Forex Glossary

A

Arbitrage: The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments so as to profit from price or currency differentials.

Ask Price: The ask is the price the market is prepared to sell a specific currency pair in the Forex market. At this price, traders can purchase the base currency. It is displayed on the right portion of the quotation. As an example, in the quote USD/CHF 1.4666/71, the ask is 1.4671; this means that you can purchase 1 USD for 1.4671 Swiss francs. The ask price is also called the offer price.

B

Base Currency: The base currency is the 1st currency of a currency pair. It indicates how much the base currency is worth when measured against the other currency. For example, if the USD/CHF rate is equal to 1.6215, then 1 dollar is worth 1.6215 Swiss francs. In the forex markets, the American dollar is normally considered to be the "base" currency for quotes; in other words, quotes are expressed as a unit of $1 per the second currency quoted in the pair. The main exceptions to this rule are the euro, the British pound, and the Australian dollar.

Bid/Ask Spread: The spread is the difference between the bid and ask price.

Bid Price: The bid is the price the market is willing to buy a specific currency pair. At this price, a forex trader can sell the base currency. It appears on the left of the quotation. As an example, if the USD/CHF is equal to 1.4527/32, the bid price is 1.4527; meaning you can sell one US Dollar for 1.4527 Swiss Francs.

BOJ: Japan's central bank (Bank of Japan).

Break-even: The break-even point is the price at which you have neither achieved a profit nor suffered a loss.

Breakout: A breakout happens when the price bursts out of a congestion pattern such as a trading range, flag or pennant, or goes through some other support or resistance level. Oftentimes, the term "breakout" is used to describe upward movements, while "breakdown" is used to describe downward breakouts. (visual example)

Broker: A person or a company that acts as a "middleman", pairing together sellers and buyers for a commission or a fee. On the other hand, a "dealer" commits its own money, taking 1 side of a position, with the objective of earning a profit off of the spread by closing out the position in a later trade with another trader.

Bull Market: A market that is characterised by rising prices.

Buy Limit order: An order to buy at a price that is lower than the current price. (see picture)

Buy Stop order: An order to buy at a price that is higher than the current price. (see picture)

C

Cable: The British pound/US Dollar exchange rate GBP/USD.

Carry Trade: This technique entails borrowing from a currency whose interest rate is generally low (usually the yen) and investing this money in assets or currencies that earn significantly higher rates. An example would be if you borrowed yen at a rate of 0.5% and invested in New Zealand at a rate of 8.25%.

CFD: A Contract for Difference is a special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying. (The advantages of trading CFDs)

Commodities: A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same category, and which investors can buy or sell, usually through futures contracts. The price of a commodity is subject to supply and demand. Risk is actually the reason trading of basic agricultural products began. For example, a farmer risked the cost of producing a product ready for market at some time in the future because he didn't know what the selling price would be.

Correlation: A statistical measure referring to the relationship between 2 or more variables (events, occurrences, etc...). A correlation between 2 variables suggests some causal relationship between these variables. Typically, the Swiss Franc is closely correlated with the German Mark. The correlation coefficient measures the degree of similarity in the fluctuations between currency pairs. (Currency pair correlation chart)

Cross (or currency pair): When someone invests in currencies, he's buying one currency against another one. These two currencies form a pair (ex: EUR/USD).

Cross rate (or parity): The exchange rate between 2 currencies where neither of the currencies are the USD.

Currency Pair: Every Forex trade involves the simultaneous buying of one currency and the selling of another currency. These two currencies are always referred to as the currency pair in a trade.

D

Day Trading: Refers to a style or type of trading where trade positions are opened and closed during the same day, that way a portfolio is held in cash during the hours that the market is closed. The idea is to make small profits using high leverage, and making many transactions so as to maximise overall profits.

Dealer: Someone 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, bringing buyers and sellers together for a fee or a commission.

Deferred Order: (see picture for the 4 types of automatically triggered orders you can make)

Direct Market Access (DMA): An investor who has direct access to the financial markets can intervene directly in the order book of each market and place orders in real-time at current prices (see the "No Dealing Desk" definition). The investor can therefore visualise the market's depth by observing the market's trends.

Drawdown: Reduction in account equity from a trade or series of trades. An important indicator that allows you to measure the maximum risk of loss using a strategy and the ability to climb back up.

E

ECB (European Central Bank): The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary policy covering the 16 member States of the Eurozone. It was established by the European Union (EU) in 1998 with its headquarters in Frankfurt, Germany.

ECN (Electronic Communication Network): ECN brokers feed and display in real-time the ECN order book data and the prices that the banks apply on the interbank market. This helps improve the market's transparency by providing information to all participants. Typically, ECN brokers are paid by a commission of the volume traded. With ECN brokers, all transactions are directly processed on the interbank market (see the "No Dealing Desk" definition).

Executable Streaming Prices (ESP): In ESP mode, transactions are executed with just one click. This is the most competitive form of trading since there is no slippage. The customer clicks on the buy or sell price and the transaction is immediately processed.

Exotic Currency: An exotic is a currency pair in which one currency is the USD and the other is a currency from a smaller country such as the Polish Zloty. There are approximately 25 exotics that can be traded.

Expert Advisor (EA): A software program that automates the process of placing trade orders.

F

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.

Fed (Federal Reserve): The Central Bank of the United States.

G

Gap: The price gap between consecutive trading ranges (last night's closing price vs. today's opening price, for example the low of the current range is higher than the high of the previous range). In theory, prices would come back to this zone in order to fill in that gap, while continuing the initial trend, however, this doesn't always happen. In some cases gaps are not filled in. (Visual example of a gap)

H

Hedging: The practice of having both a buy and a sell position on a same currency pair.

I

IF DONE Order: A Contingent or ‘If Done’ order is an order that is not activated until another separate order is executed. The contingent order facility enables you to attach orders to an already existing order so that you do not have to watch the markets at every moment of the day. The first order is a limit order, while the second order is either a stop, a limit or an OCO.

IMF: The International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

Interest Rate Differential: A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the forex market use interest rate differentials (IRDs) when pricing forward exchange rates. Based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts.

Introducing Broker: A person or organization which is able to perform all the functions of a broker except for the ability to accept money, securities, or property from a customer.

K

Key Rate: The key rate is the interest rate that controls (either directly or indirectly) bank lending rates and the cost of credit paid by borrowers. A central bank decides what this rate will be. An increase or a decrease in the key rate can have an influence on exchange rates.

L

Leverage: Leverage is the ratio of the amount used in a transaction to the required security deposit (margin). It is the ability to control large dollar amounts of a security with a comparatively small amount of capital. Leveraging varies dramatically with different brokers, ranging from 10:1 to 500:1. Leverage is frequently referred to as gearing. The formula for calculating leverage is: Leverage = 100 / Margin Percent.

Loop Order: A Loop Order is a perpetual or repeating order placed in anticipation of a cyclical movement in the market. It is a pair of matching orders where the first leg is active and the second dormant. When the desired price is reached for the active order, it is executed, the dormant order becomes active, and a new order (a copy of the one just executed) is created in a dormant state. This process repeats until the order is explicitly cancelled.

M

Major and Minor Currencies: The seven most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD) are called the major currencies. All other currencies are referred to as minor currencies. The most frequently traded minors are the New Zealand Dollar (NZD), the South African Rand (ZAR) and the Singapore Dollar (SGD).

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.

Margin: The amount of money needed to maintain a position. Each time the trader executes a new trade, a certain percentage of the account balance in the margin account will be earmarked as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units traded (called a lot).

N

No Dealing Desk: When an investor is in "no dealing desk" mode, each transaction is immediately processed on the interbank market. You benefit from the best market prices, provided by banks which are constantly competing against each other. Spreads can therefore be reduced but they aren't fixed (see the "Slippage" definition), especially when volatility is increasing during important economic announcements.

O

One Cancels the Other Order: A designation for two orders whereby if one of the two orders is executed then the other one is automatically cancelled.

OTC (Over the Counter): Non-regulated mutual agreement market where transactions are done outside of the markets, directly between buyers and sellers. The OTC market is less transparent than an organised market since the prices are determined by the market makers.

P

Pending Order: (see picture for the 4 types of automatically triggered orders you can make)

Prime Broker: A prime broker is a broker offering professional services specifically geared towards hedge funds and other large institutional customers. It provides custody for assets, provides financing for leverage, and prepares daily account statements for its clients, who are money managers, hedge funds, market makers, arbitrageurs, specialists and other professional investors.

Pips (or Points): The smallest unit of price of any foreign currency, representing the digits added to or subtracted from the 4th decimal place, ex: 0.0001. Depending on the context, it's usually one basis point (0.0001 for the EUR/USD, GBD/USD, USD/CHF currency pairs, and 0.01 for the USD/JPY currency pair). With certain brokers, prices may be displayed in fractional pips, so you might see 5 numbers after the decimal, ex: 0.00012 (1.2 pips).

Pull Back: A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum. (visual example)

Q

Quote Currency: The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealised profit or loss is expressed in this currency.

R

Rollover or Swap (Reconduction): All open positions (at the end of a day of trading) must be rolled over to the next day. The interest rate differential between the two currencies will determine whether a credit or a debit is applied to the client's account. This happens at midnight (meaning midnight wherever your broker is located - ex: you live in Dublin Ireland but your broker is located in Cyprus, midnight in Cyprus will be 10:00PM in your area!). It can be tripled between Wednesday night and Thursday morning. Check your broker's website, they usually post the current applicable rollover rates. A few brokers actually don't even charge rollover fees (such as eToro, but this should NOT be your only criterion for choosing a broker!).

S

Scalping: A strategy of buying at the bid and selling at the offer as soon as possible. Nothing to do with those monkeys who try to sell you concert tickets at three times the face value right outside of the venue.

Segregated Account: This means that your account is separated from your broker's accounts. In the event that the broker were to declare bankrupcy, your money will be protected since it will not be linked to the broker but to you.

Sell Limit order: An order to sell at a price that is higher than the current price. (see picture)

Sell Stop order: An order to sell at a price that is lower than the current price. (see picture)

Slippage: Refers to the difference between the price an order actually trades at and the price at which the investor was hoping to get. This is often linked to widening spreads which can occur when the market becomes especially volatile.

Spike: Unusual and significantly lower low or higher high within a series of prices.

Spot Price: The current market price. Settlement of spot transactions usually occurs within 2 business days.

Spread: This point or pip difference between the bid and ask price of a currency pair. Ex: EUR/USD = 1.4000/1.4003, the spread is of 3 pips.

Straight Through Processing (STP): In STP mode, transactions are entirely computerised and immediately processed on the market. Brokers are only paid through the spread.

Swing Trading: Swing trading consists of combining technical signals and indicators in order to select promising trades that should reach an objective over a time span of a couple of days.

T

Ticks: Just as a pip is the smallest price movement (the y-axis), a tick is the smallest interval of time (the x-axis) that occurs between two trades. Most brokers will "group" sequences of data and calculate the open, high, low and close over regular time intervals (1-minute, 5-minutes, 1-hour, daily and so forth).

Trailing Stop: A trailing stop is a feature of many trading applications which helps you lock in profits. The software will watch each of your positions. Each time one of your long positions goes up, the software adjusts your stop loss. If the prices moves back down a predetermined amount, you will hit the stop loss, and the software will automatically sell your stock.

Trading Range: Lateral tunnel, defined by a resistance and a horizontal support, in which prices will evolve during a certain length of time.

V

Volatility: Statistical measure of the change in price of a currency pair over a given period of time.

W

Warrant: A certificate that is typically issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price (call warrant), usually above the current market price at the time of issuance, for an extended period, anywhere from a few years to forever. In the event that the price of the security rises higher than the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a nice profit. Otherwise, the warrant will simply expire or remain unused. Warrants are listed on options exchanges and trade independently of the security with which it was issued.