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It's a warning display to other fish, I usually find Firemouths are very quick to display, but don't follow through that often, but it depends on the fish.
Some people will say that Firemouths are ultra aggressive, I've have not found an aggressive one yet - they always display and give a chase, but I've never seen a Firemouth injury another fish. I've never had a breeding pair yet, so that might be different.
Ive seen a few marks on them both just smal marks or a scale missing so im sure they have had their share of showdowns but from what i can gather they just seem to nip at each other.