any form or by any means, including photocopying, recording,
or other electronic or mechanical methods, without the prior written permission
of the publisher, except in the case of brief quotations embodied in critical
reviews and certain other non-commercial uses permitted by copyright law. For
permission requests, write to the publisher, addressed “Attention: Permissions
Coordinator,” at the email address below.

Second Edition 2020

AvaTrade Financial Centre

Five Lamps Place
Amien Street
Dublin 1
www.avatrade.com
customer@avatrade.com or by phone +1-212-941960
Disclaimer notice:

Please note the information and trading strategies contained within this
eBook is for educational purposes only.

All effort has been executed to present accurate, up-to-date, reliable, and
complete information. No warranties of any kind are declared or implied.
Under no circumstances is AvaTrade responsible for any losses, direct or
indirect, which are incurred because of the use of information contained within
this eBook, including, but not limited to, errors, omissions, or inaccuracies.

Readers acknowledge that AvaTrade is not engaging in the rendering of

legal, financial, or professional advice. The content within this eBook has
been derived for educational purposes only. 

Any information and trading strategies provided within this eBook is

not intended as and does not constitute investment advice, investment
recommendation, an offer or solicitation to invest or trade. AvaTrade disclaims
any responsibility or liability relating to the use of this material as it is purely
for educational purposes only.
Contents
Introduction  6

Chapter 1: CFDs Explained  7

Chapter 2: The Forex Market  14

Chapter 3: Rules of Trading  19

Chapter 4: What to Do and What Not to Do  26

Chapter 5: Trading Tips  34

Chapter 6: 3 CFD Trading Strategies  40

Chapter 7: The Bottom Line  45

Test Results  47

Glossary  48
Introduction
Welcome to this eBook, brought to you by AvaTrade. Our intention over the course of
this eBook is to get you feeling confident about opening a trading platform and placing
your very first trade by the end. We offer a demo trading account, and it is worth having
the platform open while working your way through this eBook in order to practice the
lessons as you are learning. Alternatively, you can start live trading for only $100. This
might be another excellent way for you to test out the markets with a low upfront
commitment.

When we talk about CFDs and Forex, we are talking about trading, rather than investing.
Trading is generally done on a shorter-term basis than investing, and it usually (although
not always) requires much less starting capital – that is the money you need to start
trading with. Trading CFDs comes with many benefits over investing, as we shall discover
over the course of this eBook. But just so you get an instant understanding, when
trading CFDs, you don’t actually own anything, e.g. the stock or the currencies involved.
Instead, you are speculating on the price movement of the asset. Will the stock rise in
value, or will it fall?

Having said all of that, let’s now learn what CFDs are and how to trade them.

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 CHAPTER 1

CFDs Explained
 Chapter 1: CFDs Explained

What are CFDs?

CFDs or Contracts for difference are legal contracts between
two parties to agree to pay the difference between the
opening price and closing price of a financial asset such as
a currency pair, commodity or a stock. For example, a trader
opens a position using a CFD to purchase a commodity
contract worth $5000. If the closing price ends up at $5200,
then the broker is required to pay the trader the difference
of $200. On the other hand, the closing price ends up at
$4800, then the trader is required to pay the broker the
difference of $200. Because of this arrangement, traders
can now gain a foothold in the financial markets without
actually having to take hold of the actual physical asset.
What a relief to know that when you are investing in oil, you
will not actually need to store those barrels in your front
room!

Here’s an example of ABC stock which is currently trading

at $20 on the stock market (that means each share is worth
$20). You decide to buy a hundred shares. Traditionally, such
an investment would cost you $2000 ($20 x 100 shares).
This is excluding any commission which is payable to the
stockbroker for executing your trading instructions.

However, with CFDs, you can now invest in the same

stock with the same trading value, with just a fraction of
the original capital that you put up when investing in the
traditional way. This is where you begin to understand the
power of leverage and trading on margin. With CFDs, most
brokers will usually require that you put up a 5% margin of
the trading value. The other 95% is effectively what you are
borrowing from the broker. In the case of our example, the
capital outlay would be just $100, as opposed to $2000. In
terms of leverage that equates to 20:1

Belonging to a category of financial instruments known as

derivatives, CFD values are dependent upon the value of
the underlying asset. So the CFD is a contract based on the
price of an asset, e.g. Gold, Facebook stock or the Euro-
dollar pair. In short, investors can benefit from the same
price movements of the underlying asset without having to
come up with a large investment amount.

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 Chapter 1: CFDs Explained

Contract Size
With regards to contract size, we are referring to the value of the CFD contract in relation
to the value of the contract for the underlying asset. Usually, the value of the CFD
contract will be in a 1 to 1 proportion. Hence, if the price of the underlying asset rises by
$5, then the price of the CFD will rise by $5 as well. However, there are exceptions where
the CFD contract will have a higher value in relation to the underlying asset. In such a
case, changes in the price of the underlying asset will result in a larger proportion in
changes for the CFD contract.

Advantages of Trading CFDs

Created in the mid-90s in the UK, CFDs grew quickly in popularity among investors
due to the flexibility and lucrative returns which they are able to provide investors with
(notwithstanding the potential losses too!) In addition, with the changes in the regulatory
environment and growth of online trading platforms, CFDs became highly accessible
to everyone. They literally broke down the barriers to the world of investing. Suddenly
trading became much more accessible to the average Joe. Along with that came heavy
competition between brokers, and more and more springing up over time. Hence, the
need for heightened regulation in the industry and knowing that you were working with
a broker that was both safe and secure.

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 Chapter 1: CFDs Explained

So what are the benefits of trading in CFDs?

Leveraged Trading
Foremost of all, trading in CFDs is affordable since you just need to come up with a
small margin in proportion to the value of the CFD contract. For example, if you wish to
purchase $10,000 worth of Gold contract and your broker only requires a 5% margin,
then you only need to come up with a deposit of just $500.

Liquidity
When you invest in the financial markets through traditional means, you require a willing
counterparty to participate in order to actualise a trading transaction. For example,
when you want to invest in a stock, you need to find a willing seller of the stock before
you can actually buy it. If there is no willing seller, then the price of the stock will rise up
until it is sufficient to entice someone to sell his or her stocks on the stock exchange.

Alternatively, if we want to sell a stock, you will also need a willing buyer for the stock.
If there is no buyer, then the price of the stock will fall until it is sufficient to attract a
buyer. The ease, which we can sell or buy a financial asset, is referred to as liquidity.
The easier it is to sell or buy, the more liquid that asset is. Often times, when the market
is undergoing a crisis, we tend to find the market becoming illiquid hence making it
difficult for one to close or open a market position. With CFDs, such a situation rarely
occurs, as there is no physical exchange of the asset and hence no requirement to find a
counterparty to the transaction. A CFD trade only requires a broker to accept the trade
and a commitment from both parties to pay the difference from the opening price of
the asset. In other words, the CFD market offers more liquidity than traditional markets.

Short Selling
In traditional markets, short selling is usually discouraged as it can have an adverse
impact on the market, such as creating panic and unwarranted downward pressure on
prices. Short selling occurs when an investor borrows a financial instrument and sells
it with the expectation of buying it back in the future for a lower price. In other words,
the short seller is betting that prices will drop. With CFD trading, there is no restriction
on short selling as a CFD transaction has no effect on the underlying security market.
The transaction is not in any way linked to the supply and demand of the underlying
security. As mentioned earlier, CFDs are basically a legal contract between the trader
and the broker. As such, with CFDs, investors can easily profit from both rising and
falling markets. This means you can “go long”/open a “long” position or “go short”/
open a “short” position.

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 Chapter 1: CFDs Explained

Rollover
Positions in the traditional markets have an expiry date. For example, with futures
contracts, as the expiry date draws closer, the price of the futures contract will begin to
fall until it reaches zero at expiry. Hence the investor must conclude his trades regardless
of whether he is making a loss or a profit before the expiry of the futures contract. If
the investor is not able to conclude his trade before the expiry date, then he needs to
rollover his trade to a new expiry date cycle. By rolling over his trade, the investor will
also incur an additional cost, which will ultimately eat into his profit margin.

With CFDs, you need not worry about fixed expiry dates even if the underlying security
has reached its expiry date. This is because the underlying asset is only used as a
reference. Your CFD contract can easily be transferred or rollover to a new expiry date
without having to incur an additional trading cost. In other words, a CFD trader can
keep his position open as long as he wants.

Trading CFDs
CFDs are especially useful for traders who are speculating in the market. The CFD trader
does not have to worry about having to own the physical shares in order to profit for a
company dividend payout. Likewise, he does not have to worry about taking physical
delivery of a consignment of crude oil when he invests in crude oil futures CFDs. With
these annoyances out of the way, the CFD investor merely has to focus on his trading
activities to ensure a profit. For beginner traders, CFDs are an excellent way to acquaint
oneself with the financial market due to its affordability. However, as with all types of
investing, trading can incur losses, so it is important to remember that you should never
invest more than you can afford to lose.

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Chapter 1 Test

1. What does the acronym “CFD” mean?

a) Call for Difference
b) Contract for Difference
c) Contract for Derivatives

2. In what category of financial security classification does

CFDs belong to?
a) Futures
b) Options
c) Derivatives

3. What is short selling?

a) Selling a security with the expectation that the price will fall
b) Selling a security with the expectation that the price will rise
c) Selling a security within a short span of time

4. What are the advantages of trading CFDs?

a) Liquidity, leverage and short selling
b) Regulated trading environment, leverage and low spreads
c) Low spreads, regulated market and fixed contract expiry date

5. What is rollover?
a) A market position closed automatically
b) A market position renewed to the next expiry cycle
c) A demand from the broker to place more funds in the trading account

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 CHAPTER 2
The Forex
Market
 Chapter 2: The Forex Market

Definition
The Foreign Exchange Market or Forex as it is commonly known is the world’s largest
market. It is the mechanism by which different currencies from around the world are
exchanged for one another. The Forex market is also the platform where the value of
one currency is established in relation to another currency. The importance of the Forex
market cannot be understated in today’s world, as it is the conduit to which global
trade flows. Without the Forex market, global trade would virtually grind to a halt. Let’s
take a look at an example of how Forex helps to facilitate international trade. Assuming
an American residing in New York wishes to buy a classic German car in Germany. To
do so, the American will need to sell U.S. dollars and buy Euros in order to pay for the
purchase of the car. 

Regarded as the world’s largest market, the daily turnover of the Forex market is said
to be in the region of $6.5 trillion dollars. While commercial activities account for a
portion of this huge turnover, the bulk of the volume is largely attributed to speculative
activities. 

Forex Pair Quotes

Currencies are always traded in pairs. The EUR/USD represents the Euro against the
U.S. dollar, where the currency on the left, the base currency is the Euro and the one on
the right side, the counter currency is the U.S. dollar.

If the value of the EUR/USD is 1.17 that means 1 Euro is worth 1.17 dollars. Another
example is the EUR/GBP = 0.90. This is the Euro against the British pound, where 1 Euro
= 0.90 GBP. When you buy the EUR, you are selling the GBP and vice versa

Quotes follow several conventions as to how they are displayed. 

1. In a Forex quote where the is one of the components of the currency pair, the
Euro will always be denoted first as the base currency. This shows how many
units of the counter currency is required to exchange for one unit of the Euro.

2. Where the Sterling is a component of the currency pair, it is the base currency
for all currencies except the Euro, In the EUR/GBP quote, the GBP becomes the
counter currency instead of the base currency.

3. For the U.S. Dollar, it is usually quoted as the counter currency in relation to the
EUR, GBP, NZD and AUD.

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 Chapter 2: The Forex Market

Numbers
Based on the Bank for International Settlements (BIS) 2019 triennial report, the Forex
market daily capitalisation volume has reached approximately $.6.5 trillion. According
to the latest figure published by bond research firm LearnBonds (January 2020), this
figure reached $6.6 trillion in 2020, which represents a 40% increase in 10 years. This
massive increase in daily turnover is good news for the retail trader as the large market
capitalisation of the Forex market tends to result in lower volatility. In other words, large
trades by central banks or institutional investors tend to have less impact on prices in
the Forex market. Any impact caused by large trades is significantly diluted. 

Nevertheless, it is important to note that the Forex markets have several major key
players, with the banks being the most influential. In fact, the interbank market is the
largest component of the Forex market, which the U.S. banks dominate. In order for a
retail trader such as yourself to be successful, you need to understand the enormity of
this market and how the various components of this market interact with each other. 

Volume and Liquidity

The Forex market is extremely attractive to many investors, largely due to its high
liquidity. With the large volume of currencies traded on the Forex market every day,
investors can get in and out of the market easily 24/5. In other words, you will never get
stuck in an unfavourable position for lack of a counterparty. Nevertheless, it is important
to note that while the Forex market is highly liquid, this liquidity can vary from currency
to currency, as well as the trading session that you are trading in. Of all the currencies
that are traded in the Forex market, the major currency pairs such as the EUR/USD and
USD/JPY make up more than 40% of the overall trading volume. Of this 40% volume, the
U.S. dollar dominates more than ¾. Next, is the Euro and in third place, the Japanese
Yen. What this means is that new traders should focus their attention towards these
three major currencies when formulating their trading strategies. 

Capitalising on opportunities in the

Forex Market
In order to take full advantage of the unique features of the Forex market, traders
should consider their approach towards making trades in the Forex market. Because
every individual has a different perspective on how to identify trading opportunities and
risks, they need to formulate a trading strategy that will suit their individual trading
personalities. They need to decide whether fundamental analysis or technical analysis
is more suited for their trading needs. In the later chapters, we will cover these types of
market analysis in more detail.

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Chapter 2 Test

1. Traditionally, the Euro has always been quoted in which

part of a currency pair quote?
a) Base Currency
b) Counter Currency
c) Primary Currency

2. Which institutions dominate the Forex market?

a) The Commercial Banks
b) The Central Banks
c) The Bank of International Settlements

3. What is the latest Forex market capitalisation figure?

a) 2.1 Trillion
b) 6.5 Trillion
c) 4 Trillion

4. What are the major currencies traded in the Forex Market?

a) USD, CHF, JPY
b) TRY, GBP, JPY
c) AUD, NZD, CNY

5. How many per cent of the overall trading volume does the
top 3 major currencies dominate?
a) 40%
b) 20%
c) 15%

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 CHAPTER 3

Rul e s o f T r a d i n g
 Chapter 3: Rules of Trading

Buying & Selling

The primary objective of any trading activity is to make a profit. Likewise, with Forex
trading, you want to buy low and sell high. However, with Forex, it is also possible for
you to sell a currency at a price and then buy it back for a lower price. Either way, the
goal is to make a gain from your transaction. In Forex trading, you will often come
across the term “exchange rate”. The term refers to how much one currency can be
exchanged for another. As we mentioned at the beginning of Chapter 2, the exchange
rate will comprise of two components, the base currency and the counter currency. The
base currency will always be the first currency in the quote.

For example, for the EUR/USD quote, the Euro is the base currency. The second currency
in the quote, the USD, is the counter currency. The relationship between the base
currency and counter currency is that it shows how much counter currency is required
to purchase one unit of the base currency. If the EUR/USD is quoted at 1:1.2, then this
means $1.2 USD is required to purchase one Euro. Another fact that we have to note
about Forex trading is that when we open a market position, we are simultaneously
buying one currency and selling the other currency. With reference to our EUR/USD
example, when we purchase this currency pair, we will be buying the Euro and selling
the USD at the same time. 

Quotes, Spreads and Profit Calculation

When you ask a broker for a quotation for a currency pair, you will be given two prices,
the BID price (lower price) and the ASK price (the higher price).

The BID price is the price that the broker is willing to purchase the base currency for.
The ASK price is the price which the broker is willing to sell the base currency for. The
difference between the BID and ASK price is called the spread. This is the margin that
the broker earns every time a trade is executed on behalf of a trader.

Profit & Loss Calculations:

Let’s take a look at how to calculate the profit and loss for the trade. In this example,
we assume that you are going to purchase a standard lot of the EUR/USD currency pair
at ASK price of 1.22850. A standard lot is 100,000 units of the base currency. Hence for
this trade, it would have cost you $122,850 (100,000 x 1.22850).  

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 Chapter 3: Rules of Trading

Let’s further assume that you decide to liquidate your position at the BID price of
1.22875. (Note, that in this case, your BID price is higher than your ASK price.).

Hence, your total return for your trade will be $122,875 (100,000 x 1.22875). The
difference of $25 ($122.875 - $122,850) will represent the profit that you earned from
this transaction. In the second part of your transaction where the BID price is lower
than the ASK price, then you will likely be making a loss from your trade. Supposing
instead of liquidating your position at the BID price of 1.22875, you liquidated at a BID
price of 1.22825. This means you will be making a trading loss of $25.

To summarise, there are two important takeaway points that

we should take note from our trading example above:
1. One standard lot traded is 100,000 units of the base currency. Apart from the
standard lot, most brokers nowadays also offer smaller trading lots such as the
Mini lot (10,000 units), the Micro lot (1,000 units) and Nano lot (100 units).
2. The trader makes a profit when the BID price that he gets is higher than the
ASK price. 

Pip Value:
In our EUR/USD trading example, we note that the ASK price for the EUR/USD pair was
quoted at 1.22850, up to 5 decimal points. A pip represents the smallest movement of
the price at the 4th decimal point. For simplicity sake, our examples only deal with a
movement of 2.5 pips in both directions. 

Currency, interest rates and swaps

Every currency that is traded in the Forex market has an interest rate attached to it.
The interest rate, however, varies with time and the time frame traded. As mentioned
earlier, each time we open a market position, we are actually buying one currency and
selling another simultaneously. When we buy a currency, we will be earning interest on
it whereas when we sell a currency, we pay interest on it. With a fluctuating exchange
rate, the interest rate for these currencies will also vary during the duration of our trade.

Due to the interest differentials, open market positions are rolled over after each
settlement date. During a swap or rollover procedure, the difference in the interest rates
is settled. The broker either received interest from you or he pays you interest depending
on interest differentials. There are basically two types of swaps, “Swap short” for keeping
“short” positions open overnight and “Swap long” for keeping “long” positions open
overnight. 

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 Chapter 3: Rules of Trading

Difference between the spot market and

CFD on rollover positions
Unlike the spot Forex market, for Forex trades conducted through CFDs, an open position
is automatically rolled over to the next settlement date or until the trader decides to
liquidate his position. 

Order types
There are five types of trading orders that are normally used in Forex trading:

Market Order
A market order is a trading order to the broker to execute a trade at the best available
price at that moment. Due to price fluctuations in the market, the price when the
market order is issued and when the trade is executed can vary. As such, this can lead
to unforeseen losses or gains by several pips. Only use market orders when prices in the
market are relatively stable.

Stop-Loss Order
A stop-loss order is an order to the broker to exit a market position that went against
your expectations when the price reaches a specified level. This type of order is designed
to limit one’s trading losses. 

Limit Order
The limit order instructs the broker to execute a trade (buy or sell) only at a predetermined
price limit or better. You use this type of order to buy below the market price or sell
above the market price. The order helps you reduce the risk of sudden price changes. 

Trailing Stop Order

The trailing stop order is similar to a stop-loss order except that the stop price level moves
as the market price moves to the predicted direction. This type of order is designed to
help you secure the profits that your trade has achieved while minimising your potential
losses. 
 
Take Profit Order
The take profit order is an instruction to the broker to close the trade automatically
when it reaches a predetermined level. This type of order is designed to secure your
trading profits based on a profit value that you set initially.

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 Chapter 3: Rules of Trading

Margin, balance and free equity

Forex brokers operate by offering margin-trading facilities to their clients. With margin
trading, a trader can leverage his trade with his limited trading capital in order to
secure a bigger profit potential. The ratio of the margin offered by the broker will vary
from broker to broker.

 If changes in the price result in the available equity being unable to cover the margin
requirements, then the broker will issue a margin call to the trader to top up his trading
account in order to maintain the minimum margin ratio. The available equity or free
equity is the portion of the trading balance that is unencumbered and can be committed
to maintaining the margin requirements for a new position or withdrawn from the
trading account.

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Chapter 3 Test

1. What is the exchange rate of a currency?

a) The exchange value between two currencies
b) The difference between the GDP of two countries
c) The price difference of a product in two different countries

2. What is the spread?

a) The spread is the filling between two pieces of bread
b) The spread is the difference between the BID and ASK price
c) The spread is the gap between the time a trade is opened to when a trade
is closed

3. What is a pip?
a) A pip is a type of financial instrument
b) A pip is a variation between two currencies
c) A pip is the fourth decimal price movement of a Forex price quote as EUR/
USD or GBP/USD

4. What is a margin call?

a) A margin call is a broker’s demand to add funds to the trading account 
b) A margin call is a decision made on the side
c) A margin call is a leverage reduction

5. What is a mini lot?

a) A mini lot is a kind of order
b) A mini lot is a trading lot that represents 10,000 units of the base currency
c) A mini lot is a type of Forex trading account

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 CHAPTER 4

W h a t t o d o a n d
wh a t n o t t o d o
To help you get started on the right footing, we have included the following
tips to get you set up correctly no matter whether you are trading from
home, from an office or even from your mobile or tablet device:

Working environment
Ensuring that you have all the proper tools at your disposal is critical in helping you
to seize all available trading opportunities. Working internet, of course, is a basic
requirement for trading. The faster the internet speed the better. If you intend to engage
in automated trading with the help of EAs, then you would be well-served to use a VPS.
This is a private server which ensures no downtime. That means all of your trades will
get executed as planned, with no slippage. 

 EAs, as you may come across later in your trading journey, are pieces of programmable
code that when installed into the MetaTrader platform will automatically follow pre-set
trading strategies. You can either programme your own, buy or rent them. This comes
later on though. For now, we will focus on the basics.
 

Trading platform
Another factor that might affect your performance as a trader is the trading platform
that you are going to trade on. The online trading platform provided by your broker is
your gateway to the financial markets. Hence, knowing how the platform works and
all the tools that are integrated with the trading platform will certainly make your life
easier and more profitable. To help you familiarise yourself with the trading platform,
you can use the demo account provided by your broker to learn about the features of
the trading platform at no risk to you. 

Here at AvaTrade, we offer a selection of different trading products. These include the
popular MT4, its younger sister which contains different features, the MT5, our proprietary
WebTrader, which can be used over an internet browser rather than necessitating
software download, and our mobile trading app, AvaTradeGO.

Charting and Technical Analysis

In addition to the platforms, you will need a charting package. Most platforms have
them inbuilt, although some traders prefer to conduct their technical analysis and
charting on an external package. A good charting package will contain a variety of
chart types, from bar chart, line chart, to Japanese candlesticks. 

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 Chapter 4: What to do and what not to do

Bar Chart

Line Chart

Japanese candlestick chart

It will contain a variety of

different timeframes and
the ability to use multiple
charts at the same time. 

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Chapter 4: What to do and what not to do

It will also contain a variety of different indicators and technical studies.

This will help you to implement technical analysis.

Technical analysis, in short, is how you can identify trends, trend reversals
and to spot entry and exit points otherwise known as signals.

These can really save you time on conducting your research.

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 Chapter 4: What to do and what not to do

Market Timing and Economic Calendar

The Forex market is open 24 hours a day, 5 days a week, so no matter where in the world
you are, you will always find a trading session, from the Asian session to the European
session to the US session. Even though the markets are open all week, you still need to
be able to isolate instances where trading opportunities arise. One simple way of doing
this is by referring to an economic calendar. The economic calendar contains the dates
and times when the key economic data are going to be released.

Major economic and investment decisions are made by investors after considering all
the relevant data that they have on hand. Some of these key data are contained in
reports that are published by the central banks or relevant government agencies. For
example, a rising unemployment rate figure released by the labour department would
indicate the economy as a whole is operating below capacity. It also means that there
is less purchasing power circulating in the economy. For some business people, this
could be a signal to indicate that this might be the wrong time to invest in a factory
expansion, for instance. Hence the release of these key economic data has the ability
to move prices in the financial markets. Therefore, knowing when these figures are
released to the public can provide you with a head start of when changes in prices in
the financial markets might occur.

Here is how
the economic
calendar looks.
Notice that each
event has an
impact (imp.) on
different assets,
and each event
has an impact
level, meaning
how important
the event is.

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 Chapter 4: What to do and what not to do

Emotions and Objective trading

Every trader is in some way emotionally affected by money that they have invested in
the financial markets. For the uninitiated, the thought of losing their investment capital
may result in them making investment decisions based on emotions, rather than on
objectivity. Trading based on emotions is a sure path to failure. Key emotions to be
aware of include fear, greed, excitement and of course, adrenaline, which may get you
to make decisions you wouldn’t normally make.

Risk Management
To avoid falling into such a situation, it is essential that you have a solid risk management
and trading plan and stick to it regardless of the circumstances. You are highly advised
to employ orders such as stop-loss orders, trailing or limit orders in all your trading
decisions to help protect you from unforeseen losses. Also, decide how much to invest
per trade, e.g. 5% of your overall capital and stick to it. 

Leverage usage
One of the key attractions of trading with CFDs is the fact that it is a leveraged product.
With the leveraging provided by your broker, you have the ability to multiply your profit
potential several times over with your limited investment capital. Nevertheless, it should
be borne in mind that leverage also has the potential to increase your trading losses
several times over. The fact is leveraging one’s trade is a double-edged sword. Therefore,
it is prudent that you use leverage modestly and not excessively. As a new trader, it is
best that you limit yourself to a leverage ratio of 1:10 or better still 1:1. 

Trading with the flow

One of the most fundamental rules of Forex trading is to never go against the flow. The
enormity of the Forex market means no single individual is able to affect the flow of
prices in the Forex market. Hence, rather than digging a hole for yourself by trying to
trade based on “gut feeling”, learn to read the market trends and trade accordingly with
the trend. Use trading tools such as technical analysis to help you define the current
trends in the market and formulate your trading strategies accordingly. This is why we
say “the trend is your friend.”

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Chapter 4 Test

1. What is the ideal leverage ratio to employ in your trade?

a) 1:100
b) 1:10
c) 1:400

2. Which is one of the fundamental rules of Forex trading?

a) Trading with the flow of the market
b) Trading against the flow of the market
c) Trading with “gut instinct”

3. What is a risk-mitigating tool that you can employ in your

trading strategies?
a) Interest rate swap
b) Stop-loss order
c) A margin call

4. What is an economic calendar?

a) A calendar depicting when all the major economic data are released
b) A calendar showing all the available trading dates
c) A calendar showing the settlement dates of your trades

5. What is emotional trading?

a) Trading the market based on gut feeling
b) Trading the market when you are depressed
c) Trading the market based on your trading strategies

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 CHAPTER 5
Trading Tips
 Chapter 5: Trading Tips

Trading Sessions
While it is a fact that the Forex market operates 24 hours a day and five days a week,
there are lulls in trading activity during those times. In fact, most trading activities are
confined to 3 specific trading sessions, the Asian trading session, the European trading
session and the US trading session. The Asian session is from 12 am to 9 am GMT. The
European session starts from 8 am to 4 pm GMT. Lastly, the US session starts from 1 pm
to 10 pm GMT. It is during these trading sessions that the Forex market is most active.
As such, it is advisable that you focus on one of these trading sessions if you are looking
for market volatility and opportunity. 

Correlation between currencies

It is important that you understand how your trading portfolio can be sensitive to
market volatility, especially when you are trading Forex. This is because the currencies
that you are trading are priced in pairs. As such, no currency pairs are independent of
each other. Being aware of how currency pairs correlate to each other will help you
become a more efficient trader by letting you have better control of how to manage
your portfolio exposure. 

Currency correlations can be either positive or negative. A positive correlation is when

two currency pairs move in the same direction. A negative correlation, on the other hand,
means the currency pairs move in the opposite direction. These currency correlations
can be used to help you realise higher profits or to hedge your market position and
reduce your exposure to risks. To help you maximise your profit potential, you can use
a positive correlation to open another position. Alternatively, you can use a negative
correlation to hedge your current open position. The strength of a currency correlation
depends on several factors such as the trading volume, the trading session of both
currency pairs. Naturally, currency pairs that include the US dollar will be more actively
traded during the US trading session. 

Correlation between Forex and

other markets
Currencies can also have correlations with other markets such as the stock market
or commodities market. Like currency pairs, the correlations can either be positive or
negative. It is important to note that the underlying reason for these correlations differs
from market to market. Being able to identify these reasons will help you take advantage
of these correlations to further increase your profit potential. These correlations exist
because of the capital flow between markets. 

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 Chapter 5: Trading Tips

Trading with market correlations

Let’s take a look at an example of using market correlations to trade. It is generally
understood that there is a positive correlation between the AUD/USD currency pair and
the price of gold. Let’s assume that several economic reports have indicated that the
US economy is in a declining state. Investors predicting that the business environment
in the US will get tougher decide to withdraw their investments from equity markets.
After withdrawing their investments from the equity markets, investors will now look for
an alternative and safe option to park their investments. The most obvious choice for
most investors will be to park their investments into gold. Naturally, the price of gold will
rise as the demand for gold rises. Since Australia is a major producer of gold, it is safe
to assume that the Australian dollar will rise as more people buy Australian dollars to
purchase gold. Since the USD is paired with the Australian dollar, this means the USD
will depreciate while the Aussie dollar will increase in value. As a Forex trader, you can
capitalise on this situation by investing in the AUD/USD currency pair. 

 Other market correlations, which you can look at is the positive correlation between
crude oil and the Canadian dollar as well as the negative correlation between the stock
markets and Swiss franc.

Fundamental analysis trading

One of the main methods of analysing the Forex market is by using fundamental analysis.
Fundamental analysis in Forex essentially measures whether a currency’s intrinsic value
is undervalued or overvalued. This is done by studying various macroeconomic factors,
such as the Gross Domestic Product (GDP) of an economy, its unemployment rate,
Government policies relating to the economy as well as the geopolitical situation of
the region. Generally, if an economy is facing good growth prospects, the value of its
currency will tend to increase. 

Technical analysis trading

Technical analysis is a method which most traders rely on to help them formulate
their trading strategy. Technical analysis involves the study of historical price data to
identify any discernable patterns in the price movements of a currency. It is based on
the principle that history repeats itself. In other words, if the price moves in a certain
manner, then it is possible to predict how it will move in the near future. To help them
discern the price movements in the Forex market, technical analysts rely heavily on the
use of trading charts and technical indicators such as Moving Average and Relative
Strength Index (RSI). 

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Here’s an example of a technical indicator overlaid onto the
(Bitcoin/US dollar) BTC/USD chart in order to identify a trend.

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Chapter 5 Test

1. What does GMT mean?

a) Greenwich Meridian Time
b) Grand Master Title
c) Global Mean Temperature

2. What is a negative currency correlation?

a) When the price of two currency pairs move in the opposite direction
b) When the price of a currency pair goes into freefall
c) When a currency is viewed negatively as a mean by criminals to hide
their ill-gotten wealth

3. Crude oil has a positive correlation with which currency?

a) Australian Dollar
b) US Dollar
c) Canadian Dollar

4. What is Technical analysis?

a) A method of analysing the market using historical price data
b) A method of market analysis using computers
c) A measurement of a currency’s liquidity

5. Which of the following is not used in fundamental analysis?

a) The GDP of an economy
b) The unemployment rate of an economy
c) The balance in your trading account

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 CHAPTER 6

3 C F D T r a d i n g
Strategies
Below are three proven CFD trading strategies
that you can try out:

News Trading Strategy

Because of its low transactional cost and high flexibility, CFDs are ideal for scalping. This
makes it suitable for news trading. This trading strategy will allow you to make quick
small gains within a short period of time. Nevertheless, in order to be successful with
News Trading, it is crucial that you keep yourself updated with any new developments
in the market by keeping a close watch on your economic calendar.

With the News Trading strategy, your goal will be to invest just before the release of a
report or right after its release. For the former, your objective is to try and predict what
the market’s reaction to the impending news release will be. This method is highly risky
as it is difficult to say for certain whether the news release will be positive, negative or
neutral. Furthermore, the market sometimes will not react as predicted. With the latter
method, i.e. trading just after the news release, the aim is to go with the market flow.
With this method, to safeguard yourself, you should employ stop loss and trade profit
orders with your trade. 

If you are trading Forex with CFDs, you should pay extra attention to any news or
statistics released by the central banks. Likewise, any information about the state of
the economy and investors’ confidence will affect the demand for a country’s currency.

Pair Trading Strategy

Pair trading is classified as a market neutral trading strategy. This strategy can be
used with any type of financial asset as well as during periods of high and low market
volatility. To employ this strategy, first select two highly correlated assets that belong in
the same industry, for example, Google and Facebook. The objective here is to go long
on the stronger asset and to go short on the other weaker asset. With this method, you
will be able to profit from the divergence between the two assets. 

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 Chapter 6: 3 CFD Trading Strategies

Hedging Strategy
Hedging in financial trading is akin to having an insurance policy. The aim of hedging is
to reduce or to negate your trading risks. For example, you hold a diversified portfolio of
stocks in blue-chip companies such as Microsoft, IBM, American Express and Goldman
Sachs. Let’s assume that you think the banking sector is going to weaken. To reduce the
effect of Goldman Sachs falling stock prices, you can go short with CFDs on Goldman
Sachs stocks. This way, you can even profit from Goldman Sachs’ falling stock prices. At
the same time, the profits from your CFD short position will help you to negate the loss
that you incurred while holding Goldman Sachs stocks. You can even hedge your entire
portfolio with market indices CFDs, as opposed to CFDs on a single stock.

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Chapter 6 Test

1. What is scalping in trading?

a) A strategy to reduce financial leverage
b) A trading strategy to make a small quick profit from a trade
c) A trading strategy to cover currency risk

2. How do you employ pair trading?

a) By buying and selling a pair of financial assets
b) By going long on a stronger performing correlated asset and going
short on a weaker correlated asset at the same time
c) By trading with two different trading platforms at the same time

3. How do you trade the news?

a) By keeping abreast of all markets developments and acting on the
news once released
b) By watching the news on the television while trading the market
c) By having a live news feed on the trading platform

4. Which institution is the prime mover in the Forex market?

a) The Central Banks
b) The Commercial Banks
c) The Government

5. How do you hedge an entire trading portfolio?

a) By buying CFD for each individual asset in the portfolio
b) By using CFD market indices
c) By using a take-profit order

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 CHAPTER 7
The B o t t o m L i n e
 Chapter 7: The Bottom Line

The Bottom Line

The bottom line is that there is nothing more important than your bottom line. That’s
your profit. Your goal in trading is to preserve the money you come in with and of course,
to make even more, so it is worth your while. Risk management can’t be overstated
enough. You should get a grasp of when to lock in profits and when to close losing
trades.

Certainly, reading and watching the videos we provide here at AvaTrade will help. But,
nothing is more important than practice, practice, practice. You can use our demo
account for one month. This is an excellent way to test out your strategies and to get
a grip of the platforms. But bear in mind, nothing is like trading for real. We offer nano
lots on various popular stocks, and you can start trading for just $100. Never risk more
than you can stand to lose. Also, note that we offer an off-the-shelf risk management
tool, called AvaProtect™. This protects your selected trades from losing.

When all is said and done, trading is exciting and sometimes scary, but know that when
you trade with AvaTrade, you are never alone. We are here to support and guide you
every step of the way.

Happy trading!

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Test Results
Chapter 1 Answers: Chapter 4 Answers:
1. b 1. b
2. c 2. a
3. a 3. b
4. a 4. a
5. b 5. a

Chapter 2 Answers: Chapter 5 Answers:

1. a 1. a
2. b 2. a
3. b 3. c
4. a 4. a
5. a 5. c

Chapter 3 Answers: Chapter 6 Answers:

1. a 1. b
2. b 2. b
3. c 3. a
4. a 4. a
5. b 5. b

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Glossary
Ask Bull market
The term “Ask” in the context of financial A “Bull” market is when the prices in a
trading is defined at the price that you market are generally on the uptrend.
purchase a financial instrument from Prices are rising as investors are holding
the seller. It is sometimes called the “Ask an optimistic view of the conditions in the
Price” or “Asking Price”.  market. 

Bear market Call

A bear market refers to a situation where With Call options, traders are able
the prices in the market are generally to profit when the price of an asset
heading in a downward trajectory. This is increases above a certain level within a
due to the fact that the sentiment of the specified time frame. They work in the
investors is one of a pessimistic view.  opposite manner of Put options where
an investment only returns a profit when
the price of an asset falls below a certain
Bid level during a specified time frame.
As opposed to the “Ask” price, which is the
price that a seller is willing to accept, the
“Bid” price is the price which an investor/ CFDs
buyer is willing to pay to purchase a CFDs or contracts for difference are a type
financial instrument.  of financial contract between two parties
to agree to exchange the difference in
price between when the contract is first
Bollinger bands executed to when it is settled. CFDs
Bollinger Bands is a technical indicator let investors capitalise on the price
developed in the mid-80s by John Bollinger. movements of an asset without having to
This technical indicator consists of upper own the asset. 
and lower bands that are derived from
moving averages. The bands will widen
as volatility in the market increases and Central Bank
contract when volatility decreases.  A country’s monetary authority, which
sets the country’s monetary policies as
well as the interest rate. 

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 Glossary

Commodities Equities
Natural resources derived from the earth The term equity can be used to mean the
either through mining or by cultivation. following:
These include Gold, oil, wheat and even
cattle. 1. Stocks or securities which repre-
sent an ownership interest in a
company.
Consolidation
A term used to describe a market in 2. The amount of funds contributed
a state of indecisiveness where prices by the shareholders inclusive of
are neither rising nor falling. The period the retained earnings or losses.
of consolidation ends when the price 3. The value of a margin account
breaks out at the upper or lower level minus the borrowings from the
of the price range. The term is also used brokerage firm.
to describe the financial statements of a
parent company and its subsidiary being 4. The net value of a piece of real
amalgamated.  estate after deducting the amount
owing to the mortgage firm. 

Core Retail Sales 5. One of the principal asset classes

which investors invest in.
A statistical measure of the total retail
sales in the economy based data collected
by the U.S Commerce Department. The ETF 
figures exclude automobile and gasoline
sales. It is often used by analysts and The term ETF refers to an Exchange
policymakers as a measure of consumer Traded Fund. It is a type of investment
confidence.  fund that is traded on exchanges. Usually,
ETFs track the performance of a market
index or a set of assets.
Currencies
Currency is money used as a token of Expiration Rate
exchange for goods and services. It can
take the form of coins, paper notes or The value of a financial security such as
digital code. Normally, money is only an option contract or futures contract at
issued by a government, but in recent the time the contract expires.
years, digital currencies such as Bitcoin
which have no central issuing authority is Expiration Time
slowly being accepted as an alternative
medium of exchange.  The time and date when an option or
futures contract is due to expire.

Derivatives
A type of financial instrument or contract
whose value is derived from the value of
an underlying asset. 

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 Glossary

Financial Market  Indices

An all-encompassing term used to These are a basket of assets grouped
describe a market where commodities, into one instrument. They are grouped
currencies and other financial securities by sector or region. Some well-known
are being traded.  regional examples include the Nikkei
225, the FTSE 100, the S&P 500 and the
CAC40. You can trade an index as a CFD
Financial Securities by speculating on whether the value is
An instrument that represents ownership rising or falling.
of an asset. It has a monetary value and
hence can be traded on the financial
markets.  Leverage 
Leveraging in the context of financial
trading lets you, as an investor, multiply
Fiscal Policy your profit potential with your limited
A government policy that involves investment capital. At the same time, you
adjusting its tax rates and spending will also receive more exposure when you
levels to influence the conditions in the leverage your market position. This can
economy on a macro level.  bring higher returns and higher risks.

Forex  Margin
Forex or foreign exchange refers to the act This is like borrowing money from your
of exchanging one currency for another broker, in the same way you would take a
currency. The forex market is the largest mortgage from your broker or bank. You
market in the world, with a daily turnover use the borrowed money to trade and
of more than 5.5 trillion dollars. Another return it when you lose a trade or keep it
unique feature of the forex market is the when you win a trade.
fact that trading is conducted on a 24-
hour basis.
Monetary Policy
The macroeconomic policy is decided by
Futures the central bank of the country. Typically,
A financial contract that obliges a buyer it involves adjusting the money supply
to buy, and a seller to sell an asset at a and interest rate to control consumption,
predetermined price at some fixed point liquidity and consumption in the economy.
in the future. In the U.S, the Fed is in charge of the U.S
monetary policy. 
Hedging
A risk management strategy which
Resistance
investors use to limit or offset the The resistance is a hypnotically upper
probability of losses as a result of price price level which an asset’s price has
fluctuations in the market. difficulty in breaching. Any attempt of the
price to move beyond this upper level is
met with resistance. 

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 Glossary

Retracement Support
A temporary reversal of the price of an The support is the lower price level that
asset that goes against the prevailing an asset’s price has difficulty in breaking
trend.  through. Any attempt of the price to move
further below this lower level is met with
resistance. 
Stocks
A type of financial security, which
represents partial ownership in a
Trade Balance
business or company. Stocks of public   Sometimes known as the Balance of
listed companies are traded on registered Trade. It represents a country’s exports
exchanges such as the New York Stock minus its imports. 
Exchange, NASDAQ and the London
Stock Exchange. 
Volatility
Refers to the degree of variations in the
series of prices of an asset over a period
of time. Typically, the higher the volatility,
the riskier it is to invest in the asset. 

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