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Forex Glossary Of Terms

A

Adjustable Peg: Term for an exchange rate regime where a country’s exchange rate is “pegged” (fixed) in relation to another currency.

American Depositary Receipt (ADR): A security that physically remains in a foreign country, usually in the custody of a bank, but is traded in the U.S.

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

Arbitrage: The simultaneous purchase and sale of similar instruments in different markets to take advantage of price discrepancies.

Ask price: The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract. At this price, the trader can buy the base currency.

AUD/USD: Australian Dollar/US Dollar

Aussie: Forex slang name for the Australian dollar.

Average daily volume: Equals volume for a specified time period divided by the number of twenty four hour business days within that same time period.

B

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

Bar Chart: A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a horizontal line to the left of the bar, and the closing price, which is marked with a horizontal line of the right of the bar.

Base currency: United States Dollars. The currency to which each transaction shall be converted at the close of each position.

Basis point: For many currencies, this denotes the fourth decimal place in the exchange rate and represents 1/100 of one percent (.01%). For such currencies as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.

Bear: One who believes prices will move lower.

Bear Market: A currency market in which prices are declining.

Bid:- The price at which a buyer has offered to purchase the currency.

Bid/Ask Spread: The difference between the bid and offer price.

Breakaway Gap: A gap in prices that signals the end of a price pattern and the beginning of an important market move.

Broker: An individual or firm that acts as an intermediary, putting together buyers and sellers. Forex brokers are compensated by revenues from their activities as currency dealers, including monies from buying, selling, converting, and holding currencies, interest on deposited funds, and rollover fees.

Brokerage House: A firm that handles orders to buy or sell currency on behalf of its customers.

Bull: One who expects prices to rise.

Bull Market: A market in which prices are rising.

Bundesbank: Central Bank of Germany.

C

Cable: Trader language referring to the Sterling/US Dollar exchange rate. The name came about because the rate was originally transmitted via a transatlantic cable beginning round the mid 1800′s.

Call Rate: The overnight interbank interest rate.

Central Bank: A government or almost governmental organization that manages a country’s monetary policy. As an example, the US central bank is the Federal Reserve. As another example, as you read above, the German central bank is the Bundesbank.

Charting: The use of charts to analyze market behavior and anticipate future price movements.

Chartist: One who engages in technical analysis and/or uses charting techniques.

CHF/JPY: Swiss Franc/Japanese Yen

Closed position:  A transaction which leaves the trade with a zero net commitment to the market with regards to a particular currency.

Cross Rate: An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.

Currency Risk: The risk of incurring losses resulting from an adverse change in exchange rates.

D

Day Trader: A trader who establishes and liquidates positions within one day’s trading, ending the twenty four hour day with no open position in the market.

Day Trading: Refers to establishing and liquidating the same position or positions within one hour day’s trading, thus ending the twenty four hour day with no open position in the market.

Discretionary Account: An arrangement by which the holder of the account gives written power of attorney to another person, often his or her broker, to make trading decisions. Also known as a controlled or managed account.

Dollar Rate: When a given amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate which is quoted as variable amount of US Dollars to one Sterling.

Double ‘Top’, ‘Bottom’: A bar chart formation that signals a possible trend reversal. In a point and figure chart, double tops and bottoms are used for buy and sell signals.

Down Trend: A price trend characterized by a series of lower highs and lower lows.

E

Economic Indicator: A statistics which indicates current economic growth rates and trends such as retail sales and employment.

ECN Broker: A type of Forex brokerage firm that provide its clients direct access to other Forex market participants.

ECU:  European  Currency Unit.

EDI:   Electronic  Data Interchange.

Electronic Trading: Trading via computer through an automated, order entry and matching system.

Equilibrium Price: The market price at which the quantity supplied of an item equals the quantity demanded.

EUR/CHF: Euro/Swiss Franc

EUR/GBP: Euro/British Pound

EUR/JPY:  Euro/Japanese Yen

EUR/USD:  Euro/US Dollar

EURO:  The currency of the European Monetary Union (EMU).

European Central Bank (ECB): the Central Bank for the new European Monetary Union.

European Terms: A method of quoting exchange rates, which measures the amount of foreign currency needed to buy one U.S. dollar, i.e., foreign currency unit per dollar. Reciprocal of European Terms is another method of quoting exchange rates, which measures the U.S. dollar value of one foreign currency unit, i.e., U.S. dollars per foreign units.

Exhaustion Gap: A gap in prices near the top or bottom of a price move that signals an abrupt turn in the market.

F

Federal Funds: Member bank deposits at the Federal Reserve; these funds are loaned by member banks to other member banks.

Federal Funds Rate: The rate of interest charged for the use of federal funds..

Federal Reserve System: A central banking system in the United States, created by the Federal Reserve Act in 1913, designed to assist the nation in attaining its economic and financial goals. The structure of the Federal Reserve System includes a Board of Governors, the Federal Open Market Committee, and 12 Federal Reserve Banks.

Forex Market: An over-the-counter market where buyers and sellers conduct foreign exchange business by telephone, computer, or other means of communication.  Also referred to as foreign exchange market.

Fundamental Analysis: The study of supply and demand information to help project future prices. For securities, a method of evaluating the prospects of a security by analyzing accepted accounting measures such as earnings, sales, and assets.

Fundamentalist: One who engages in fundamental analysis.

FX:  Foreign Exchange.

G

G8: The international forum for the governments of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States.

GBP/CHF: British Pound/Swiss Franc

GBP/JPY: British Pound/Japanese Yen

GBP/USD:  British Pound/US Dollar

Gap: A price area at which the market didn’t trade from one day to the next.

Gap Theory: A type of technical analysis that studies gaps in prices.

Going Long: The purchase of a currency for investment or speculation.

Going Short: The selling of a currency not owned by the seller.

Gross Domestic Product: The value of all final goods and services produced by an economy over a particular time period, normally a year.

Gross National Product: Gross Domestic Product plus the income accruing to domestic residents as a result of investments abroad less income earned in domestic markets accruing to foreigners abroad.

H

Head and Shoulders: A sideways price formation at the top or bottom of the market that indicates a major market reversal.

High: The highest price of the day for a particular currency.

Hit the bid: Acceptance of purchasing at the offer or selling at the bid.

I

Interbank Rates: The Foreign Exchange rates that large international banks quote other large international banks.

Initial Margin: The deposit a Forex trader needs to make before being allocated a trading limit.

Initial Margin Requirement: The minimum portion of a new security purchase that a Forex trader must pay for in cash.

K

Kiwi: A Forex slang name for the New Zealand currency — New Zealand dollar.

L

Lagging Indicators: Market indicators showing the general direction of the economy and confirming or denying the trend implied by the leading indicators. Also referred to as concurrent indicators.

Leading Indicators: Market indicators that signal the state of the economy for the coming months.  Some leading indicators include: average manufacturing workweek, initial claims for unemployment insurance, orders for consumer goods and material, percentage of companies reporting slower deliveries, change in manufacturers’ unfilled orders for durable goods, plant and equipment orders, new building permits, index of consumer expectations, change in material prices, prices of stocks, price of currencies, and changes in the money supply.

Leverage: The use of a smaller amount of assets to control a greater amount of assets.  For example, the use of a relatively small amount of cash to control a currency with a relatively high notional value.

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

Liquidity: The measure of markets which describes the relationship between the trading volume and the price change.

Long: One who has bought a currency pair to establish a market position and who has not yet closed out this position through an offsetting  procedure.  The opposite of short.

Lot: The term used to describe a designated number of Forex contracts, e.g., a 5 lot purchase. Also called “cars.”

Low: The lowest price of the day for a particular currency.

M

Maintenance Margin / Maintenance Performance Bond: A sum, usually smaller than the initial margin, which must remain on deposit in the customer’s account for any position. A drop in funds below this level requires a deposit back to initial margin levels.

Margin Account: Account which is used to hold investor’s deposited money for FOREX trading.

Margin Call: A call from a clearinghouse to a clearing member, or from a Forex brokerage firm to a customer, to bring margin deposits up to a required minimum level.

Mark-To-Market: The daily adjustment of accounts and margin requirements to reflect profits and losses. Positions are marked-to-market.

Market Close: As you read in the ‘FPMP’, this refers to the time of day that the Forex market closes. In the 24 hour-a-day foreign exchange market, there is no official market close. 5:00 PM EST is often referred to and understood as the market close because value dates for spot transactions change to the next new value date at that time.

Market Order: An order to be filled immediately at the best price available.

Market Price: The current price for which the currency is traded for on the market.

Minimum Price Fluctuation: The smallest increment of price movement possible in trading a given currency  contract.

Momentum: The tendency of a currency pair to continue movement in a single direction.

Money Supply: The amount of money in the economy, consisting primarily of currency in circulation plus deposits in banks: M-1 refers to the U.S. money supply consisting of currency held by the public, traveler’s checks, checking account funds, NOW and super- NOW accounts, automatic transfer service accounts, and balances in credit unions. M-2 refers to the U.S. money supply consisting M-1 plus savings and small time deposits (less than $100,000) at depository institutions, overnight repurchase agreements at commercial banks, and money market mutual fund accounts. M-3 refers to the U.S. money supply consisting of M-2 plus large time deposits ($100,000 or more) at depository institutions, repurchase agreements with maturities longer than one day at commercial banks, and institutional money market accounts.

Moving Average Chart: A chart recording moving averages of market prices.

Moving Averages: A type of technical analysis using the averages of settlement prices.  A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.

N

Net Position: The amount of currency bought or sold which has not yet been offset by opposite transactions.

NZD/USD: New Zealand Dollar/US Dollar

O

Offer: Indicates a willingness to sell at a given price; opposite to the bid.  Also called the ask price.

Open Order: Any order resident in the order book, such as a day order or a good-til-cancelled order.

Open Position: Position on buying (long) or selling (short) for a currency pair.

Order: Order for a broker to buy or sell the currency with a certain rate.

Overbought/Oversold: A technical opinion of a market which has risen/fallen too much in relation to underlying fundamental factors.

Over-The-Counter Market (OTC): A market where foreign currencies are bought and sold by telephone, computer, and other means of communications.

Overvalued: Describing a currency trading at a higher price than it logically should.  Normally associated with the results of price predictions by mathematical models.  If a currency is trading in the market for a higher price than the model indicates, the currency is said to be overvalued.

P

Pip: This is the smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Pips are also called Points.

Point and Figure Chart: A graph of prices charted with x’s for price increases and o’s for price decreases, used by the chartist for buy and sell signals.

Position Trader: A trader who takes a position in the market and may hold that position over a long period of time.

Prime Rate: Interest rate charged by major banks to their most creditworthy customers.

Principal Value: The original amount invested by the Forex trader.

Price Transparency: The ability of all Forex participants to view or deal at the same price.

Producer Price Index (PPI): An index that shows the cost of resources needed to produce manufactured goods during the previous month.

R

Rally: An upward movement of prices following a decline.

Range: The price span (‘High’ to ‘Low’) during a given trading session or other time period.

Rate: The price of one currency in terms of another, often used for dealing purposes.

Reciprocal of European Terms: One method of quoting exchange rates, which measures the U.S. dollar value of one foreign currency unit, i.e., U.S. dollars per foreign units. See also

Resistance, Resistance Line: A term in technical analysis indicating a price area where sufficient supply exists such that the price may have trouble rising above that area.

Retracement: A price move in the opposite direction of a recent trend.

Return (on investment): The percentage profit that one makes, or might make, on his investment.

Risk (Foreign Exchange Risk): The risk that the exchange rate on a foreign currency will move against the position held by a Forex trader such that the value of the investment is reduced.

Runaway Gap: A gap in prices after a trend has begun that signals the halfway point of a market move.

S

Scalper: A trader who trades intending to make small, short-term profits during the course of a trading session.

Selling Climax: An extraordinarily high volume occurring suddenly in a downtrend signaling the end of the trend

Sideways Trend: Seen in a bar chart when prices tend not to go above or below a certain range of levels.

Spot Price: The current market price of a currency

Spread: (1) During trading, the difference between the best bid and the best offer for a given currency pair at a given point in time. Referred to as the bid-offer spread or bid-ask spread.
Standard Deviation: A statistical measure of the spread of a distribution.  In financial markets, often used as a measure of the price volatility of an instrument – e.g. the magnitude of the daily price changes in a given currency.

Sterling: Another term for the British currency, ‘The Pound.”

Stop-Limit Order: This is an order to sell or buy a contract (lot) when the market reaches a certain price. Usually this is a combination of stop-order and limit-order.

 

Stop-Loss Order:  This is an order to sell or buy a contract (lot) lot for a certain price or worse. It is often used to avoid large losses when the market moves in the opposite direction.

 

Support: Price level for which intensive buying can lead to the price decreasing (down-trend).

Suitability Requirement: A requirement that any investing strategy fall within the financial means and investment objectives of a Forex investor.

Suitable: Describing a strategy or trading philosophy in which the Forex investor is operating in accordance with his or her financial means and investment objectives.

Support, Support Line: A term in technical analysis indicating a price area where sufficient demand exists such that the price may have trouble falling below that area.

T

Take Profit Order: A Forex trader’s instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on that position.

Technical Analysis: The study of historical price patterns to help forecast future prices.

Trader: A market participant who buys and sells instruments on an exchange.

Transaction: This term is context-dependent. From an operational standpoint, it refers to a matched trade, but has other meanings for clearing and systems purposes.

Treasury Bill: A Treasury bill is a short-term U.S. government obligation with an original maturity of one year or less. Unlike a bond or note, a bill does not pay a semi-annual, fixed rate coupon. A bill is typically issued at a price below its par value and is therefore a discounted instrument. The level of the discount depends on the level of prevailing interest rates. In general, the higher short-term interest rates are, the greater the discount. The return to an investor in bills is simply the difference between the issue price and par value.

Treasury Bond: U.S. Government-debt security with a coupon and original maturity of more than 10 years. Interest is paid semiannually.

Treasury Note: U.S. Government-debt security with a coupon and original maturity of one to 10 years.

Trend: The general direction of the market.

Two-Way Price: This is a quote in the Forex that indicates a bid and an offer.

U

Undervalued: Describing a currency trading at a lower price than it logically should.  Normally associated with the results of price predictions by mathematical models. If a currency is trading in the market for a lower price than the model indicates, the currency is said to be undervalued.

Uptick: This is a new price quote at a price higher than the preceding quote.

UP Trend: A price trend characterized by a series of higher highs and higher lows.

USD/CAD: US Dollar/Canadian Dollar

USD/CHF: US Dollar/Swiss Franc

USD/JPY: US Dollar/Japanese Yen

USD/ZAR: US Dollar/South African Rand

U.S. Treasury Bill: See treasury bill.

U.S. Treasury Bond: See treasury bond.

U.S. Treasury Note: See treasury note.

V

Volatility: This is a statistical measure of the number of price changes for a given currency pair in a given period of time.

W

Wire House: An alternate term for a brokerage firm.

Whipsaw: A definition for a condition of a highly volatile market where a sharp price movement is quickly followed by a very sharp reversal.

Y

Yard: Another word used in the currency markets meaning, ‘billion.”

Yield Curve: A chart in which the yield level is plotted on the vertical axis and the term to maturity of debt instruments of similar creditworthiness is plotted on the horizontal axis.  The yield curve is positive when long-term rates are higher than short-term rates.  However, the yield curve is negative or inverted when long-term rates are lower than short-term rates.