Glossary

A

Abandoned Baby

The Abandoned Baby is a reversal Japanese candlestick pattern that is formed by three candles: one doji and two candles with bodies.

 

Before AND after the doji, there is a gap.

 

The shadows on the doji must completely gap below or above the shadows of the first and third candle.

 

There are two types of Abandoned Baby:

1. Bullish Abandoned Baby

2. Bearish Abandoned Baby

 

The Abandoned Baby pattern is fairly rare as the price movements need to meet specific criteria in order to create the pattern.

 

To identify an Abandoned Baby pattern, look for the following criteria:

 

Bullish Abandoned Baby

- There must be a large black (or red) candlestick in a downtrend.

 

- The black candle must be followed by a doji that gaps below the close of the first candle.

 

- The last candle in the three-candlestick pattern must be white (or green) and open above the doji.

 

 

Bearish Abandoned Baby

- There must be a large white (or green) candlestick in an uptrend.

 

- The white candle must be followed by a doji that gaps above the close of the first candle.

 

- The last candle in the three-candlestick pattern must be black (or red) and open below the doji. 

 

It is very important that there are gaps between the first and second candles as well as the second and third candles.

 

 

Neighboring candles must NOT overlap.

 

If they do overlap, it is considered a Morning Star or Evening Star candlestick pattern.

 

The Abandoned Baby is a reversal pattern.

 

After a solid uptrend or downtrend, there is a pause, a moment of uncertainty (depicted by the doji).

 

 

Then, the momentum suddenly shifts.

 

If there had been an uptrend previously, the bears take control and push the price downward.

 

If there had been a downtrend previously, the bulls take control and push the price upward.

 

This rapid shift signals a strong reversal.

 

The larger the gaps, the greater the reversal.

B

Base Currency

The base currency is the first currency in a currency pair.

 

It compares the values between the first currency and the second currency in a currency pair.

 

In the forex market, currency unit prices are quoted as currency pairs.

 

The base currency, which is also known as the transaction currency, is the first currency appearing in a currency pair quotation.

 

The second part of the currency quotation is called the quote currency or the counter currency.

 

For example, if you were looking at the EUR/USD currency pair, the euro would be the base currency and the U.S. dollar would be the quote currency.

 

In forex, currency pairs are written as XXX/YYY or simply XXXYYY.

 

Here, XXX is the base currency and YYY is the quote currency.

 

The abbreviations used for currencies are prescribed by the International Organization for Standardization (ISO). These codes are provided in standard ISO 4217.

 

Currency pairs use these codes made of three letters to represent a particular currency.

 

Currencies showing a currency pair are usually separated with a slash character. The slash is sometimes removed but it means the same thing.

C

Carry Trade

The Carry Trade is a trading strategy where investors/traders sell or borrow assets with lower-yielding interest rates to fund or buy higher-yielding assets.

 

In forex, carry trade involves borrowing in currencies with low-interest rates (called funding currencies) and investing in those with high-interest rates (the target currencies).

 

Examples of recently attractive target currencies are the Brazilian real, the South African rand and the Australian dollar.

 

Popular funding currencies included most recently the U.S. dollar and historically also the Japanese yen or the Swiss franc.

 

If the target currency does not depreciate vis-à-vis the funding currency during the life of the investment, then the investor earns at least the interest differential.

 

This strategy does not work if uncovered interest parity (UIP) holds.

 

The UIP condition states that higher-yielding currencies will tend to depreciate against lower-yielding ones at a rate equal to the interest differential so that expected returns are equalized in a given currency.