We quote currency pairs by “5, 3 and 2” decimal places – also known as fractional pips or pipettes.
On a 5 decimal place currency pair a pip is 0.00010
On a 3 decimal place currency pair a pip is 0.010
On a 2 decimal place currency pair a pip is 0.10
For example: If GBP/USD moves from 1.51542 to 1.51552, that .00010 USD move higher is one pip.
When trading FX and other symbols, there are some easy rules to calculate the ‘pip-value’ of the trade so you can work out your potential gains and losses quickly.
In the case of managing risk, correct position sizing is critical.
This means achieving the correct exposure on each position relative to the size of your account and taking the time to understand how volatility and the recent moves in price affect how much risk you’re prepared to take.
It also includes assessing the event risk to better understand the potential market-moving catalysts that could affect price and your open trades.
A chart can help us to assess the probability of a move higher, lower, or range-bound in the markets. Markets are a series of mostly random events, so as traders our job is to manage risk and assess probability and that’s where charting can genuinely help.
When you’re starting out using technical, price action analysis or a mixture of both, the first thing you should do is ask yourself a few questions about what the markets are trying to tell you:
What’s the chart pattern saying about the behaviour of active market participants at that moment?
If a market is trending higher or lower, what’s the probability of a continuation of that trend?
A market may have travelled from A to B, but how can we assess the overall quality of the journey?
Forex trading is the simultaneous act of buying one currency while selling another.
The combination of these two currencies make up what’s known as a currency pair. Currencies are always traded in pairs, and each currency in a pair is represented by a unique three-letter code.
The first two letters in the code represent the country, and the third letter identifies the currency, such as the code JPY = Japanese Yen.
Forex prices are known as rates, and they express the value of one currency in terms of the other.
For example, a price or rate in euro-dollar could be quoted as:
EUR/USD = 1.23700 The currency to the left of the slash is the base currency (in this example, the euro), and the currency on the right-hand side is the quote currency (in this example, the US dollar).
While technical and price action analysis probes on the ‘what’, fundamental analysis is interested in the ‘why’.
Fundamental analysis is an incredibly diverse discipline and can take time to master, which is why so many retail traders start their trading journey by studying technical analysis.
So, whether we’re anticipating and subsequently reacting to news, corporate earnings, economic data, central bank action or politics, trading using fundamentals is about gathering knowledge as to why a market is reacting the way it does. It also helps us understand whether these variables will continue to influence price going forward – and to what degree.
Bull or Uptrend
Uptrends are comprised of a series of consecutive higher highs and higher lows within price action under which the price is trending higher. A consistent and stable uptrend is seen as being bullish and a buying opportunity.
Bear or Downtrend
Downtrends are made up of a series of lower highs and lower lows during which the price of the instrument trends lower. Sustained downtrends are seen as being bearish for the underlying price and are considered to be selling opportunities.
Ranging or Flat
When a market isn’t trending higher or lower it’s said to be flat or range bound.
In these periods neither the bulls or the bears have control of the underlying price, and the market moves sideways until one of these groups becomes dominant once more.