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Understanding Currency Pairs
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.
These are called ‘currency pairs’, and include a base currency and a quote currency. The display below shows the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs used on the forex market.
The base currency is the first currency that appears in a forex pair. This currency is bought or sold in exchange for the quote currency.
So, based on the example above, it will cost a trader 1.0916 USD to buy 1 EUR.
Alternatively, a trader could sell 1 EUR for 1.0916 USD.
The quote currency – also referred to as the ‘counter’ currency – is the second currency that appears in a forex pair.
A spread is the difference between the ask price and the bid price. In other words, it is the cost of trading.
For example, if the Euro to US dollar is trading with an ask price of 1.0918 and a bid price of 1.0916, then the spread will be the ask price minus the bid price. In this case, 0.0002.
The Bid Price is the price a trader is willing to buy a currency pair at. It is given in real-time and is constantly updated.
The Ask Price is the price a trader will sell a currency for.
It is given in real-time and will change constantly, driven by market demand, as well as the political and economic factors
that influence the value of individual currencies.
A point in price – or pip for short – is a measure of the change in a currency pair in the forex market.
The acronym can also stand for ‘percentage in point’ and ‘price interest point’. A pip is used to measure price movements, and it represents a change in a currency pair. Most currency pairs are quoted to five decimal places.
Forex Trading Q&A
Understanding Forex Charts
A candlestick is a chart, also known as a Japanese Candlestick Chart, and is favoured by traders due to the wide range of information they portray. The chart displays the high, low, opening and closing prices.
A candlestick has three pips; open close and the wicks.The wicks show the high to low range and the ‘real body’ (wide section) shows investors if the closing price was higher or lower than the opening price.
If the candlestick is filled then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.
A bar chart shows the opening, close, high and low of the currency prices.
The top of the bar represents the highest paid price and the bottom indicates the lowest traded price for that specific time period.
The actual bar represents the currency pair’s overall trading range and the horizontal lines on the sides represent the opening (left) and the closing prices (right).
A bar chart is most commonly used to identify the contraction and expansion of price ranges.
A line chart is easy to understand for forex trading beginners. In a line chart, a line is drawn from one closing price to the next.
When connected, it is easy to identify a general price movement of a currency pair throughout a time period and determine currency patterns.
What are technical indicators and FX signals?
Technical indicators are mathematical calculations that use historic price action and volume to forecast future price movements, providing trade entry and exit signals. These signals suggest a potential time and price for a trader to enter a trade, in order to profit from the predicted move in price. Technical indicators are usually displayed over or below price charts to help traders identify trends and overbought or oversold situations.