Learn to trade forex
Basic trading terms
A bar chart is made up of vertical bars that show daily price range and the horizontal hash on the left side of each bar indicates opening price whereas the right-side hash marks the closing price on that day.
Bullish & Bearish
"Bullish" and "Bearish" are the attitudes investors present towards the forex market.
If the market appears bullish, forex traders believe that the exchange rate will go up over time.
If the market appears bearish, forex traders believe that the exchange rate will go down over time.
Buy & Sell
“Buy” or "Long" refers to the action taken when we forecast the exchange rate will go up.
"Sell" or "Short" refers to the action taken when we forecast the exchange rate will go down.
Hummingbird Trading uses “candlestick” charts that show the opening price, closing price, the high price, and the low price for a given time period.
The “body” of the candlestick will be colored purple if the asset closed lower than the opening price, and will be colored turquoise or blue if the asset closed higher than the opening price. The “wicks” or “shadows” of the candle represent the highest and lowest prices the asset reached during that time period.
Currency Acronyms, Abbreviations & Symbols
The internationally recognized 3-letter acronym: the first two letters stand for the country and the last one abbreviates currency name.
Here are the main ones you need to know:
New Zealand Dollar
The exchange rate is the rate at which you can trade one currency for another currency.
Let’s say we have a currency pair USD/CAD: 1.3200 (bid) / 1.3207 (ask). This means that we can buy 1.32 Canadian dollars with 1 U.S. dollar whereas we can sell 1.3207 Canadian dollars to get 1 U.S. dollar.
A forward foreign exchange rate refers to the exchange rate that you can set up a future forex transaction. The forward rate is based on the spot rate, mainly justified by carry costs and public expectation towards the fluctuation of interest rate in the future.
Let’s say we want to buy electrical appliances from a company located in the U.K. and we have to pay 10,000 pound in 30 days. But we for sure will be afraid that the rate may turn against us in 30 days. Therefore, we can make a forward contract to lock in the forward rate in advance so that we don’t have to suffer from currency losses.
The rate the lender charges for the use of capital, commonly noted on an annual basis.
When banks want to borrow money from a central bank, the lent money will accumulate interest based on the central bank's interest rate.
Fact: Switzerland and Japan’s Central Banks adopted negative interest rates in early 2016. This means if the commercial bank borrows money from the central bank, the central bank will pay rather than receive the interest when the commercial bank returns the money.
Limit entry order
A limit entry order is the order to buy at the price below or sell at the price above the current market.
For example, we can trade 1 pound for 1.3021 U.S dollar. We then decide we won’t make a deal if the rate doesn't hit 1.3041. At this point, we can set a sell limit-entry order instead of waiting for the price to go up staring at the trading screen. Hummingbird Trading will automatically execute the order if the rate goes up to the desired level.
A line chart consists of straight lines connected between one closing price and the next closing price.
Lots are a pre-defined amount of currency and can be broken down into different types. A standard lot size is 100,000 units of a particular currency. A mini lot and a micro lot respectively represent 10,000 units and 1,000 units. So, if you hear someone refer to a mini lot of USD, they actually mean 10,000 United States dollars
Lots were used by currency traders primarily in the past. Today, you do not actually have to trade using lots and can in fact trade any amount you want. However, the concept of lots is still regularly used in trading and helps you to better understand the amounts being exchanged. Let’s say we want to trade 300,000 euros for U.S. dollars. To put it another way, we can say that we want to trade 3 standard lots of euro.
Margin is the amount of money required as a deposit to open a trade in Hummingbird Trading.
Formula: (Market Quote * Volume) / Leverage = Margin required
Market Order is the order to buy or sell at the best current price.
The amount of the currency exchanged within a certain amount of time.
As you should already know, the currency exchange markets are the largest in the world. Every day, companies and banks exchange trillions of United States Dollars for other currencies in order to purchase the goods and services we all consume on a daily basis. So much currency is traded each day that the price of buying and selling currencies (the exchange rate) is in constant fluctuation.
Fact: Every day an average of over 5.3 trillion USD are exchanged. The NY Stock Exchange, the largest stock market in the world, trades a measly $50 billion per day… That’s a mere 1% of the size of currency markets!
Forex Option represents the right to buy or sell an asset at a future date.
A Buy option means you have the right to buy the asset at a fixed price, a.k.a. the strike price, before or on the expiration date. In the same token, a Sell option means you have the right to sell the asset at the fixed price.
Pips & pipettes
A pip (also known as basis point) stands for one price interest point and is equal to 0.0001 units of a currency. When you see those tiny numbers in an exchange rate, in most cases the pip is the 4th decimal place. So in a GDP/USD, an exchange rate of 1.20063, the 6 represents 6 pips. If the rate of GBP/USD is up by 0.0010 USD, we can say it’s up by 10 pips.
Pipette: the 5th decimal place in an exchange rate. It represents 0.00001 units of a currency. If the rate in the above example is down by 0.00001 USD, we can say it’s down by 1 pipette.
Rollover is the interest paid or earned for holding an open position.
Each currency has an associated interest rate, and because forex is traded in pairs, every trade involves two different interest rates. Unlike most brokers who calculate interest at the end of the trading day, Hummingbird Trading calculates interest in real time; every time you close a position, you can see incurred or owed interest.
A spot foreign exchange rate refers to the exchange rate that you can buy or sell forex with instant delivery.
For example, we’ve scheduled a last minute trip to the U.K., departing tonight, and we want to prepare ourselves some cash before hopping on the plane. We use the spot rate when we take the dollar to the bank and trade it for the pound immediately.
The spread is the gap between the sell (bid) price and the buy (offer/ask) price.
Let’s say the USD/CAD currency rate is currently at 1.3200 (bid) /1.3207 (ask). The spread is then $0.0007 or 7 pips.
Tip: The Ask price is always higher than the Bid price, as A always comes before B.
A stop-entry order is the order to buy at a particular price above or sell at a particular price below the market. Just FYI...it’s also called Auto Close in Hummingbird Trading.
Let’s say we can buy 1.3021 U.S. dollar with 1 pound at the best available rate and we think it will continue to drop even if it goes down to 1.3011. Then we will place a stop-entry order at 1.3011. Hummingbird Trading will then automatically execute the trade at 1.3011 at the best available price if things come as expected.
Stop-loss order is an order to prevent you from the potential additional losses from the previous trade. Just FYI...it’s called Auto Close in Hummingbird Trading.
For instance, we set a buy market order to buy 1.3021 U.S. dollar with 1 pound as we anticipate the rate will rise soon. Meanwhile we concern about the imminent loss as the price might drop right away. We will also place a stop-loss order at 1.3011. If the rate really turns against us and drops to 1.3011, Hummingbird Trading will then execute the stop-loss order to sell at the 1.3011, the best available price to close out our position at the expense of 10 pips.
Forex Swap represents a binding contract structure to let individual exchange an amount of currency for another currency from counterparty at a currently agreed rate at a future date.
Trade multiplier or leverage
The use of borrowed capital to make an investment.
The Trade Multiplier, or Leverage, is a great tool when you want to amplify your earnings. When you put thousands of U.S. dollars into the market, you will probably only end up with a few bucks return. Archimedes once said that he would move the earth if somebody gave him the place to stand on. In the same token, if we borrow money with as much as 10 times or 100 times as the amount of our own investment and trade it, we will receive a 10 to 100 times higher return.
One thing to keep in mind when using a trade multiplier: the higher the multiplier the greater the profit potential, but also the GREATER THE RISK of losing.
Volatility is the amount of risk associated with a currency, caused by fluctuations in the exchange rates. It tracks the movement of an exchange rate over a period of time.
Volatility is like the movement of a roller coaster which frequently hits both high points and low points. This happens to prices as well. The more you experience changes in price, or volatility, the more risk you take. On the other hand, a flat line normally means no volatility. It can be good for your capital but it’s also disheartening when you want to gain profits out of buying low, selling high.
Now that you know the main forex trading terms, let's spend some time looking into currency pairs.
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