Glossary Of Forex Terms

Glossary of Forex Terms

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A


Aggregate Demand - The sum of government spending, personal consumption expenditures, and business expenditures

Appreciation - A currency is said to ‘appreciate ‘when it strengthens in price in response to market demand

Algo – Slang for trading algorithm. A set of rules to automatically determine trading buy/sell orders

Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small rice differentials between markets

Around - Dealer jargon used in quoting when the forward premium/discount is near parity. For example,

“two-two around” would translate into 2 points to either side of the present spot

Ask Rate - The rate at which a financial instrument if offered for sale (as in bid/ask spread)

Asset - In the context of foreign exchange it is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward or spot deal.

Asset Allocation - Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor’s objectives

At Best - An instruction given to a dealer to buy or sell at the best rate that is currently available in the market

At Par Forward Spread - When the forward price is equivalent to the spot price






At or Better - An order to deal at a specific rate or better

At the Price Stop-Loss Order - A stop-loss order that must be executed at the requested level regardless of market conditions

At-the-Money - An option whose strike/exercise price is equal to or near the current market price of the underlying instrument

B


Back Office - The departments and processes related to the settlement of financial transactions

Balance of Payments - A systematic record of the economic transactions during a given period for a country.

(1) The term is often used to mean either: (i) balance of payments on “current account” or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values

Balance of Trade - The value of a country’s exports minus its imports

Bar Charts - Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar

Base Currency - In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts. In the FX markets, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar

Base Rate - A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base

Basis Convergence - The process whereby the basis tends towards zero as the contract expiry approaches

Basis Point - One per cent of one per cent

Basis Price - The price expressed in terms of yield maturity or annual rate of return

Basis Trading - Taking opposite positions in the cash and futures market with the intention of profiting from favourable movements in the basis

Basis - The difference between the cash price and futures price

Basket - A group of currencies normally used to manage the exchange rate of a currency

Bear Market - A market distinguished by declining prices

Bid Rate - The rate at which a trader is willing to buy a currency

Bid/Ask Spread - The difference between the bid and offer price, and the most widely used measure of market liquidity. Usually how the broker makes his profit. Spreads tend to increase when a news release is due of during the quiet hours when liquidity is harder to find

Big Figure - Dealer expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.40/107.45,but would be quoted verbally without the first three digits i.e. “40/45”

Binary Options - A binary “call” (or “step up”) is like a standard European call option except that the pay off at expiry is fixed at one unit of the counter currency, if the call expires in the money

Black-Scholes Model - An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets

Book - In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions

Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. In contrast, a ‘dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party

Bretton Woods Agreement of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies

Bull Market - A market distinguished by rising prices

Bundesbank - Germany’s Central Bank

Buying/Selling - In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit

C


Cable - Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s

Call Option - A call option confers the right but not the obligation to buy stock, shares or futures at a specified price

Call - An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period

Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded

Carry - The interest cost of financing securities or other financial instruments held

Central Bank - A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank. Others include the ECB, BOE, BOJ

Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader

Choice Market- A market with no spread. All trades buys and sells occur at that one price

Clearing - The process of settling a trade

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997 political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the ‘Asian Contagion’

Collateral - Something given to secure a loan or as a guarantee of performance

Commission – A transaction fee charged by a broker

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, financial instability in Thailand caused high volatility in its domestic currency, the Baht, which triggered a contagion into other East Asian emerging currencies, and then to Latin America. It is now referred to as the Asian Contagion Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction

Contract - The standard unit of trading

Contract (Unit or Lot) - The standard unit of trading on certain exchanges

Counterparty - One of the participants in a financial transaction

Country Risk – Risk associated with a cross-border transaction, including but not limited to legal and political conditions such as war etc.

Cross Rates - The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the U.S. dollar, the currency in which most exchanges are usually quoted

Currency - Any form of money issued by a government or central bank and used as legal tender and a basis for trade

Currency Risk - the probability of an adverse change in exchange rates

D


Day Trading - Refers to positions which are opened and closed on the same trading day

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

Deficit - A negative balance of trade or payments

Delivery - An FX trade where both sides make and take actual delivery of the currencies traded

Depreciation - A fall in the value of a currency due to market forces

Derivative – A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument

Devaluation - The deliberate downward adjustment of a currency’s price, normally by official announcement

Discount - Less than the spot price. For example, forward discount

E


Economic Indicator - Economic indicators such as GDP, foreign investment, 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

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

EURO – since 2002 the Euro has been the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU). Members of the EMU are Cyprus, Germany, Estonia, France, Belgium, Greece, Latvia, Lithuania, Luxembourg, Austria, Finland, Ireland, Malta, the Netherlands, Italy, Slovakia, Slovenia, Spain and Portugal

European Central Bank (ECB) - the Central Bank for the new European Monetary Union

Exposure - The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices

F


Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US

Federal Reserve System - The central bank of the United States, with responsibility for implementing the country's monetary policy and regulating member banks of the System. The Fed was created in 1913 and is composed of 12 regional Federal Reserve Banks and a national Board of Governors

Fixed Exchange Rate- Official rate set by monetary authorities for one or more currencies

Floating Exchange Rates - Floating exchange rates refer to the value of a currency as decided by supply and demand Flat/square - Dealer jargon used to describe a position that has been completely reversed, e.g you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position

Foreign Exchange - (Forex, FX) is the simultaneous buying of one currency while selling for another. This market of exchange has more buyers and sellers and daily volume than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day, 5 days a week.

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

Forward Contract - A forward contract fixes the exchange rate for future delivery at a date to be agreed by both participants. A deposit (or a minimum margin) is usually required in forward transactions. For example, if I want to lock in today's rate to buy $10,000 USD at 1.5820 Canadian for the next 4 months, I will have the ability to purchase up to $10,000 USD at this rate

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 - Forward trading is making the opposite trade of a spot trade in a given period of time. Often investors will swap their trades forward for anywhere from a week or two up to several months depending on the time frame of the investment. Even though a forward trade is on a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date

Forward points - The pips added to or subtracted from the current exchange rate to calculate a forward price

Fundamental Analysis - focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects

Futures Contract- An obligation to exchange a good or instrument at a set price on a 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. An OTC is any contract NOT traded on an exchange

G


Gearing - Also known as margin trading. A term used to in the relationship of actual equity versus controlling equity

Group of Five (G5) - are five leading industrial nations (France, Japan, Germany, the UK and US), which meet from time-to-time to discuss common economic problems

Group of Seven (7) are 7 leading non-communist industrial nations composed of G5 plus Canada and Italy

Group of Ten (G10) is also known as The Paris Club which includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, UK and US. These nations signed an accord in1962 to increase the fund available to the IMF and aid member countries with balance-of payments difficulties

Goldilocks Economy was a term coined back in the mid-1902 to describe an economy that was not too hot and not too cold. This typically describes an economy that enjoyed steady growth with nominal rate of inflation

Good ‘til Cancelled (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels

H


Head and Shoulders - A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the price to drop to around the same level as the shoulder. A further modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to sell

Hedging - A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions it would protect one against fluctuations in the foreign exchange rate. (see Forward Contract)

I


Inflation - An economic condition whereby prices for consumer goods rise, eroding purchasing power

Initial margin - The initial deposit of collateral required to enter into a position as a guarantee on future performance

Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks

K


Kiwi Slang for the New Zealand dollar

L


Leading Indicators - Statistics that are considered to predict future economic activity

LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank

Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 102.00/05, then a limit order to buy USD would be at a price below 102. (i.e. 101.50)

Line Charts - The Line Chart connects single prices for a selected time period

Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability

Liquidation - The closing of an existing position through the execution of an offsetting transaction

Long position - A position that appreciates in value if market prices increase. When one buys currency, their position is long

M


Margin - The required equity that an investor must deposit to collateralize a position

Margin Deposit - The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value, which allow for this high leverage

In the event that funds in the account fall below margin requirements, brokerage firms will automatically close all open positions

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. If the equity balance in your account falls below the margin requirement, a margin call will be generated. In the event that an account exceeds its maximum allowable leverage, ALL open positions are liquidated immediately, regardless of the size or the nature of positions held within the account

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 Risk - Exposure to changes in market prices

Mark-to-Market - Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements

Maturity - The date for settlement or expiry of a financial instrument

Metatrader – Forex and share trading platform. Runs on Windows and can host automated robot trading algorithms and indicators that can be developed with MT4 Metaquotes software right within the platform.

N


Narrow Market - occurs when there is light trading and greater fluctuations in prices relative to volume. This is often interchanged for THIN MARKET

O


Offer - The rate at which a dealer is willing to sell a currency

Offsetting transaction - A trade with which serves to cancel or offset some or all of the market risk of an open position

One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled

Open order – An order that will be executed when a market moves to its designated price

Normally associated with Good ‘til Cancelled Orders

Open position - A deal not yet reversed or settled with a physical payment

Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange

Overnight - A trade that remains open until the next business day

P


Pips - Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Some brokers quote to 5 places, the 5th place is called a point or pipette.

Political Risk - Exposure to changes in governmental policy which will have an adverse effect on an investor’s position

Point & Figure charts - The Point & Figure Chart disregards Time and focuses entirely on price activity

Position - The netted total holdings of a given currency

Premium - In the currency markets, describes the amount by which the forward or futures price exceed the spot price

Price Transparency - Describes quotes to which every market participant has equal access

Q


Quote - An indicative market price, normally used for information purposes only

R


Rate - The price of one currency in terms of another, typically used for dealing purposes

Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell

Revaluation - An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation

Revaluation Rates - The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day

Risk - Exposure to uncertain change, the variability of returns significantly 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 - To hedge one’s risk they will employ financial analysis and trading techniques

Roll-Over - Process whereby the settlement of a deal is rolled forward to another value date

The cost of this process is based on the interest rate differential of the two currencies

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

S


Settlement – The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve actual physical exchange of one currency for another

Short Position - An investment position that benefits from a decline in market price. When one sells a currency their position is short

Spot/Next - A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa by means of swap for spot value day against the next working day

Spot Price – The current market price. Settlement of spot transactions usually occurs within two business days

Spot (Rate) - In FX Markets, Spot refers to the cash price without interest factored in

Spot Trade - When you trade foreign exchange you are always quoted a spot price 2 business days in advance. This is under normal conditions where there are no bank holidays in the traded currencies countries or is not over a weekend

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 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market

Stagflation - Recession or low growth in conjunction with high inflation rates

Sterling – slang for British Pound

Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49

Stochastics Oscillator - This technical analysis indicator is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, and prices tend to close near their low

Stop Loss Order - Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common

Support Levels - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below. Recurring failure for the price to move below that point produces a pattern that can usually be shaped by a straight line. It is the opposite of Resistance levels

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

T


Technical Analysis - An effort to forecast prices by analysing market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators

Tick - Minimum price move

Ticker - Shows current and/or recent history of a currency either in the format of a graph or table

Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day

Trading - Buying or selling of goods and services among countries called commerce. Forex Trading is the trading of Foreign Currencies

Transaction Cost – the cost of buying or selling a financial instrument

Transaction Date – The date on which a trade occurs

Trend - simply the direction of the market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated

Trend Line - This is a Technical Analysis indicator also called or linear regression, which is a statistical tool used to uncover trends. It is calculated by using the "Least Squares" method

There are two ways to use the linear regression line: a. Trade in the direction of the Trend line. b. Construct a parallel trend channel above and below the Trend line to be used as support and resistance levels

Turnover - The total money value of all executed transactions in a given time period; volume

Two-Way Price - When both a bid and offer rate is quoted for a FX transaction

U


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 Prime Rate - The interest rate at which US banks will lend to their prime corporate customers

V


Value Date - The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date

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 unfavourable price movements

Volatility (Vol) - A measure of price fluctuations. 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

W


Weak Dollar/ Strong Dollar - 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

Whipsaw – slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal

Working day - A day on which the banks in a currency’s principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both (all relevant currency centres in the case of a cross) are open.

Y


Yard – Slang for a billion

Yield - Return on capital investment

Z




Zero Coupon Bond - A bond that pays no interest. The bond is initially offered at a discount to its redemption value


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