Catalog / Forex Trading Cheat Sheet
Forex Trading Cheat Sheet
A comprehensive cheat sheet for Forex (Foreign Exchange) trading, covering terminology, strategies, risk management, and technical analysis tools.
Forex Basics & Terminology
Key Forex Terms
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Currency Pair |
The quotation of two different currencies, with the value of one currency being quoted against the other (e.g., EUR/USD). |
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Base Currency |
The first currency listed in a currency pair. It represents how much of the quote currency is needed to purchase one unit of the base currency. |
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Quote Currency |
The second currency listed in a currency pair. It represents the price one pays in order to buy the base currency. |
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Pip (Point in Percentage) |
The smallest price increment a currency pair can move. Typically, it’s 0.0001 for most pairs and 0.01 for JPY pairs. |
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Leverage |
The use of borrowed funds to increase trading size and potential returns (or losses). Expressed as a ratio (e.g., 1:100). |
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Margin |
The amount of money required in your account to open and maintain a leveraged position. |
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Spread |
The difference between the bid (selling) and ask (buying) price of a currency pair. It represents the broker’s commission. |
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Bid Price |
The price at which a broker is willing to buy a currency pair from you. |
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Ask Price |
The price at which a broker is willing to sell a currency pair to you. |
Order Types
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Market Order |
An order to buy or sell a currency pair immediately at the best available price. |
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Limit Order |
An order to buy or sell a currency pair at a specific price or better. Buy limit orders are placed below the current market price, and sell limit orders are placed above. |
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Stop Order |
An order to buy or sell a currency pair when the price reaches a specified level. Buy stop orders are placed above the current market price, and sell stop orders are placed below. |
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Stop-Loss Order |
An order attached to a position to limit potential losses if the price moves against you. Can be a Market or Limit order. |
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Take-Profit Order |
An order attached to a position to automatically close the position when the price reaches a desired profit level. |
Technical Analysis
Chart Patterns
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Head and Shoulders |
A reversal pattern indicating a potential downtrend. Characterized by a peak (left shoulder), a higher peak (head), and another peak roughly equal to the first (right shoulder). |
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Inverse Head and Shoulders |
A reversal pattern indicating a potential uptrend. The inverse of the head and shoulders pattern. |
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Double Top |
A reversal pattern indicating a potential downtrend. Price attempts to break a resistance level twice but fails. |
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Double Bottom |
A reversal pattern indicating a potential uptrend. Price attempts to break a support level twice but fails. |
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Triangles (Ascending, Descending, Symmetrical) |
Continuation patterns indicating a potential breakout in the direction of the prevailing trend. |
Technical Indicators
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Moving Averages (MA) |
Calculates the average price of a security over a specific period. Used to identify trends and potential support/resistance levels. |
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Relative Strength Index (RSI) |
A momentum oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. Values range from 0 to 100.
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Moving Average Convergence Divergence (MACD) |
A trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. Used to identify potential buy/sell signals.
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Fibonacci Retracement |
A tool used to identify potential support and resistance levels based on Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%). |
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Bollinger Bands |
Volatility bands placed above and below a moving average. Used to identify potential overbought/oversold conditions and price breakouts.
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Trading Strategies
Common Forex Strategies
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Scalping: A trading style that specializes in profiting off small price changes, generally after a trade is executed and becomes profitable. It often involves making hundreds of trades in a single day. |
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Day Trading: A strategy involving opening and closing positions within the same trading day, avoiding overnight exposure to market risk. |
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Swing Trading: A medium-term strategy involving holding positions for several days or weeks to profit from price swings. |
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Position Trading: A long-term strategy involving holding positions for months or years, focusing on fundamental analysis and long-term trends. |
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Trend Following: Identifying and trading in the direction of established trends. Combines technical and fundamental analysis. |
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Breakout Trading: Identifying and trading breakouts above resistance or below support levels. Requires quick execution and risk management. |
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Range Trading: Identifying and trading within a defined price range, buying at support and selling at resistance. |
Risk Management
Risk Management Techniques
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Position Sizing |
Determining the appropriate size of your trades based on your account balance and risk tolerance. A common rule is to risk no more than 1-2% of your capital per trade. |
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Stop-Loss Orders |
Placing stop-loss orders to limit potential losses on each trade. Critical for protecting your capital. |
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Take-Profit Orders |
Setting take-profit orders to automatically close positions when a desired profit level is reached. Helps to secure profits and avoid emotional decision-making. |
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Risk-Reward Ratio |
Assessing the potential profit relative to the potential loss on each trade. Aim for a risk-reward ratio of at least 1:2 or higher. |
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Leverage Management |
Using leverage carefully and responsibly. Higher leverage can amplify both profits and losses. Beginners should start with low leverage. |
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Hedging |
Opening offsetting positions in correlated currency pairs to reduce overall portfolio risk. |
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Diversification |
Trading multiple currency pairs to spread risk and reduce exposure to any single currency. |
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Staying Informed |
Keeping up-to-date with economic news, political events, and market trends that can impact currency prices. Use a reliable news source. |