When a currency is quoted, it is done in regard to another currency, so that the value of one is reflected through the value of another. For instance, the foreign exchange quote for U.S. Dollar and Japanese Yen (JPY) will look like this:
USD/JPY = The first currency is the base currency and the second is the quote currency.
When trading currencies there is a bid price (buy) and ask price (sell). When buying a currency pair (going long) the ask price represents the amount of quoted currency to be paid in order to buy one unit of the base currency.
The bid price is used when selling a currency pair (going short) and represents the price the market will have to pay for the quoted currency for one unit of the base currency.
For example: EUR/USD is quoted at 1.5024/1.5027, where 1.5024 is the bid price and 1.5027 is the ask price. If you were to sell the quoted currency, you would receive 1.5024 U.S. dollars per 1 Euro.
Spread is the difference between the bid and the ask price. For instance, in EUR/USD 1.5024/1.5027 the spread is 3 pips.
Pip represents the smallest unit a price can move in any currency quote. The exact value of an individual pip depends on the currency being traded.
There are three main types of orders traders use.
Knowing when each one is applicable helps them make better decisions.
Market order represents an order to buy or sell a currency at a market price. It is used when a trader wants to place an order, based on the price of the currency. Traders often use market orders to enter a new position or exit it.
The stop order automatically closes trader’s positions when prices move in a different direction than anticipated. Traders can easily place stop order when they want to trade at an indicated price. Stop order is used to enter or exit new positions.
Limit order is an order traders place to buy and sell at a certain limit. This type of order is used when traders want to enter or exit a position at a specified price. Limit order can be used to buy currencies below the market price or sell above the market price.
A trend represents the general direction in which a security or market is headed. Trends are a valuable tool when trading online, so traders need to be familiar with their use.
Types of Trends
An uptrend describes the price movement when the overall direction is upward. The goal of most technical traders is to identify a strong uptrend and profit from until it converses.
Describes the movement of the price when the overall direction is downward. Many traders seek to avoid downtrends because they can drastically affect the value of the investment.
Describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal.
A trend line is a charting technique that adds a line to a chart to represent the trend in the market. These lines show the trend and identify trend reversals.
Channel lines are an addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend connects a series of highs, while the lower connects a series of lows. A channel can slope upward, downward or sideways.