Base / Quote
In forex trading, a currency pair consists of two currencies:
Base Currency: The first currency in the pair (e.g., EUR in EUR/USD). It represents the currency being bought or sold.
Quote Currency: The second currency in the pair (e.g., USD in EUR/USD). It represents the value of the base currency in terms of the quote currency. For example, if EUR/USD = 1.2000, it means 1 EUR is worth 1.2000 USD.
Points, Pips, Ticks
Points: The smallest price movement for non-forex instruments (e.g., futures or indices).
Pips: The standard unit of price movement in forex, typically the fourth decimal place (e.g., 0.0001). For JPY pairs, the second decimal place is used (e.g., 0.01).
Ticks: The minimum price movement for an instrument, often used for commodities or stocks. Ticks vary by instrument.
Prices (Open/Close Position)
Open Price: The price at which a position is entered. For example, buying EUR/USD at 1.2000 means 1.2000 is your open price.
Close Price: The price at which a position is exited. For example, closing EUR/USD at 1.2050 means 1.2050 is your close price.
The difference between the open and close price determines the profit or loss for the trade.
Ask / Bid Prices
Ask Price: The price at which you can buy an asset. It represents the lowest price a seller is willing to accept for the asset. For example, if EUR/USD has an ask price of 1.2001, you can buy EUR/USD at that price.
Bid Price: The price at which you can sell an asset. It represents the highest price a buyer is willing to pay for the asset. For example, if EUR/USD has a bid price of 1.1999, you can sell EUR/USD at that price.
The difference between the Ask and Bid prices is called the Spread. This is a key cost of trading.
Spread
The Spread is the difference between the Ask Price and the Bid Price of a financial instrument.
It represents a cost to the trader, as trades are executed at the Ask price (for buys) and the Bid price (for sells).
Tight Spreads: Often found in liquid markets like forex majors (e.g., EUR/USD), where the cost of trading is lower.
Wide Spreads: Found in less liquid markets or during high volatility, where the cost of trading is higher.
Leverage
Leverage allows traders to control larger positions with a smaller amount of capital. It is expressed as a ratio (e.g., 1:100):
Example: With 1:100 leverage, a $1,000 deposit can control a $100,000 position.
Leverage amplifies both potential profits and losses, so it must be used responsibly.
Commission Per Lot
A fixed fee is charged per lot traded. This fee varies based on the broker or instrument.
Example: If the commission is $3 per lot and you trade 2 lots, the total commission will be $6.
Commission is deducted from your account balance when the trade is opened and/or closed.
Swap (Rollover Fee)
Swaps are fees or credits applied to positions held overnight. They are calculated based on interest rate differentials between currencies in a pair:
Long Swap: The fee or credit applied when holding a buy (long) position overnight.
Short Swap: The fee or credit applied when holding a sell (short) position overnight.
Schedule: Swaps are typically charged at the end of the trading day, based on the broker’s server time.
Triple Swap: On certain days (usually Wednesday), triple swaps are applied to account for weekend rollover fees.
Off-Session Time
Off-session time refers to periods when the market is closed for trading. During these times:
- No new trades can be opened or closed.
- Pending orders will not trigger until the market reopens.
- Price movements and liquidity may be affected when the market resumes, often leading to gaps.
Understanding off-session times is crucial for planning trades, especially for instruments with specific trading hours, such as commodities or indices.
How to Read Candlesticks
Candlestick charts are a visual representation of price movements within a specific timeframe. Each candlestick consists of:
Body: The rectangular part of the candlestick that represents the difference between the open and close prices.
Green/White Candle: Indicates a bullish movement (close price is higher than open price).
Red/Black Candle: Indicates a bearish movement (close price is lower than open price).
Wicks (Shadows): The thin lines above and below the body that represent the highest and lowest prices during the timeframe.
Key Points:
The top of the wick shows the highest price (high).
The bottom of the wick shows the lowest price (low).
Common Candlestick Patterns
Bullish Engulfing: A large bullish candle fully engulfs the previous bearish candle, signaling a potential upward reversal.
Bearish Engulfing: A large bearish candle fully engulfs the previous bullish candle, signaling a potential downward reversal.
Doji: A candle with a very small body, indicating indecision in the market.
Hammer: A bullish reversal pattern with a small body and a long lower wick.
Shooting Star: A bearish reversal pattern with a small body and a long upper wick.
Timeframes determine the duration represented by each candlestick on the chart. Common timeframes include:
1-Minute (M1): Ideal for scalping and short-term trading.
5-Minute (M5) / 15-Minute (M15): Suitable for intraday trading.
1-Hour (H1): Often used for medium-term trades.
4-Hour (H4): Balances detail and overview, commonly used by swing traders.
1-Day (D1): Represents daily price movements, favored by long-term traders.
1-Week (W1): Offers a broader market perspective.
Selecting the right timeframe depends on your trading strategy and objectives. Lower timeframes provide more detailed insights for short-term trading, while higher timeframes help identify long-term trends and key support/resistance levels.