Chart Types
A chart is simply a visual representation of a currency pairs price over a set period of time.Let's take a look at the 3 most popular types of price charts.
1: Line
2: Bar chart.
3: Candlestick chart.
Line charts are drawn by simply connecting one closing price to the next closing price in one single line.The main advantage of this type of chart is that it's extremely clean that it filters out a lot of market noise.
A bar chart is a little more complex it shows the opening and closing prices as well as the highs and lows.The horizontal line on the left shows the opening price, the bottom of the vertical line shows the lowest price for that specific time.The horizontal price on the right shows the closing price while the top of the vertical line shows the highest price for that specific time.
The candle stick chart is a variation of the bar chart.Candlestick charts show the same price information as a bar chart but in a prettier graphic format.The larger blocks in the middle are called bodies. The vertical lines above the body are called the upper shadow.The vertical lines below the body are called lower shadows.Green body candles indicate that the currency closes above the opening price.Red body candles indicate that the currency closes below the opening price.Candlesticks are easy to interpret and are a good place for beginners to start figuring out forex chart analysis.
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Leverage and Margin
Leverage is a loan provided to the trader by a broker and it's usually expressed in the form of a ratio.Usually if something costs 20000 euros, you need to pay the same amount of money for it - that's common sense but in forex trading you don't need to have the whole price of what you're purchasing; you only need to deposit some money to cover possible losses.The deposit you put up is what we call margin.The broker then lets you trade multiples of that margin which will allow you to make bigger returns relative to the margin invested.
For example, let's say you buy $10000 of GBP/USD, you could just deposit $10000 and change it to pounds but with margin trading if you choose 1 to 10 leverage you only have to put one tenth of the total amount as margin which would cost you only $1000.If you choose one to 100 leverage you will need to put one hundredth of the $10000 which would be $100.So with the $100 margin you can trade as if you had actually invested $10000.
With margin your losses are limited while your potential profits are unlimited.If you have a $1000 trading account to start after opening a $10000 position with a $100 margin you'd still have $900 in your account balance to enter new positions on other currency pairs.
You can put up trades in other currency pairs which will drastically increase your chances of success.Without leverage a trader would need to come up with the entire $10000 capital on each trade.Leverage will allow the trader to take the same position with less capital.Leverage however can amplify both profits as well as loss.
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Short and Long Positions
In the trading of assets, an investor can take 2 types of positions.
1: Short Postion
2: Long.Positin
In the case of a short position, traders are hoping that a currency will decrease in the future so they sell it at a higher price and buy it back at a lower price in the future.This option is known as it GOING SHORT.For example if the New Zealand dollar against the US dollar is worth 0.7000 and the trader analysis shows that it might depreciate in the future 0.6980 the trader would sell at the high price or in other words go SHORT. Once the price depreciates to 0.6980, they buy back and make money from the price movement.In the case of the LONG POSTIONS it's the typical opposite of the short position - In which you buy low and sell high, some traders hoping for a currency to increase in the future.They usually buy at a lower price and sell it back at a higher price. This option is known as going long, these are short and long positions in a nutshell.
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Lots
What is a lot in forex?
Currency pairs are traded in what we call lots.We have 3 most common types of lot.
1: Standard lot size
2: Mini lot size
3: Micro lot size.
One standard lot is equal to 100000 units of the base currency.One mini lot is equal to 10000 units of the base currency.One micro lot is equal to 1000 units of the base currency.
In simple terms, that’s what a forex lot means
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Pips Points and Ticks
What exactly is Pips, Points and Ticks?Pips Points and Ticks are terms used to define price changes in the financial markets. A point represents a small price change to the left of the decimal point.An investor might describe a stock price increase from USD 80 to USD 84 as a 4 points movement rather than a 4 dollar movement.
A tick denotes the smallest price change to the right of the decimal points. The market has different tick sizes it could be 0.01, 0.001 or even 0.0001.
A pip usually refers to the fourth decimal place of a price. If the EUR/USD pair moves from 1.1307 to 1.1308 that’s a 1 pip movement.However sometimes the term can be used for any possible price change regardless of the decimal place precisely like a tick.Pip term is the most used term by traders in the forex market.
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