Forex Dictionary


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TermEquivalent termsDefinition
Abenomics This refers to economic policy made up of quantitative easing, stimulus and inflation targets. It was introduced in Japan by Prime Minister, Shinzo Abe who’s surname has given rise to the term.
Adjustable Peg Exchange rate system where a country’s central bank pegs (fixes) its currency’s exchange rate to a more popular reserve currency, such as the USD or Euro, yet has the ability to change the rate when it so desires. Reason? The country might want a fixed rate to make its currency more valuable, in order to make imports cheaper; conversely, it might want a fixed rate to make its currency seem less valuable, to encourage foreigners to buy their exports.
Aggregate Demand The sum of government spending, personal consumption expenditures, and business expenditures. In Keynsian theory, if the level of debt stops rising and instead slows or falls with the bursting of a credit bubble, then aggregate demand will suffer a sudden and sustained drop when the private sector stops spending and instead turns to debt reduction. The prescription was more government deficit spending to compensate for the shortfall in private debt spending. Hazlitt (Austrian school) thought that Keynes focus on Macroeconomic “aggregates” such as aggregate demand were statistical fictions that concealed the microeconomic relationships among a multitude of individual prices and wages, and that the deficit spending solution for bursting bubbles did more harm than good.
Aggregate Risk Systematic Risk Generated from a variety of sources (fiscal, monetary, regulatory policy, or shocks from natural disasters), aggregate risk poses large implications for economic growth. For instance, when a credit bubble has reached a peak and starts to decline, some banks go bankrupt, others tighten up on credit, raising the standards of quality and reducing the quantity of credit, which can prevent economic growth.
Algorithmic Trading Trading based on pre-defined formulas as opposed to a person manually executing a trade.
API Trading Application Programming Interface Trading Trading that works through an Application Programming Interface (API), or “go-between” that enables software to interact with other software. In Forex, an API refers to the interface that enables the platform to connect to the market, facilitating real-time forex price quotations, trade execution and order and trade confirmations.
Appreciation An increase in the value of the currency in response to increased demand. A decrease in the value in the currency is called depreciation.
Arbitrage Trades that take advantage of price differences that are not expected to persist, such as price differences between banks or brokerages or regions. Although the price difference may be very small, arbs typically trade regularly and in huge volume, often with fast computer systems, so they can make sizable profits. Markets are seldom efficient, and arbitrage opportunities do sometimes exist between banks or brokerages, but transaction costs (spread and/or commission) make this strategy more risky than it seems.
Ask Also known as the ‘offer’ price, it is the quoted price at which an investor can buy a currency pair (seen as the higher quoted price than the bid). The difference between the ask and the bid is called the Bid-Ask Spread
Asset An item that has value in an exchange. Assets can be physical, such as real estate or stocks, or a right, such as a patent; they can be as liquid (easily converted to money) as cash in the bank or as illiquid (not as easily converted to money) as real estate.
Asset Allocation Not putting all your eggs in one basket and instead dividing your funds into different markets in an attempt to reduce your risk.
Asset Class The classification of an asset, such as stocks, options, fixed income, commodities, or forex.
ATR Average True Range ATR (Average True Range) is a technical indicator measuring price movement between high and lows over a period of time.
AUD Australian Dollar Aussie The AUD (Australian Dollar) is the official currency of Australia. Is is also called the ‘Aussie’
AUD/USD AUDUSD Abbreviation for the Australian dollar and U.S. dollar (AUD/USD) currency pair. The currency pair tells the reader how many U.S. dollars (the quote currency) are needed to purchase one Australian dollar (the base currency). Trading the AUD/USD is also known as trading the “Aussie”.
AUDUSD This is a tradeable currency pairing between the Australian Dollar (AUD) and the U.S. Dollar (USD)
Australian Securities and Investments Commission ASIC Australian Securities and Investments Commission (ASIC) is Australia’s corporate, markets and financial services regulator
Authorized Dealer A financial institution granted authorization from a relevant regulatory body to act as a dealer of forex. In the US, the National Futures Association (NFA) ensures that forex dealers are subject to stringent screening and enforcement of regulations.
Automated Trading Means your orders are sent via software robot to your broker automatically and instantly without human intervention, even when away from your computer. It is more disciplined than manual trading, because there no more missed opportunities or poor execution because trader is not in front of computer, second guessing his system, or making typing mistakes. See manual trader.
TermEquivalent termsDefinition
Back Office Operations The brokerage department that handles internal accounting, compliance with government regulations, legal matters, account record keeping, settlements, and clearing services.
Backtesting This is a process of testing the success/failure of a trading strategy using historical price/market data.
Bad Fill This is a slang trading term for a trade that is not executed at the price the trader wanted. Slippage due to volatility or some delay in execution are some of the reasons for it.
Balance of Trade BOT A country’s exports minus its imports. If the value of exports exceeds that of imports, the country has a trade surplus, while the opposite case is a trade deficit. An overly large trade deficit weakens the currency over time. See also trade deficit, trade surplus.
Band A range between two limits. In countries where the currency is pegged, the band represents the range in which the rates are permitted to fluctuate. Government regulation may also establish a band of acceptable inflation rates and take steps to ensure that they remain with that band.
Bank of Canada BOC The Bank of Canada is the central bank of Canada and is responsible for monetary policy.
Bank of England BOE Established in 1694 (second oldest central bank), it has three primary goals: 1) support the economic policies of the UK government to promote economic growth; 2) maintain price stability with a CPI inflation target of 2%; and 3) maintain financial stability, which means protecting against threats to the whole financial system (which means that in exceptional circumstances the Bank the Bank may act as the lender of last resort by extending credit when no other institution will.
Bank of Japan BOJ The central bank of Japan, established in 1882, it is responsible for issuing the yen, setting monetary policy, issuing Japanese government securities, and preserving a strong financial industry.The Bank of Japan is headquartered in Nihonbashi, Tokyo, on the site of a former gold mint (the Kinza), near the famous Ginza district, whose name means “silver mint”. http://www.boj.or.jp/en/
Bank Rate The interest rate at which a central bank is prepared to make short-term loans to commercial banks. In general, a low interest rate indicates that the central bank is trying to promote growth by making liquidity easily available, whereas a high rate shows the central bank is concerned about inflationary pressures and so is trying to reduce the amount of money in the economy. In the United States, the bank rate is known as the federal funds rate, whereas in the United Kingdom the key interest rate is called the official bank rate, the lowest rate at which the Bank act as a lender of last resort to the money markets.
Bar Charts A popular format for studying the price action of currency pairs, a bar chart can represent any time frame and is made up of four elements: the Open, High, Low, and Close for the trading session/time period. The top of the bar represents the High, the bottom the Low, the small dash to the left represents the Open, and the small dash to the right the Close.
Base Currency The first currency listed in currency pair, the base currency is the currency against which exchange rates are generally quoted in a given country. Examples: for USD/JPY, the US Dollar is the base currency; for EUR/USD, the Euro is the base currency.
Basis Point One hundredth of one percent, or 0.0001.
Bear A trader who believes prices of a currency will decline, and so takes steps to limit losses or exploit profits if and when the market falls.
Bear Market A market distinguished by declining prices, usually for an extended period of time.
Bid Also known as the ‘bid price’ and ‘bid rate’, it is the quoted price at which an investor can sell a currency pair (seen as a lower quoted price than the ask). The difference between the bid and the ask is called the bid-ask spread.
Bid/Ask Spread This is the difference between the bid and price (Ask-Bid). The spread is how Forex brokers make money from our trades. Example: If the current bid price for the EUR/USD currency pair is 1.5750 and the current ask price is 1.5753, this means that you can sell the EUR/USD at 1.5750 and buy at 1.5753. The 3 pip difference is called the spread.
Big Figure The first two or three digits of a foreign exchange price or rate. Examples: for the USD/JPY rate of 88.30/32 the big figure is 88; for the EUR/USD price of 1.3318/1.3320 , the big figure is 1.3.
Bollinger Bands A popular volatility indicator, it plots three bands on to the underlying price curve: the moving average, and the bands themselves, which are two standard deviations above and below the moving average.
Book In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions.
Brazilian Real BRL The official currency of Brazil is the Brazilian Real and it’s currency code is BRL.
Bretton Woods Agreement An agreement signed by the original United Nations members in 1944 that established the international monetary fund (IMF) and the post-World War II international monetary system of fixed exchange rates. The system created a fixed exchange rate system with 1% fluctuations of the currency pegged to the price of gold at US $35 per ounce. The Agreement remained in place till 1971, when the United States under Nixon unilaterally depegged from gold and established a floating exchange rate for the major currencies.
British Pound GBP The currency of the United Kingdom, issued by the Bank of England, it is the third largest reserve currency in the world and is the oldest currency still in use. It was pegged to the US Dollar under the Bretton Woods System, but has become a floating currency since 1971. Also called Pound Sterling, or Cable.
Broker An individual or firm that executes orders to buy and sell currencies and related instruments for a commission or spread.
Bull Someone who believes that prices will rise, and so takes steps to limit losses or exploit profits when and if the market rises.
Bull Market A market distinguished by rising prices.
Bundesbank Germany’s Central Bank, established in 1957 and headquartered in Frankfurt, it issued the Deutsche mark until 2002 when it was replaced with the euro. Today, the Bundesbank remains the most influential member of the European System of Central Banks, and it has a lingering reputation of having a hard money (anti-inflationary) money policy.
Buy Limit Order A conditional order to buy a currency at the specified price (the limit) below the current market, or lower.
Buy On Margin Essentially means buying on credit. Margin refers to the portion that is put up rather than what is borrowed.
Buy Stop A limit order placed above the current market price, and once triggered, becomes a market order. Buy stops are used to exit short positions or start a new long position at the breakout price.
Buying/Selling Since currencies are always priced in pairs, all trades result in the simultaneous buying of one currency and the selling of another. Hopefully you buy the currency that increases in value relative to the one you sold. If the bought currency appreciates in value, then you must sell the currency back in order to lock in the profit.
TermEquivalent termsDefinition
Cable Slang used for the GBP/USD currency pair (British pound vs the US dollar), derived from when the British Pound was more dominant and the currency was continually wired between North America and Europe via transatlantic cable in the 19th Century.
Canadian Dollar CAD The Canadian Dollar (CAD) is the official currency of Canada.
Canadian Overnight Money Market Rate The rate used by financial institutions to borrow money to cover a shortage of funds (primarily for end-of-day settlement) from those institutions with a surplus of funds.
Candlestick Chart A popular chart where each session is represented by a drawing that looks like a candle. The candle has wicks (called shadows) coming out of each end, with the top representing the high and bottom representing the low prices for the session. If the open price is higher than the close price, the rectangle between the open and close price is shaded; the bottom of the body is the open and the top the close, and entire candlestick represents upward movement. If the close price is higher than the open price, that area of the chart is not shaded; the bottom of the body is the close and the top the open, and the entire candlestick represents downward movement.
Capital At Risk CaR CAR Capital at risk refers to how much of a trader’s capital is exposed to being lost in a worst case scenario for a specific trade or all trades on an account.
Carry Grid A grid system that stages multiple limit orders on a carry positive currency, each order set in fixed intervals from each other, scaling in when the market travels adversely to your initial entry. The grid component can increase the odds of getting to breakeven, while the carry component can bring interest profit while it is doing so. The largest risk is that the sustained adverse move can quickly pile up the grid levels, increasing and aiming the leverage against the account.
Cary Trade You borrow and pay interest on a low interest rate currency like the Yen in order to buy a higher interest currency or debt instrument, such as the Australian Dollar or Aussie government bonds. While the trade can produce a positive interest rate differential over time, the largest risk of the carry trade is that the exchange rate will move in an adverse direction, eliminating the profit from the positive interest rate differential.
Cash on Deposit Funds deposited in a trading account.
Central Bank A government or quasi-governmental organization whose responsibilities include the issue and regulation of currency, the regulation of banks under its jurisdiction, and the enactment of a sustainable monetary policy. Central banks are commonly charged with finding the balance between maintaining low inflation and high economic growth. They do this primarily by setting interest rates at which they lend to banks under its jurisdiction which, in turn, highly influences interest rates throughout the country or region. Prominent central banks include the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, and the People’s Bank of China.
Central Bank Rate Overnight Rate This is the interest rate charged by central banks on loans to domestic banks. Movements up or down on the rate have an affect on domestic bank lending rates to their customers.
Chartist An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Two chartists may have different projections after viewing the same chart.
CHF Swiss Franc Swissy The Swiss Franc (CHF) is the official currency of Switzerland.
Chicago Mercantile Exchange CME Established in the 19th century, it is the largest options and futures exchange in the world, with 70% of its business takes place electronically on CME Globex, the oldest electronic futures exchange in the world with well over one billion transactions since its introduction in 1992.
Chilean Peso CLP The Chilean Peso (CLP) is the official currency of Chile
Choice Market Locked Market A market where the bid equals the ask (identical) and thus no bid-ask spread. All trades buys and sells occur at that one price. This type of market is a temporary phenomenon and relatively uncommon.
Clearing The process of settling a trade, wherein the seller delivers the price (or good) and the buyer buys it, in prescribed manner and on time. A trade that does not clear is said to fail.
Clearing House Interbank Payment System CHIPS An international wire system sued by major banks.
Closed Position A transaction that offsets the number of units taken in a previous position so that your market exposure is zero. When 10,000 units of EURUSD are bought, the position is closed when 10,000 units are sold
Closing Market Rate The rate at which a position can be closed based on the market price at end of the day.
CNH Offshore Chinese Renminbi Market The renminbi is the official legal tender in mainland China with the exception of Hong Kong. The Chinese yuan (CNY) refers to the standard unit of renminbi and it represents the onshore or mainland Chinese spot currency market. To allow for cross border settlement with Hong Kong, Macau and other ASEAN countries the CNH (offshore yuan) was introduced in 2010. Any offshore corporate entity or individual investor is allowed to trade CNH.
Collateral Something given to secure a loan or as a guarantee of performance.
Commission A transaction fee paid to a broker to execute a trade that varies from broker to broker. For some forex brokers such as ECNs, the spread is narrower than most brokers (which makes it attractive), but it can only get away with this tighter spread by charging a commission (which makes it less attractive). When evaluating and comparing the transaction costs of brokers, one should add the spread plus commission.
Commodities Exchange An exchange where various commodities and derivatives products are traded, including wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, and so on. The Chicago Board of Trade and New York Mercantile Exchange are the largest and most well-known commodity exchanges in the world.
Commodities Futures Trading Commission CFTC The United States regulatory agency for commodity futures trading (www.cftc.gov), as well as forex in recent years. It is an independent agency of the US government with the stated mission to protect market users and public from fraud, manipulation and abusive practices.
Confirmation A document exchanged by counterparts to a transaction that states the terms of said transaction immediately after a trade is executed, such as settlement date, size, price, commission, terms of trade, etc.
Consumer Price Index CPI A month to month economic indicator which gauges changes in the cost of living by measuring price changes in a common basket of goods and services that most people use, such as food, clothing, transportation, and entertainment. The annual percentage change in a CPI is used as a measure of inflation. The CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
Contagion The tendency of an economic crisis to spread from one market to another. For example, the late 2000s recession began with a large number of defaults on subprime mortgages in the US, and because investors worldwide invested in mortgage-backed securities based on subprime, the US subprime defaults turned turned into a global meltdown.
Contract UnitLot The standard unit of trading on certain exchanges.
Contract For Difference CFD Contract for difference (CFD) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.
Conversion Rate The value of one currency exchanged for another currency.
Convertible Currency A currency that can be exchanged for another without special permission and few restrictions.
Copey Traders’ term for the Danish Krone.
Correlation A statistical term measuring the relationship between two seemingly variables during a period of time. In finance, correlation is the extent to which the values of different investments move in tandem with one another .For example, the EURUSD and the EURJPY on a daily time frame have over 80% correlation, that is, they move largely in the same direction. Markets with a correlation of +0.5 (or 50%) or more tend to rise or fall in value at the same time, whereas markets with a correlation of -0.5 to -1 (-50 to -100%) move in inverted directions.
Counterparty One of the participants in a financial transaction. The buyer and seller of a good are the counterparties to the sale of that good.
Country Risk The risk that a foreign government will alter its policies or regulations so that it negatively impacts the economy or particular industry/market returns.
Credit Sqeeze Credit Crunch Occurring when economic growth is declining and/or interest rates rise and/or systemic rise in bade debt, it represents a situation where it is difficult to finance through borrowing.
Cross Rates Foreign exchange rate between two currencies that do not involve the US Dollar.
Currency Any form of money issued by a government or central bank and used as legal tender and a basis for trade.
Currency Forwards Similar to currency futures markets with the difference between them being that the terms of contract between the two parties is determined solely by the parties involved and don’t have to be based on a public commodities market.
Currency Futures Where contracts are bought and sold based upon a standard size (much larger than spot forex) and settlement date on public commodities markets. Investors agree to buy or sell a fixed amount of a specific currency at a fixed exchange rate on a fixed date in the future.
Currency Pair The two currencies in a foreign exchange transaction. The “EUR/USD” is an example of a currency pair.
Currency Risk The probability of an adverse change in exchange rates, to the exchanger or trader’s detriment.
TermEquivalent termsDefinition
Day Order With stocks, a request from a customer to buy or sell a stock, that, if not cancelled or executed the day it is placed, expires automatically. For example, with a day order to buy a stock at $50 or better, and the stock never rises above $50, the order is not filled and expires as worthless. See also good-till-cancelled order.
Day Trade The opening and closing of a position in the same trading day, in order to profit from short-term changes in price.
Day trader A trader who makes many trades through a trading day, buying and selling positions in order to profit from short-term changes in prices. Duration of trades is a few minutes to a few hours, and rarely held overnight. Day trading is considered high risk because there is no guarantee that price will move in the short term desired direction, and transaction costs mount up with this more frequent trading style.
Day Trading Refers to positions which are opened and closed on the same trading day.
Deal Blotter A list of all the deals that were done in a trading day.
Deal Date The date a transaction is entered.
Dealer An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.
Dealing Desk Used loosely as the place where dealers facilitate pricing and executing of trades. In forex, the dealing desk has the connotation that trades must be pre-approved by human dealers working in the interests of the brokerage and thus more subject to manipulation than if auto-executed without a dealer.
Debt Monetization The ability of some central banks to print money and buy its government bonds, in order to keep the over-indebted government from defaulting. When the budget deficit continues to expand, and there is not enough willing lenders, a government can raise taxes (not popular), cut spending (also not popular), or it can just let its central bank print money to buy its bonds as part of its asset-buying program. Often inflation in one form or another, including local currency depreciation, is the result.
Deficit A negative balance of trade or payments. Outflow exceeds inflow, or expenditure exceeds income, or liabilities exceed assets, or losses exceed profits, or over a given period of time, usually a year. In a trade deficit, imports exceed exports; in a government deficit, spending exceeds revenue. Deficits add to one’s debts because they must be funded by borrowing.
Deflation Opposite of inflation (the increase in prices and goods and services), it is the decline in the price of goods and services. Mainstream economists consider any deflationary movement as economic hell, associating it with recessions and depressions, when in fact it is heaven for savers or those on fixed incomes. The currency gains value over time, and one can buy more with the saved dollar next year than today.
Delivery In the world of options, forwards and futures contracts, it is the transfer of a security or underlying asset to the buyer, though most of the time the delivery does not occur, as traders offset their positions with opposite contracts. In forex trading, there is no delivery of the actual currency, and instead, profits and losses are credited or debited from one’s account balance.
Depreciation A fall in the value of a currency due to market forces.
Depth of Market The volume of buy and sell orders waiting to be transacted for a particular currency pair at a particular point in time.
Derivative A contract whose value is based on, “derived” from, an underlying security, future, or other physical instrument. For instance, a call option on APPLE (APPL) is a derivative security that obtains value from the changing value of the APPLE stock. A derivative can be either risky or not, depending on the type used and how it is used.
Deutsche Aktien Xchange DAX Germany’s primary stock index, tracking the performance (dividends added in) of the 30 most actively traded stocks on the Frankfurt Stock Exchange.
Deutschmark D-Mark The former currency of Germany, introduced in 1948, it became one of the most important currencies in the world until it was replaced by the Euro when Germany joined the European Union in 1999 and ceased circulation in 2002.
Devaluation Often initiated by a government announcement, it is deliberate downward adjustment of a currency’s price relative to other currencies. Governments like Japan (and more forcibly, China) will act to deliberately devalue their own currencies to make their exports less expensive in foreign markets.
Discretionary Account An account where the customer gives someone else permission to make trading decisions for them.
Dollar Rate The amount of foreign currency quoted against one US Dollar.
Domestic Rates The interest rates that apply to deposits or borrowing of a particular foreign currency. These rates are similar to those offered within the foreign country to citizens who keep money in deposit accounts.
Drawdown The size of a drop in the value of an account from its peak to low over a given period. Maximum drawdown is the maximum drop from peak to low over the life of the account.
Durable Goods Order An economic indicator that marks the change in sales levels of products that have a lifespan of three years or more, such as home appliances, furniture, cars.
TermEquivalent termsDefinition
Easing Refers to either a small price decline in a currency or when a central bank engages in monetary policy to spur spending. An example of central bank easing would be lowering of interest rates.
ECB Conferences The top functionaries of the European Central Bank (ECB) hold regular press conferences in which they outline Central Bank decisions and concerns.
ECN broker Brokers which provide access to an electronic trading network, supplied with streaming quotes from the top tier banks in the world. By trading through an ECN broker, a currency trader generally benefits from greater price transparency, faster processing, increased liquidity and more availability in the marketplace. See also: Electronic Communication Network.
Economic Indicator Economic indicators such as GDP, unemployment, and the trade balance reflect the general health of an economy, and are therefore responsible for the underlying shifts in supply and demand for that currency.
Electronic Communication Network ECN A term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. FX ECNs brokers provide access to an electronic trading network, supplied with streaming quotes from the top tier banks in the world. By trading through an ECN broker, a currency trader generally benefits from greater price transparency, faster processing, increased liquidity and more availability in the marketplace.
Electronic Funds Transfer EFT Electronic transfer of funds, by telephone or computer, rather than by check or cash. Also called wire transfer.
Elliot Wave Principle A form of technical analysis used to forecast trends in market activity by ascribing a pattern of eight waves to any complete cycle. The eight wave patterns consists of a five-stage advance and a three-stage correction.
End Of Day Order EOD An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET.
Equities Ownership interest in a corporation in the form of common stock or preferred stock.
Equity Total assets minus total liabilities; also called net worth
Equity Curve The value of a trading account graphed over a period of time.
Escrow Account A segregated account where customer money is kept separate from a dealer’s operating funds.
Euribor Euribor® (Euro Interbank Offered Rate) is the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank. See also: LIBOR
EURO EUR The currency of the participating member nations of the European Union, it was introduced in 1999 when 11 European countries adopted it, and became the official currency of participating members in 2002. It was adopted to facilitate global trade and encourage the integration of markets across national borders.
Eurocurrency A currency that is deposited in a financial institution located outside the currency’s country of origin. For example, a eurodollar is a certificate of deposit in US dollars issued in some other country; likewise, a euroyen is a CD issued in yen outside Japan.
European Central Bank ECB Established in Frankfurt in 1998, the ECB is responsible for all monetary policy decisions that influence the Euro currency, especially the setting of key interest rates. Lately it has been active in lowering interest rates to increase the amount of money in the economy in order to spur growth. Though it has never wanted to become the lender of last resort, it has become such after the sovereign debt crisis, printing and lending money to struggling banks and governments.
European Currency Unit The predecessor of the Euro, established in 1979 and known as a “semi-pegged” system in which currencies were variable with respect to each within a certain range or band.
European Monetary System Originating in 1979 by nine members of the European Community (EC), the EMS comprised three elements: the European Currency Unit (ECU), the monetary unit for EC transactions; the Exchange Rate Mechanism (ERM), whereby members kept their rates within a band; and the European Monetary Cooperation Fund, which issues the ECU and oversees the ERM. It was a leading initiative leading up to the deployment of the Euro.
European Union Founded by the Treaty of Rome in 1957 as a common market for six nations, it was known as the European Community till Jan 1, 1994 and currently comprises 15 European nations, with the goal to have a single market for goods and services without economic barriers and a common currency (the Euro) with one monetary authority (ECB).
Exchange The physical location of trading activity. Some famous examples include the New York Stock Exchange or the Chicago Mercantile Exchange.
Exchange Control Government restrictions (laws and regulations) controlling the exchange of foreign or domestic currency. A government may restrict the purchase of select foreign currencies by domestic citizens, or the purchase of local domestic currency by foreigners. Wikipedia provides a useful list of countries with exchange controls here: http://en.wikipedia.org/wiki/Foreign_exchange_controls.
Exchange rate The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example, if the US Dollar buys 1.20 Canadian dollars, the exchange rate is 1.2 to 1.
Exit Simply closing your position. If long, then an exit is the sale of your long position; if short, the exit is the purchase of the short currency.
Exotics The lesser traded currencies, as opposed to the major currencies which are heavily traded.
Expiration Date The day on which a financial option is no longer valid.
Exposure The net of all long and short positions for a particular currency. Based on the traders’ positions for all currencies, his/her exposures can result in either loss or gain.
TermEquivalent termsDefinition
Fiat Currency Nonconvertible paper money, fiat currency has no intrinsic value and is backed by nothing other than trust in the government issuing the currency. Most currencies are fiat currencies and as such, they are all subject to inflation. In a fiat currency system, the currency value fluctuates up and down in response to demand and supply pressures, which allows traders to speculate on future currency values.
Fibonacci Indicators The Fibonacci Fans and Bands are multiple support/resistance lines drawn on charts derived from the Fibonacci number series.
Fill or Kill Usually a large order that must be executed immediately and completely, or else it is cancelled. Considered the opposite of a good til cancelled (GTC) order. It differs from an immediate or cancel (IOC) in that an IOC may be only partially filled, while an FOK must be entirely filled.
Fill Price The price at which a buy or sell order is executed, and may or not be the investor’s requested price, depending on the type of order.
Financial Risk The possibility that a business won’t be able to meet its financial obligations; a higher proportion of debt increases the likelihood that the firm will be unable to make the required interest and principal payments. Broadly, it is any risk that results from giving money to another person or entity. Lending money carries the financial risk that the borrower will not repay, and purchasing assets carries the financial risk that the asset price may depreciate or not be sold.
Finex Futures and Options currency trading at the New York Cotton Exchange (NYCE), with a trading floors in New York City and Dublin, helping create a 24-hour market for most FINEX contacts.
Fiscal Policy Government policies related to spending and taxing for the specific purpose of influencing the economy. Debate is on scope. Tight fiscal policy adherents (Austrian School) argue that government acts best when it acts least, promoting low taxes and spending; loose policy adherents (Keynes) believe that government should play a larger role in promoting economic well-being.
Fisher Effect A theory stating that a currency’s real interest rate is equal to its nominal interest rate less the inflation rate; if inflation rises, real interest eventually rises, and if inflation falls, real interest rate will fall. Thus, increasing inflationary expectations result in increasing interest rates.
Fixed Exchange Rate Pegged Exchange Rate A policy whereby the central bank maintains an official rate for their currency, often intervening to keep the rate fixed within a limited range. The government may decide to link the value to another currency or to a valuable commodity like gold. For example, under the Bretton Woods System, most world currencies fixed themselves to the US Dollar, which in turn was fixed to gold. Nowadays, a country adopting this policy will fix its currency to a more dominant currency, such as the US Dollar, and it must hold enough dollars in reserve to account for all the currency in circulation.
Flat / Square Dealer jargon indicating your position is 0 as you have done the opposite of your original trade. For instance, you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.
Floating Exchange Rates An exchange rate determined by market forces, otherwise called a floating exchange rate, i.e., it changes from day to day and is dependent on supply and demand rather than say, a pegged exchange rate set by government fiat.
Foreign Exchange Forex FX Is the simultaneous buying of one currency while selling another; for instance, the buying of pounds and selling of dollars (buy GBP/USD). This market of exchange has more buyers and sellers and daily volume than any other in the world and takes place between governments, banks and speculators across the globe, 24 hours a day.
Foreign Market Centers The first to open up is Frankfort, followed by London (largest), New York, Sydney, and Tokyo. Trading passes from one center to the next, the traders in one bank’s dealing desk handing off the trading book to their colleagues in another center.
Forex Charting Software Forex charting software packages providing analytical tools to assist currency traders determine the direction of currency pairs.
Forex Demo Account Free Forex Practice Account, trading software and charts that allow for prospective clients to test trading ideas and sharpen trading skills without financial risk.
Forward The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved. Alt: A transaction that settles at a future date.
Forward Contract Fixes the exchange rate for future delivery at a date to be agreed upon by both participants. For instance, the trader agrees to buy $10,000 USD at 90.70 Yen in the next 4 months, thus allowing him to purchase up to $10,000 at this agreed upon rate, and this contract must be honored whether price the rate goes to 80 Yen or 100 Yen.
Forward Rates Swaps A Forward Rate refers to a cash price of 2 currencies interest difference for a fixed term. Forward rates can be calculated easily given the fixed term interest rates of each currency and the current spot rate.
Forward Trading Investors can swap their trades forward for anywhere from a week or two up to several months depending on the time frame of the investment, and the position can be closed out at any time.
Fundamental Analysis Focuses on the economic forces of supply and demand that causes price movement, such as interest rates, GDP, inflation, unemployment, trade balance, and so on. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.
Fundamental Trader Fundamentalist A trader who uses fundamental analysis to determine market direction
Funding Currencies Low interest rate currencies.
Futures An obligation to exchange a good or instrument at a specific price on a pre-determined future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts – ETC), versus forwards, which are considered Over The Counter (OTC) contracts and NOT traded on an exchange.
TermEquivalent termsDefinition
GBP Currency code for British Pound sterling, commonly called the pound (Symbol is £). The third largest reserve currency in the world, it traces its origins to Anglo-Saxon times and is the oldest currency in use today.
Gearing Synonym to financial leverage, the term relates to margin trading where the trader control a position whose face value is greater than the money he deposited.
Globex Established by Reuters in 1992, it is a trading platform that allows traders to trade electronic futures and options without regard for time zone.
Going Long The purchase of a currency pair when square.
Going Short Selling a currency pair when square.
Gold Standard In contrast with fiat money, it is a monetary system in which currencies are defined in terms of their gold content and payment imbalances between countries are settled in gold. It was in effect across Europe and the United States from 1870 to 1914, and most recently under the Bretton Woods System. The advantage is that reduces the likelihood of inflation and takes monetary policy out of the hands of government policymakers.
Golden Cross In technical analysis, when a short moving average (20 day) crosses under/over a long moving average (200 day), considered a favorable sign that the underlying currency will move in the same direction.
Goldilocks Economy Coined in 1902 to describe an economy that has steady growth and acceptable inflation, and thus not too hot and not too cold.
Good Until Canceled An order to buy or sell a currency at a specific price whenever that price becomes available, and this order not expire at the end of the trading day (see Day Order), though broker may set a limit of 30-60 days.
Gross Domestic Product GDP The total value of all goods and services produced in a country over time, usually in a given year, including the income of foreign corporations and foreign residents working in the US, but excluding the income US residents and corporations overseas. GDP is calculated by adding together total consumer spending, total government spending, and the value of net exports. Increasing GDP indicates a growing economy.
Gross National Product GNP GDP plus the income abroad from domestic citizens living in a different country minus income made in home country by non-citizens. Less commonly used now.
Group of Eight G8 G7 plus Russia.
Group of Five G5 Five leading industrial nations (France, Japan, Germany, the UK andUS), which meet from time-to-time to discuss common economic problems.
Group of Seven G7 Seven leading non-communist industrial nations composed of G5 plus Canada and Italy.
Group of Ten G10 Also known as The Paris Club, it includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, UK and US. These nations signed an accord in 1962 to increase the fund available to the IMF and aid member countries with balance-of-payments difficulties.
TermEquivalent termsDefinition
Hard Currency A freely convertible currency issued by a politically and economically stable country that investors have confidence in because they see it as not depreciating in value in the foreseeable future. Examples of hard currencies include the US Dollar or the Euro or the Japanese yen.
Head and Shoulders In technical analysis, it is a price pattern of three peaks, the middle one (head) higher than the bracketing two forming what looks to be a head with two shoulders on each side. Bullish points can be taken along the neckline, but if the currency falls below the neckline at the third peak, it is considered a sell signal (bearish reversal).
Hedge Reducing risk associated with adverse market movements by using two counterbalancing investments, thereby minimizing any losses caused by price fluctuations. For example, if one has an open long position in EURUSD of 10,000 units, one can offset this position by shorting an equal amount of EURUSD. Hedging reduces risk but it is also reduces potential profit.
Hedge Fund Managed Fund A private fund resembling a mutual fund but usually open to the very wealthy and able to employ a number of different strategies, such as long-short strategies or high frequency strategies. Managers are rewarded in two ways, as a percentage of asset under management (ex: 2% management fee), and a percentage of profit of the fund (20% performance fee).
High / Low Refers to the time period’s traded high and low price.
Hit the bid Selling at the bid price.
TermEquivalent termsDefinition
Indicator pollution Term invented by us to describe how the addition of outside indicators and techniques to any one indicator can obscure and distort the true nature of that indicator.
Inflation The rate at which the general price level of consumer goods and services is rising, indicating erosion in the purchasing power of money. Inflation has historically occurred when a country prints too much of its currency in too short a period of time, and central banks attempt to control inflation by raising interest rates when necessary, which decreases the amount of money in circulation.
Initial Margin The initial deposit that determines a corresponding maximum trade size. In a 50:1 brokerage, the initial margin required to open a 10,000 unit is $200.
Interbank Market A non-physical, electronic communication network in which financial institutions can trade.
Interbank Rates The Foreign Exchange rates at which large international banks quote other large international banks.
Interest Rate The rate charged (for the borrowing of) or paid (for the lending of) money. An interest rate is expressed as an annual percentage of the principal, and it changes as a result of inflation and Central Bank policies.
Interest Rate Differential IRD The difference in the interest rates associated with two currencies.
Interest Rate Swap An exchange of interest for the mutual benefit of the exchangers, with one party y paying an agreed-upon fixed interest rate for the notional amount in exchange for the interest that same amount earns for the duration of the agreement.
International Monetary Fund IMF Established in 1944, this supranational organization seeks to stabilize foreign exchange rates, lower trade barriers, and lend foreign currency reserves to members with short-term balance of payment problems.
International Monetary Market IMM A division of the Merc established in 1972, it trades currencies, interest-rate options and interest rate futures, along with the eurodollar and LIBOR-based securities, and is the second largest futures exchange in the world and the largest in the United States.
International Organization for Standardization The organization responsible for developing the standardized forex trading codes used by traders, such as EUR for Euros or CAD for the Canadian Dollar.
Intra Day Position Positions that are opened and closed within the same trade day.
Introducing Broker A person or firm that introduces customers to a market maker often in return for commission or a portion of the spread.
ISO 4217 It is the international standard describing three-letter codes (also known as the currency code) to define the names of currencies established by the International Organization for Standardization (ISO). The first two letters of the code are the two letters of ISO 3166-1 alpha-2 country codes (which are also used as the basis for national top-level domains on the Internet) and the third is usually the initial of the currency itself. So Japan’s currency code becomes JPY—JP for Japan and Y for yen.
Japanese yen JPY The Yen is the Japanese currency unit. It is the third most-traded currency in the foreign exchange market after United States dollar and the Euro.
Jobber A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.
Jurisdictional Risk The risk that funds will be lost when placed under the jurisdiction of a foreign authority.
Key Currency When smaller economies align their exchange rates to that of a more domimant economy.
Kiwi Traders term for the New Zealand Dollar. See also: NZD
TermEquivalent termsDefinition
Lagging Indicator Economic indicators used to confirm a previous economic trend. For example, a fall in unemployment rate is considered a lagging indicator of an economic recovery, occurring after other indicators of recovery, such as GDP growth.
Leading Indicators Economic indicators used to predict a future trend before it has occurred. For example, a reduction in the average number of hours worked by manufacturing employees is a leading indicator of economic slowdown or recession.
Leverage The ratio of margin to the maximum position size. With a deposit of $1000 and a leverage of 50:1, a trader could enter a position with a face value of $50,000 (5 mini lots). Leveraging allows you to profit quickly, but lose money just as fast.
Liability The obligation to deliver currency as part of a spot transaction. However, in speculative forex trading, currency is not delivered and instead, all profits and losses are subtracted from margin deposits.
Limit order An order to buy a currency pair at a specified price (the limit) or better. As an example, if the current price of USD/YEN is 90.00/05, then a limit order to buy USD would be at a price below 90. (i.e., 89.50), and the order will be executed only if the market reaches or betters that price.
Line Charts In technical analysis, it is simple chart that shows a market’s price (such as close) over a period of time, connecting the market’s closing prices by a line, but definitely not as popular or useful as the bar chart or the candlestick chart.
Liquidation The result of a margin call, all positions are closed to prevent further loss.
Liquidity Describes a market where there are many buyers and sellers generating a great deal of volume, and this larger liquidity translates into tighter spreads.
London Inter-Bank Offered Rate LIBOR The interest rate participating banks offer one another for unsecured loans on the London wholesale money market (or interbank market), and is roughly comparable to the US Federal funds rate. It is the most widely used benchmark for short term interest rates in the world, because most of the world’s largest borrowers borrow money on the London market.
Long position When one buys a currency, their position is long.
Lots Standardized method of sizing positions in forex; standard lots usually represent 100,000 units of a particular currency ($10 per pip), mini lots represent 10,000 units ($1 per pip), and micro lots represent 1,000 units ($0.10 per pip).
TermEquivalent termsDefinition
M1 Money supply component which consists of all cash in circulation, plus all of the money held in checking accounts, as well as all the money in travelers checks.
M2 Money supply component which consists of M1 plus all of the money held in money market funds, savings accounts, and small Certificates of Deposits.
M3 Money supply component which consists of M2 plus all of the large Certificates of Deposits.
Maintenance Margin The minimum margin that must be available in an account to support all open trades.
Managed Float Also known as a “dirty” float, this is an Exchange rate policy where central banks regularly intervene to stabilize and/or steer the direction of their currency.
Manual Trader A trader that inputs his/her trades manually without an API.
Margin The required equity that an investor must deposit to maintain an open position. For example, with an open position of $50,000 and a leverage of 50:1, the required margin would be $1000.
Margin Account An account that allows leverage buying and short selling on credit.
Margin Call A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the client and the equity has fallen below the margin requirement. Positions are automatically liquidated till equity moves above margin requirement.
Market Close In the 24-hour forex market, the market never closes. For administrative purposes, many banks institute 5pm EST as the market close in order to differentiate between value dates, as well as mark delivery dates.
Market Maker A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.
Market Order An order for immediate execution at the best available price.
Market Rate The most current quote for a currency pair.
Market Risk Risk that cannot be diversified away.
Mark-To-Market For an open position, what its value would be if it were closed out at the current market rates.
Martingale A betting strategy where the gambler / trader doubles his/her bet after every loss, so that the first win recovers all previous losses plus wins a profit equal to the original stake. In forex, the doubling can occur after a predefined pip loss level, and the martingale can be hitched to a technical entry mechanism more accurate than flipping a coin. Nevertheless, no matter how well defined and back tested the pip loss level and entry mechanism, it will eventually bust an account, even though it might dramatically increase the balance for some time.
Masked Inflation Masked inflation occurs when a productive economy can cause business costs to fall and globalization of the labor market can bring in cheap goods from low labor cost countries.
Maturity The date for settlement or expiry of a financial instrument.
Maximum Leverage The biggest position that a margin deposit would cover. At a leverage of 50, one could enter a maximum leveraged position of $100,000 by depositing $2,000 worth of margin.
Mean Reversion A theory suggesting that prices and returns eventually move back towards the mean or average. Hence, a shock in prices will return or revert eventually to the level before the shock and the time it takes to revert is called the time to reversion.
MetaTrader MT4 A popular online trading platform with over 250+ supporting brokers to trade Forex, CFD, and Futures markets, it has a user-friendly front-end trading interface that provides technical analysis, charting and expert advisors to help with developing automated trading strategies.
Middle Rate The price halfway between the bid and ask quote offered by dealers.
Mini Account A special type of trading account where traders can trade partial lot sizes, such as 1000 units or 10,000 units.
Mobile Trading Trading that can be conducted via mobile devices such a cellular phone or smart phone on the go, using wireless interest.
Momentum The tendency of the market to continue moving in the same direction in which it is currently moving. There are various ways of measuring momentum, some involving volume and others measuring how price has increased over the price of X bars ago.
Monetarists Macroeconomic theory, inspired by the work of Milton Friedman, that is concerned with the sources of national income and causes of inflation. The theory states that the amount of money issued by government should be kept steady to match economic growth and inflation is directly determined by the money supply. Monetarists believe that a government ought to set target interest rates to encourage or slow growth in the supply. For example, when an economy is growing rapidly, monetarists recommend raising interest rates; and when in a recession, they recommend lowering interest rates.
Monetary Base Required and non-required deposits made at the central bank by member banks and the currency in circulation (see M1).
Monetary Easing When a central bank encourages spending by easing monetary controls, such as lowering interest rates.
Monetary Policy Central bank actions to influence the economy through money supply levels, generally through the setting of interest rates. In a sluggish economy, the central bank will try to lower interest rates to increases the money supply by easing the availability of credit, which is thought to promote economic growth short term and inflation long term. Monetary policy may also refer to the printing of money to lend to troubled, over-indebted banks or governments, which also cause inflation. If there is fear of an economy growing to quickly or overheating, a restrictive monetary policy will try to high interest rates to constrict credit and slow down growth while reducing inflation.
Monetary Policy Committee MPC Is a committee of the Bank of England that meets every month to decide the official interest rate in the United Kingdom.
Money Manager A person who is responsible for the entire financial portfolio of an individual or other entity and receives payment in exchange for choosing and monitoring appropriate investments for the client.
Moving Average The average price of a currency over a certain period of time, calculated continuously; for example, in a 10 day simple moving average, the closing prices of the last 10 days are added up and divided by 10. Moving averages help smooth out the noise of a currency pair in order to better discover trends.
TermEquivalent termsDefinition
Naked Put A put sold by someone who is not short the underlying asset. It is considered very risky because if the put holder’s market dramatically fell in price, the put seller must pay the put holder a substantially amount of cash. See also Covered Options.
Narrow Market Occurs when there is light trading and large fluctuations in prices can occur due to low volume trading; for instance, a large order to buy the instrument can affect the price significantly. Also called a thin market.
Negative Carry Pairs A carry trade where the trader is long the lower interest currency and short the higher interest currency. For instance, the trader might be long USD (at low 0.5% interest) and short the AUD (at high 3.5% interest), and thus short AUDUSD, with a negative carry of -3%, and yet the trade may not be so bad if were part of a hedging strategy.
Net Asset Value NAV The total value of an asset (company, fund or trading account) less liabilities. With a trading account, the NAV is the balance of deposits, realized and unrealized profit/loss, and interest, minus withdrawals.
Net Position The size or value of a position after offsetting opposite positions. In terms of size, if one where long 5000 units of EURUSD, and short 3000 units of EURUSD, then one’s net position size is long 2000 units of EURUSD. In terms of value, if one were long 5000 EURUSD with 100 pips profit (and thus up $5000), and short 3000 units of EURUSD with 50 pips in loss (and thus down $1500), the net position value is +$3500.
Netting A method of reducing credit, settlement and other risks of financial contracts by aggregating (combining) two or more obligations to achieve a reduced net obligation.
New Zealand Dollar NZD The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands, Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents. See also: NZD
News Trader An investor who bases his/her decisions on the outcome of a news announcement and its impact on the market.
Noise Price and volume fluctuations that confuses traders trying to interpret market direction. Traders of technical analysis apply smoothing indicators like the moving average to reduce noise and see more clearly the overall direction.
NOK Currency symbol for the Norwegian Krone.
Non-Client Order an order to buy or sell a security by a member firm on an exchange, rather than a client. In securities trading, non-client orders are allowed, but brokers must give priority to client orders for the same securities.
Non-Farm Payroll NFP Reported monthly on the first Friday at 8:30 am EST, this figure represents the total number of paid U.S. workers of any business, excluding farm employees, general government employees, private household employees, and employees of nonprofit organizations that provide assistance to individuals. The NFP report also includes estimates of the average work week and average weekly earnings of all non-farm employees. It has become the most dramatic news event for the major currency pairs.
NYCE New York Cotton Exchange.
NZD NZD is the currency symbol for the New Zealand Dollar. See also: Kiwi
TermEquivalent termsDefinition
Odd Lot Less than the standard transaction size. In securities trading, odd lots are orders less than 100 shares of stock. In forex trading, odd lots are less than 100,000 units, which has become so commonplace now that is not so odd and rarely used.
Offer Also known as the Ask Price, it is the price at which the seller is willing to sell, and thus the buyer is the one buying at the ask, the best price currently available. The difference between the ask and the bid is called the bid-ask spread.
Offset the liquidation of a futures or option position by selling an equal number of identical contracts for a long position, or buying an equal number for short position, so that no further obligation exists.
Offshore A business entity incorporated in a foreign country, often a known tax haven, often to escape domestic regulation, though they must abide by domestic regulations if its operations are carried on within the domestic country.
Old Lady Term for the central bank of England.
Omnibus Account An account that one futures commission merchant carries for another in which the transactions of multiple individual account holders are combined rather than designated separately.
One Cancels the Other Order OCO A type of order composed of several conditional parts, so that if one part of the order is filled, all other parts are automatically cancelled. For example, the trader might want to straddle a volatile news event, taking a buy stop 50 pips above the market and a sell stop 50 pips below the market price, and if he gets filled with the one, the other one is cancelled.
Open order An good ‘til cancelled order that will be executed when a market moves to its designated price, a pending limit or stop.
Open position A position long or short that is subject to market fluctuations and thus profits or losses. See also: Closed Position
Options The right, but not the obligation, to buy (long call) or sell (long put) an underlying asset. For instance, call options buyers bet that the currency will be worth more than the price set by the option strike price, plus the price they pay for the option itself. Most use options to speculate with greater leverage and limited risk (price of the option), while some use options to hedge against market movements.
Order Instructions to buy or sell.
Oscillators Technical analysis tools that provide buy and sell signals, characterized by a signal that oscillates between overbought and oversold levels.
Over the Counter OTC Refers to trading not done over a formal exchange. Forex is traded over the counter, because traders enter forex transactions electronically (counterparty is the market maker) rather than through an exchange.
Overbought A currency pair is considered overbought when its price shoot up more quickly than expected and traders anticipate a correction (or fall) in price.
Overnight A trade that remains open until the next business day.
Overnight Limit The maximum amount of a net long or short position that a dealer can carry over into the next dealing day.
Overnight Position A dealer’s net position that is carried into the next trading day.
Oversold A currency pair is considered oversold when its price drops more quickly than expected and traders anticipate a rally in price.
Owner The account holder.
TermEquivalent termsDefinition
Par Of equal value, the word is often used in relation to pegged currencies. If one currency pegs itself to another at par, it means that the central bank has declared the currencies of equal value.
Partial Lot Many brokerages allow trading in partial lots, which are fractions of 100,000 units that normally make up a full lot.
Pegged A system whose currency is tied to that of another currency. For example, the Chinese yuan is tied to, or pegged to, the US dollar. Most pegs are allowed to deviate within a small band.
Petrodollars Refers to the revenue of oil producing nations (OPEC nations) for the sale of their oil.
Pips Acronym for ‘percentage in point,’ the term refers to the smallest incremental movement in currency price. In EUR/USD, a movement of 0.0001 is one pip (for example, from 1.3100 to 1.3101). In USD/JPY, a movement of 0.01 is one pip (for example, from 116.32 to 116.31 yen).
Point & Figure charts In Technical analysis, a chart that records changes in price activity of a currency without any consideration of time. Price is charted in the y-axis, but nothing is measured in the x-axis, and the chart is designed as a series of X (rising price) and O (falling price), the price change of which must exceed a certain amount before it is charted.
Political Risk Exposure to changes in governmental policy or other regulations which will have an adverse effect on an investor’s position. For example, if a new government enacts a new inflation target policy higher than its competition, the domestic currency will fall when easy money floods the economy.
Position A trade that is still open (See Open Position).
Premium The amount added to the spot price of a currency to get the forward or future price.
Price Transparency Describes quotes to which every market participant has equal access.
Principal Value The original amount invested.
Producer Price Index PPI An index tracking the monthly changes in the wholesale price of goods bought and sold by producers before they reach the retail market. A dramatic increase in wholesale prices may be seen as an early indicator of inflation.
Profit Taking Taking Profits Closing a position to cash in on gains. On a bullish move, profit taking after a significant rise in price can push prices down temporarily, even though the trend is generally intact.
Profit/Loss The actual “realised” gain or loss resulting from trading activities on closed Positions, plus the theoretical “unrealised” gain or loss on open Positions that have been Mark-to-Market.
Protective Stop Order type whereby an open position is automatically liquidated at a specific price in order to minimize loses. For example, if a trade is long EURUSD at 1.3150, they might wish to put in a stop loss order for 1.3100 (50 pips below entry), which would limit the loss to 50 pips. See Stop Loss Order.
Purchasing Power Parity PPP The notion that, in an efficient market, the ratio between domestic and foreign price levels should equal the foreign exchange rate. For instance, if one pound is worth two dollars, then one pound in England should buy the same good and services that two dollars can buy in the United States.
Put Writer A writer of a put option, also called the seller of a put. He picks up the option premium from the put holder, and hopes that the market does not fall too much below the strike price.
TermEquivalent termsDefinition
Quantitative Analysis A technique to analyze an observed behavior by using complex mathematical and statistical modeling and measurement methods.
Quantitative Easing Quantitative easing is the term for the bank’s printing of money in order to flood commercial banks with excess lending, to encourage more spending, and to monetize the government’s excessive deficit. In recent years, Ben Bernanke been implementing several rounds of quantitative easing ($45 billion per month in 2012) to encourage borrowing/spending in a down economy, and to cover over 40% of the US government deficit.
Quote The display of both the bid and ask prices of a currency pair.
Quote Currency The second currency when two currencies are quoted. For the EUR/USD, EUR is the base currency while USD is the quote currency. The exchange rate quoted is how many units of the second currency you will receive for one unit of the base currency.
TermEquivalent termsDefinition
Rally An upward recovery prices after a prolonged decrease in price to oversold levels, or a bear market rally, which is a brief upward move between two downturns.
Range The high and low prices recorded over a given trading period, with the size of the price range an indicatory of volatility (large price range = large volatility; low range = little volatility).
Rate The price of one currency in terms of another, typically used for dealing purposes
Rate Differentials The difference between the interest rates of two countries, with the higher rate attracting investment financed by the lower rate.
Rate of Return The percentage of money gained or lost on an investment relative to the amount of money invested.
Ratio Spread Holding an unequal amount of long and short options positions, such as two short and one long.
Realized P/L The profit and loss from a closing a position.
Regulated Market A market in which a government agency monitors and regulates industry activity to protect investors, such as forex trading in the United States.
Regulatory Risk This is a potential risk to trading in a particular region due to changes to laws and regulations governing trading in that region.
Resistance A term used in technical analysis to indicate an upper bound price level where there are many willing sellers. Short sellers will often try to sell at this resistance level, while buyers will fight to break out of this overhead resistance level.
Retail FX Market Individual and institutional traders of smaller size as opposed to dealers and brokers and larger institutions. The retail FX market has been growing in size over the last 10 years, a phenomenon which has helped to drive down the costs of trading.
Revaluation An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.
Right Hand Side Refers to the ask or offer price, the price at which traders buy.
Risk Foreign Exchange Risk The risk that the exchange rate on a foreign currency will move against the position held by an investor. Exposure to uncertain change and the likelihood of less-than-expected returns.
Risk Capital The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.
Risk Management The use of strategies to reduce financial risk, such as trading only 2% of maximum leverage, or adding a stop-loss to minimize maximum loss.
Roll-Over When a Spot Forex position is held at the end of the business day prior to its Value date, it will be rolled over to a new value and positions will be subject to a swap charge or credit based on the interest rates of the two traded currencies.
Rollover Credit Amount credited to a trader’s account from an overnight rollover, when the long currency of a currency pair has a higher yielding interest rate than the shorted currency.
Rollover Debit Amount debited from a trader’s account because of an overnight rollover, when the long currency of a currency pair has a lower yielding interest rate than the shorted currency.
Rollover Rate The daily rollover interest rate is the amount a trader either pays or earns, depending on the established margin and position in the market. To avoid rollovers simply make sure positions are closed at the established end of the market day.
Round Lot In most cases, 100,000 units of a currency.
Round Trip The buying and selling of a currency pair and having the profit or loss applied to one’s account currency.
TermEquivalent termsDefinition
Same Day Transaction A position that is opened and closed on the same day.
Scalping A fast-paced trading activity where the trader seeks 1-5 pips from each trade. Many forex brokers do not like scalpers.
SEK ISO code for the Swedish krona.
Sell Limit Order A conditional order to sell a specified price (the limit) above the current market, or higher.
Sell Stop A pending order placed below the current market price, and once triggered, becomes a market sell order. Sell stops are used to exit buy positions and start a new short position at the breakdown price.
Selling Rate Same as the Ask or Offer rate.
Selling Short Selling a currency pair, which is equivalent to being short the base currency (first currency quoted) and long the quote currency (second quoted).
Settlement The physical delivery of currencies made when a contract matures, which is two days after the trade date. However, in practice traders don’t take delivery, but profits and losses are applied directly to their account balance.
Settlement Date In forex, the date when physical delivery must take place. For most currency pairs it is two days after the trade date. However, the USD/CAD currency pair settles one day after its trade date.
Settlement Risk Loss as a result of one’s counter-party being unable to settle.
Short Selling a currency pair, which is equivalent to being short the base currency (first currency quoted) and long the quote currency (second quoted).
Short Covering The act of buying the exact same units of a currency pair one has previously sold short in order to close the position.
Short Position Short In FX, when a currency pair is sold, the position is said to be short. The primary currency in the pair is short, the secondary one is long.
Short Squeeze When the currency prices start to move up sharply and many traders with short positions scramble cover their positions (exit), which accelerates the upward move, further aggravating the losses of short sellers who have not covered their positions.
Sidelined When there is above ordinary interest in a currency pair, other major currency pairs that are thinly traded as a result are considered sidelined.
Sidelines Describes investors who are watching the market instead of taking a position on it.
Singapore Dollar SGD The Singapore Dollar (SGD) is the official currency of Singapore.
Slippage It is the difference between expected order fill and actual order fill due to revisions in price and spread (usually negative, or not in your favor) due to a fast market movement, illiquid market, or dishonest broker.
Soft Market Where there are more sellers than buyers resulting in the potential for a quick downtrend.
Sovereign Risk In FX, it is the risk that a foreign central bank will significantly alter is monetary policy and affect one’s currency trades. For example, if one conducts a currency trade with a country that has float, and it decides midstream it wants a peg, the decision can significantly impact the profitability of the trade. Sovereign risk is also the risk of owning a bond of a foreign government, which may stop paying interest or repudiate its debt.
Speculative The condition where there is no guarantee that money will be made and tremendous risk that you will lose all your capital. Most retail traders are speculators and the attraction is that you can you can make a great deal of money very quickly, though you can also lose it just as fast.
Spike A larger than usual price movement that just as suddenly returns to close at its previous level.
Spot Market Market where people buy and sell actual financial instruments (currencies) for two-day delivery.
Spot Price The current market price.
Spread The difference between the bid (buy) and offer (ask, sell) prices; in other words the spread is the commission that the brokerage house makes on each trade. This can vary widely between currencies and between brokerage firms. For example, USD/JPY may bid at 90.40 and ask at 90.42, this two-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.
Square A condition where all positions in a dealer’s books are closed.
Squeeze Broadly, a period when currencies increase in price and investors who have sold short must cover their short positions to prevent larger losses. In reference to central banks, the term represents the Central bank’s attempt to reduce the money supply in order to increase the price of money.
Sterilization To weaken the domestic currency, sterilization by the central bank involves selling the domestic currency on the forex market and buying the foreign currency.
Sterling slang for British Pound (GBP). See also: British pound, GBP, Cable.
Stochastic Oscillator This technical analysis indicator of momentum is based on the premise that during an upward trading market, prices tend to close near their high, downward they close near their low. The transaction signals occur when the %K crosses a three-period moving average called the %D.
Stocky Traders’ term for the Swedish Krona.
Stop Loss Order Order type whereby an open position is automatically liquidated at a specific price in order to minimize loses. For example, if a trade is long EURUSD at 1.3150, they might wish to put in a stop loss order for 1.3100 (50 pips below entry), which would limit the loss to 50 pips. Technically the same as a stop order, but carries the connotation of avoiding further losses than seeking to cashin on future gains. See Protective Stop.
Stop Losses Designed to limit an investor’s loss, it is a limit order to close a position when it reaches a certain price. When long, the stop loss order is placed x pips/x percent below the current market price. When short, the stop loss order is placed x pips /x percent above the current market price.
Stop Order Stop An order to buy or to sell a currency when the currency’s price reaches or passes a specified level.
STP Straight Through Processing Straight through processing (STP) removes any manual intervention in a electronically entered transaction process. The transaction information is passed directly from one party to the other.
Straddle An option strategy involving holding an equal number of puts and calls with the same strike price and expiry date. Used when the trader believes that the market will be volatile and will undergo dramatic price changes, and it allows the investor to profit regardless of which direction the market takes so long as there is significant movement. Small movement will result in a loss.
Strangle Similar to a straddle, the strangle is a cheaper strategy since the strike prices of both the call and the put are far out of the money.
Strike Price The price at which the underlying asset can be bought or sold as specified in an option contract.
Sub-account Some broker allows users to segregate their accounts into various sub-accounts to simplify various trading and hedging strategies.
Support Levels A term used in technical analysis indicating a specific price level at which a currency will meet difficulty in crossing below due to strong buying pressure. Opposite to resistance level.
Swap A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.
SWIFT Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.
Swiss Franc CHF The Swiss Franc (CHF) is the official currency of Switzerland.
Swissy Trader’s nickname for the Swiss Franc. See also: CHF
TermEquivalent termsDefinition
Take Profit Order Order type whereby an open position is closed at a specific price (above the market for a long, below for a short) in order to lock in a profit.
Technical Analysis Determining trends and analyzing market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators. Compare fundamental analysis.
Technical Correction A temporary decline (rise) in a currency price after a series of extremely high gains (low declines). When a currency is considered overbought or oversold, the price has become unsustainably high or low and a technical correction brings it back to a more realistic level.
Technical Indicators These are indicators such as moving average, MACD, momentum, chart formations, support and resistance lines, all of which aim to reveal short term trends that technical analysts use to predict future price movements.
Technical Trader An investor who uses technical analysis. See also: Technical Analysis.
TED Spread Indicates the difference between the US Treasury bill rate and LIBOR, used by some traders to measure trader anxiety or credit quality.
Thai Baht THB The Thai Baht (THB) is the official currency of Thailand.
The City Located within greater London, UK, The City is one of the largest concentrations of financial and business institutions in the world, and is the largest currency trading center.
Thin Market See Narrow Market.
Tick Minimum price move, either up or down. Also known as a pip.
Ticker Shows current and/or recent history of a currency either in the format of a graph or table.
Trade Date The date on which a position is opened.
Trade Deficit When a country imports more than it exports. A trade deficit represents an outflow of domestic currency to foreign markets. Economists will try to argue that it is not necessary a bad thing, but when it is chronic, it can represent long term depreciation of the home currency.
Trade Surplus When a country exports more than it imports. A trade surplus represents an inflow of foreign currency, which can lead to long term strengthening of the home currency.
Trading Buying or selling of goods and services among countries, and in FX, it is the trading of foreign currency pairs.
Trading Platforms A software application used for trading forex, usually over the Internet.
Trailing Stop Loss Designed to limit potential losses on an open order, the trailing stop automatically adjusts the exit price closer to the market price when the market moves in your favor.
Transaction Buying or selling a currency pair.
Transaction Cost The cost of buying or selling a financial instrument (commission + spread). Transaction Date – The date on which a trade opens or closes.
Treasury Bills US government short-term obligations with 13-, 26-, and 52-week maturities.
Treasury Bonds US government long-term obligations with 15-year or more maturities.
Treasury Notes US government medium-term obligations with 2- to 10-year maturities.
Trend The general direction of the market, whether up or down or sideways, the period of which may be short term or long term. Trends are important in technical analysis, as most indicators are used to identity an early trend or its reversal.
Trend lines Project from historical points on the graph that are considered significant (multiple swing highs or swing lows), the direction of the trend lines shows whether the market is advancing or declining, and when these lines are broken, the beginning of a new trend is indicated.
Two-Way Price / Two Way Quotation A price that includes both the bid and offer price.
TermEquivalent termsDefinition
Unconvertible Currency A currency that cannot be exchanged for another because of foreign exchange regulations.
Undervalued When a currency is below its purchasing power parity it is considered undervalued.
Unit A widely used quantity of currency.
Unrealized Profit Unrealized Loss A hypothetical valuation of the current position and the resultant profit or loss if the position were to be liquidated at that moment, and become realized profits and losses when the position is closed.
Unsterilized Intervention An unsterilized intervention is where a country’s central bank directly buys or sells its own currency in an attempt to influence the value of it.
Unsystematic Risk Unsystematic risk is the risk that affects one or more currency pairs rather than the whole forex market. Examples would be political unrest in a country, natural disasters in a region, trade embargoes etc.
Uptick A new price quote at a price higher than the preceding quote.
Uptick Rule In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.
US Dollar USD The currency of the United States of America.
US Dollar Index USDX The US Dollar Index (USDX) is a market index that tracks the value of the US dollar (USD) relative to the Euro (EUR), the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Swiss franc (CHF) and the Swedish krona (SEK).
US Prime Rate The interest rate at which banks in the US will lend to their prime corporate customers.
US Treasury The department within the United States government that is responsible for issuing Treasury bills, notes, and bonds.
TermEquivalent termsDefinition
Valuation The process of determining the value of an asset or company.
Value Date Maturity Date The settlement date for a currency contract, usually two business days. For USD/CAD it is one business day.
Variation Margin Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.
Virtual Balance This is the real-time balance on an account taking open trades in profit (or loss) and cash balance into consideration.
Volatility Vol Measure of how much the price of a currency changes over time. The standard deviation of a price series is commonly used to measure price volatility.
Volume Represents the total amount of trading activity in a particular stock, commodity or index for that day. It is the total number of contracts traded during the day.
TermEquivalent termsDefinition
Warrants A certificate, usually issued along with a bond or preferred stock, giving the holder to buy a specific number of securities at a specific price, which is usually above the current market. They are like call options but with longer time spans, sometimes years, and they are offered by corporations, while call options are not issued by firms.
Weak Dollar/ Strong Dollar The dollar is said to be weak (relative to a previous time period) against another currency when more dollars are required to buy one unit of another currency. The dollar is strong or has gained in strength when fewer dollars are required to buy one unit of another currency. For example, if $1 buys 1.2 Euros in 2000 but today $1 buys only 0.73 Euros then the dollar has weakened against the euro.
Whipsaw A change in currency price followed by another change in the opposite direction. For instance, EURUSD rises 50 pips from 1.3100 to 1.3150, then falls 50 pips to 1.3100 and then rises 75 pips to 1.3175. Whipsaws present risks for short term trend traders who end up buying and selling at the worst possible time and getting stopped out.
Wholesale The sale of services, goods, or commodities in large quantities to individual clients.
Wire Transfer Electronic transfer of funds from one bank to another.
Withholding Tax Income tax withheld from employees’ wages or salary and paid directly to the government tax agency by the employer, thus reducing the possibility that the employee will spend his/her tax liability.
Working Day When the banks in the country of origin for a particular currency are open for business, which for currency pairs becomes compounded because both banks must be open.
World Trade Organization WTO A global organization of countries that trade with one another and set rules by which trading is conducted.
TermEquivalent termsDefinition
XAG A currency symbol under the ISO 4217 standard denoting one troy ounce of silver
XAG/USD XAG/USD exchange rates for Silver to U.S. Dollar. Because of Dodd-Frank Wall Street Reform regulations, they are no longer offered by forex firms, though still popular offshore.
XAU A currency symbol under the ISO 4217 denoting one troy ounce of gold.
XAU/USD XAU/USD exchange rates for Gold to U.S. Dollar. Because of Dodd-Frank Wall Street Reform regulations, they are no longer offered by forex firms, though still popular offshore.
Yard Traders’ term for a billion as in a billion dollars.
Yield The return on an investment, usually calculated in percentage terms.
Yield Curve A curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at a given point in time.
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