Hello there, this is tradingpedia.com and this video introduces some basic terminology to know when trading the currency market, but also when trading financial markets as traders and investors have used these terms for quite some time and it is unlikely that they will change anytime soon.
Bid and Ask Price
In the case of the FX market, the first thing to know is that all quotes have a bid and an ask price. In other words, if you believe that the EURGBP moves to the upside, you want to express that by buying. Buying only takes place from the ask price, selling from the bid price. The distance between the two is the spread, a fee paid to the brokerage house, for the services offered.
Bullish and Bearish
If you believe that the EURGBP moves to the upside, if you are bullish, you express that bullish view by buying from the ask price.
The term comes from the bull, the animal, as the bull has its horns pointing to the upside. If you search the Internet and you look for the Wall Street bull, this is the explanation, because the stock market is supposed to go to the upside.
If you believe that a currency pair will move to the downside, you would want to sell from the bid price, and by the time you close it you use the ask price and the broker will bank the spread. If you believe that the market moves to the downside, you have a bearish view on the pair, meaning that the EUR depreciates, and the GBP appreciates. The term comes from another animal, the bear, as it moves with its head pointing to the ground.
Any quotation on the FX dashboard has five digits, with the exception of the JPY pairs. When you measure the distance that the market travels, you should use pips or pip points. For instance, the EURUSD quote is 1.18099 – 18103. The five-digit quotation was recently introduced a few years ago, as technology improved and instead of a four-digit account now you can open a five-digit account for better execution and service from the broker. But a pip remained the fourth digit.
So if the EURUSD moves from 1.1810 to 1.1821, you will have a profit of 11 pips. What else to know?
Another thing to consider is the nicknames that exist on the FX market. Not all currencies have ones, but some do. For instance, the GBPUSD is called cable. You may read or hear that “cable dropped 100 points due to Bank of England signaling more easing”. Cable refers to the GBPUSD pair, as the name comes from the first physical cable laid down at the bottom of the ocean to connect the two financial centers, London, and New York.
Another nickname is the Aussie pair. This is the AUDUSD pair. Or, the Loonie pair. Loonie is the nickname for the Canadian dollar. Kiwi is the nickname for the New Zealand dollar. Some people refer to the EURUSD pair as “fiber”, although not used so often.
Hawkish and Dovish View
Traders can express a bullish or a bearish view. If I am bullish Euro, it is important to know what the counterparty is. If I am bullish EURGBP, I am expressing the Euro bullishness against the GBP. Or, I am bullish Euro against the AUD.
But central bankers are also active forces in the market, only that they cannot express a bullish or bearish view because they are not supposed to influence the exchange rates, they act as independent organizations. Therefore, when a central banker issues a statement, can only deliver a “hawkish” view. This is the equivalent of bullish, meaning it is positive for the currency. Or, it can deliver a “dovish” view, meaning the equivalent of being bearish.
In other words, a central bank will not hint at buying here and selling there, but it will hint that, for instance, monetary conditions favor a hawkish statement because inflation pushed higher in the United States and therefore the overall FOMC Statement is hawkish when compared with the previous one. Or, the Fed may deliver a dovish view, because unemployment is higher than expected. In other words, it only refers to the possible effects on the currency.
If you are bullish, you look for the currency to move to the upside, if the statement of a central bank is hawkish, that is positive for the currency. Hawkish and dovish names also come from two animals, the hawk in the sky and the dove, so it shows the same relationship, high and low, or up and down, that you can find overall in financial markets.
Thank you for being here. Bye bye.