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
What does a filled (or red) body indicate?
that the close price is lower than the open (bearish)
What does a hollow (or green) body show?
the close price is higher than the open (bullish)
What are wicks ( or shadows)
the lines extending above and below the body showing the highest and lowest prices reached during that period
Doji
forms when the open and close prices are almost identical, suggesting indecision in the market, it can indicate a possible trend reversal if found at the end of a trend
Hammer
has a small body with a long lower wick, indicating potential reversal after a downtrend. It shows that buyers are starting to outweigh sellers.
Engulfing Pattern
A bullish engulfing pattern occurs when a small bearish candle is followed by a larger bullish candle, often signaling a potential reversal in an uptrend. The opposite holds for a bearish engulfing patterns in a downtrend.
What is the support level?
A support level is a price level where a currency pair tends to find buying interest, which prevents it from moving lower.
Strong demand zone
If a price hits a support level multiple times but does not break through
Resistance
a price level where a currency pair tends to find selling interest, preventing it from moving higher
Strong resistance level
a zone where the price has repeatedly struggled to rise above
Name and define 3 ways to identify support and resistance:
- Horizontal Levels: By looking at historical price action, traders can identify flat levels where price has previously reversed
- Trendlines: Drawing trendlines along higher highs or lower lows can help identify dynamic support and resistance in trending markets
- Moving Averages: Some traders use moving averages as dynamic support or resistance levels
Technical indicators and oscillators
mathematical calculations based on historical price, volume, and/or open interest. They help traders analyze trends, identify reversals, and determine overbought or oversold conditions.
Moving Averages (MA)
smooth out price date to help identify the direction of the trend
Simple moving average (SMA)
calculates the average price over a specific period
Exponential Moving Average (EMA)
gives more weight to recent prices, more responsive to newer information
Moving average crossover
When a shorter-period MA crosses a longer-period MA to signal potential buy or sell opportunities
Relative Strength Index (RSI)
a momentum oscillator that ranges from 0 to 100, indicating overbought conditions when above 70 and oversold conditions when below 30. It helps traders indentify when a currency pair might be due for a reversal or correction
Moving Average Convergence Divergence (MACD)
is a trend-following momentum indicator that shows the relationship between two moving averages (typically the 12-period EMA and 26- period EMA)
Utilizing MACD, what may signal a potential buy opportunity
When the MACD line crosses above the signal line
Utilizing MACD, what may signal a sell opportunity
When the MACD lines crosses below the signal line
Bollinger Bands
consist of a moving average and two standard deviations lines, providing a relative measure of price volatility.
When a price touches the upper band in a Bollinger Band what does it suggest about the market?
May be overbought
When a price touches the lower band in a Bollinger Band what does it suggest about the market?
it suggest the market may be oversold
Short-Term Time Frames
1-minute, 5-minute, 15-minute charts. Often used by day traders for quick trades within the day. These charts provide granular price details but can be noisy and lead to overtrading if not managed carefully.
Medium-Term Time Frames
1-hour, 4-hour charts. Commonly used by swing traders, these charts offer a balance between capturing price trends and filtering out some of the “noise” of smaller movements.
