Forex Basics Flashcards
Exchange Rate
The exchange rate represents how much of the quote
currency (EUR) is needed to buy one unit of the base currency (USD)
Example: USD/EUR
B/Q
Base currency/ quote currency
“pips” (percentage in points)
the smallest price move that
an exchange rate can make, usually equal to 0.0001 for most pairs. The pip value helps calculate potential gains or losses in a trade
List the “major pairs” in Forex
EUR/USD, GBP/USD, USD/JPY, and USD/CHF
List the “minor pairs” in Forex
EUR/GBP, EUR/AUD,
or GBP/JPY
What are “exotic pairs” in Forex? Give two examples.
These involve one major
currency and one from an emerging
or smaller economy.
USD/ TRY (U.S. Dollar/Turkish Lira) or USD/SEK (U.S. Dollar/Swedish Krona)
How can interest rate effect the Forex market?
A rate increase typically strengthens a currency, as higher
rates attract investors seeking better returns. Conversely, a rate cut can weaken a currency.
Name two commonly monitored inflation indicators
Consumer Price Index (CPI) and the Producer Price Index (PPI)
How can inflation data influence the Forex market?
High inflation can erode a currency’s purchasing power, leading central banks to raise interest
rates, which can affect currency value.
How can employment figures influence the Forex market?
Strong job growth can signal a growing economy, boosting a
currency’s value. High unemployment, on the other hand, can lead to lower consumer spending
and economic slowdown, weakening the currency
Gross Domestic Product (GDP)
represents the total value of goods and services produced
in a country
How can GDP influence the Forex market?
A higher-than-expected GDP growth rate can strengthen a currency, while lower growth can have the opposite effect.
How can GDP influence the Forex market?
Political events, elections, trade agreements, and conflicts can lead to sudden changes in currency prices. For example, a stable political
environment can strengthen a currency, while political uncertainty or tensions can weaken it.
Standard Lot
100,000 units of the base currency. Each pip movement represents a $10 gain or loss.
Mini Lot
10,000 units of the base currency. Each pip movement represents a $1 gain or loss.
Micro Lot
1,000 units of the base currency. Each pip movement represents a $0.10 gain or loss.
Leverage
a feature offered by brokers that enables traders to control a large
position with a smaller amount of capital. It is expressed as a ratio, like 100:1, which means that for
every $1 of your capital, you can trade $100 worth of currency.
Margin
the amount of money required to open a leveraged position. It’s essentially collateral for the broker, ensuring that the trader can cover any potential losses.
Margin Call
If your trade goes against you and your equity falls below a certain threshold, your broker may issue a margin call, requiring you to deposit more funds to maintain the position.
Define Day Trading, list an advantage and disadvantage
Day trading involves opening and closing trades within a single day. Day traders focus on short-term price movements and typically don’t hold positions overnight. This style
requires active market monitoring, quick decision-making, and understanding of intraday price
patterns.
Advantages: Avoids overnight risks and benefits from high leverage on short-term moves.
Disadvantages: Requires significant time and concentration; can be stressful for beginners
Define Swing Trading. List an advantage and disadvantage.
Swing trading involves holding positions for several days to weeks, aiming to
profit from medium-term price movements. Swing traders look for market “swings” or trends,
using both technical and fundamental analysis to make decisions.
Advantages: Less time-intensive than day trading; allows traders to capture more significant
moves.
Disadvantages: Requires patience and can involve holding positions through overnight
volatility.
Define position trading. List an advantage and disadvantage.
Position trading is a longer-term strategy where trades are held for weeks,
months, or even years. Position traders focus on fundamental factors and long-term trends
rather than short-term price fluctuations.
Advantages: Requires minimal time commitment and allows traders to avoid the noise of
daily market fluctuations.
Disadvantages: Involves holding positions for extended periods, which can tie up capital and
expose trades to long-term market risks.
What does each candlestick represent?
each candlestick represents a specific time period and shows the open, high, low, and close prices (OHLC)
What does the body of the candlestick represent?
the opening and closing prices
