Forex Trading Test 2 — Questions and Answers

Question 1: When you go long, what does that mean?

You have bought the base currency and expect it to move higher (Correct answer)
You have made a profit on your open position
You have closed all of your position
You have bought exceeding your margin

Correct answer: You have bought the base currency and expect it to move higher

Going long in Forex means buying the base currency of a pair, anticipating its value will increase relative to the quote currency. This strategy aims to profit from an upward price movement, as you would then sell the base currency back at a higher price. It's a fundamental concept in directional trading, indicating a bullish outlook on the base currency.

Question 2: The variable currency in the USD/JPY currency pair is the:

JPY (Correct answer)
USD

Correct answer: JPY

In a currency pair like USD/JPY, the first currency listed (USD) is the base currency, and the second currency (JPY) is the quote or variable currency. The quote currency indicates how much of it is needed to buy one unit of the base currency. Therefore, the JPY is the variable currency, as its value fluctuates relative to the USD.

Question 3: When you start a trade, you are?

Selling the variable currency and losing on the base currency
Purchasing or selling the variable currency and making a profit or loss on it
Buying or selling the base currency and profiting or losing on the variable currency (Correct answer)
Buying the base currency and profiting on the variable currency

Correct answer: Buying or selling the base currency and profiting or losing on the variable currency

When trading a currency pair, you are always buying or selling the base currency (the first currency in the pair). The price quoted tells you how much of the variable (or quote) currency you need to buy or sell one unit of the base currency. Your profit or loss is then calculated in terms of the variable currency, reflecting the change in value of the base currency against it.

Question 4: Define market order.

An order to buy at the market price (Correct answer)
An order to buy and mark the orders
An order to limit the order to certain markets
An order that needs to be filled today

Correct answer: An order to buy at the market price

A market order is an instruction to immediately buy or sell a security at the best available current price. It prioritizes execution speed over a specific price, meaning the trade will be filled as quickly as possible at whatever price the market is currently offering. This type of order is used when a trader wants to enter or exit a position without delay.

Question 5: Your stop loss when starting a buy trade should be:

Below and above the entry price
Above the entry price
On the entry price
Below the entry price (Correct answer)

Correct answer: Below the entry price

When you initiate a buy trade, you expect the price to rise. A stop-loss order is placed to limit potential losses if the market moves against your prediction. Therefore, for a buy trade, the stop loss should be set below your entry price, so if the market falls to that level, your position is automatically closed to prevent further losses.

Question 6: The variable currency in the EUR/USD currency pair is the:

USD (Correct answer)
EUR

Correct answer: USD

In the EUR/USD currency pair, the Euro (EUR) is the base currency, and the US Dollar (USD) is the quote or variable currency. The quote indicates how many US dollars are required to purchase one Euro. Thus, the USD is the variable currency, showing its value relative to the base currency.

Question 7: In order to determine the pip on a currency pair you must:

Know the trade volume and the currency pair's number of digits (Correct answer)
Know the currency pair's interest rate
Know the rate of the currency pair
Know weather you will open a buy or a sell position

Correct answer: Know the trade volume and the currency pair's number of digits

A pip (point in percentage) is the smallest price increment a currency pair can move. To calculate the monetary value of a pip for a specific trade, you need to consider the trade volume (lot size) and the number of decimal places the currency pair is quoted to (e.g., 4 or 2 for JPY pairs). This allows you to determine the profit or loss per pip movement for your position.

Question 8: Your take profit should be the following when you establish a sell position:

On the entry price
Above the entry price
Below the selling price
Below the entry price (Correct answer)

Correct answer: Below the entry price

When you establish a sell position, you anticipate the market price will fall. A take-profit order is set to automatically close your position once it reaches a predetermined profit level. Therefore, for a sell trade, the take-profit order should be placed below your entry price, locking in gains if the market declines as expected.

Question 9: When you start a sell position, your objective is for the market to:

Go up
Stay at the entry price
Fluctuate
Go Down (Correct answer)

Correct answer: Go Down

Starting a sell position, also known as going short, means you are selling the base currency of a pair with the expectation that its value will decrease. Your objective is to buy it back at a lower price later, thereby profiting from the downward movement. This strategy is employed when a trader has a bearish outlook on the base currency.

Question 10: If your leverage is 1:200, you need a margin of: for a trade of 1 lot on the EUR/USD.

5,000 EUR
830 USD
500 EUR (Correct answer)
500 USD

Correct answer: 500 EUR

A standard lot in Forex is 100,000 units of the base currency. For a 1 lot trade on EUR/USD, this means 100,000 EUR. With a leverage of 1:200, the required margin is the total trade value divided by the leverage ratio. So, 100,000 EUR / 200 = 500 EUR. This 500 EUR is the capital you need to put up to control a position worth 100,000 EUR.

Question 11: If you believe there are more than one possible answers, select more than one. The EUR/USD pip value is computed in:

Variable Currency (Correct answer)
USD (Correct answer)
EUR
Base currency

Correct answer: Variable Currency

The pip value for any currency pair is always calculated and expressed in the quote (variable) currency. In the EUR/USD pair, the USD is the quote currency. Therefore, the pip value for EUR/USD is computed in USD, meaning each pip movement represents a certain amount of US dollars.

Forex Trading Test 2

When you go long, what does that mean?