Forex Terms
Below is a list of some of the most
commonly used forex terms, sorted in alphabetical
order.
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 price
differentials between markets.
Ask Price –
Sometimes called the Offer Price, this is the forex market
price for traders to buy currencies. Ask Prices are shown on
the right side of a quote – e.g. EUR/USD 1.1965/68 – means
that one euro can be bought for 1.1968 US dollars.
At or Better
– An order to deal at a specific rate or better.
At-the-Money
– An option whose strike/exercise price is equal to or near
the current forex market price of the underlying instrument.
Bar Chart – A type of chart used in Technical
Analysis. Each time division on the chart is displayed as a
vertical bar which show the following information – the top
of the bar is the high price, the bottom of the bar is the
low price, the horizontal line on the left of the bar shows
the opening price and the horizontal line on the right of
the bar shows the closing price.
Base Currency – is the first currency in a currency
pair. A quote shows how much the base currency is worth in
the quote (second) currency. For example, in the quote - USD/JPY
112.13 – US dollars are the base currency, with 1 US dollar
being worth 112.13 Japanese yen.
Bid Price – is the price a trader can sell
currencies. The Bid Price is shown on the left side of a
quote - e.g. EUR/USD 1.1965 / 68 – means that one euro can
be sold for 1.1965 UD dollars.
Bid/Ask Spread – is the difference between the bid
price and the ask price in any currency quotation. The
spread represents the broker's fee, and varies from broker
to broker.
Broker – the intermediary between buyer and seller.
Most forex brokers are associated with large financial
institutions and earn money by setting a spread between bid
and ask prices. Some brokers offer forex training or market
analysis as part of their services; ask your broker if they
offer this sort of service.
Candlestick Chart - A type of chart used in forex
Technical Analysis. Each time a division on the chart is
displayed as a candlestick – a red or green vertical bar
with extensions above and below the candlestick body. The
top of the extension shows the highest price for the chart
division and the bottom of the extension shows the lowest
price. Red candlesticks indicate a lower closing price than
opening price, and green candlesticks indicate the price is
rising. Spot forex might be indicated.
Cross Currency – A currency pair that does not
include US dollars – e.g. EUR/GBP.
Currency Option - Option contract which gives the
right but not the obligation to buy or sell a currency with
another currency at a specified exchange rate during a
specified period.
Currency Pair
– Two currencies involved in a forex transaction – e.g. EUR/USD.
Day Trading
– Refers to opening and closing the same position or
positions within one day's trade.
Economic Indicator – A statistical report issued by
governments or academic institutions indicating economic
conditions within a country.
First In First Out (FIFO) – refers to the order that
open orders are liquidated. The first orders to be
liquidated are the first that were opened.
Foreign Exchange (FOREX, FX) – Simultaneous buying of
one currency and selling another.
Forward – A
deal that will commence at an agreed date in the future.
Forward trades in forex are usually expressed as a margin
above (premium) or below (discount) the spot rate. To obtain
the actual forward forex price, one adds the margin to the
spot rate. The rate will reflect what the forex rate has to
be at the forward date so that if funds were re-exchanged at
that rate there would be no profit or loss (i.e. a neutral
trade). The rate is calculated from the relevant deposit
rates in the 2 underlying currencies and the spot forex
rate. Unlike in the futures market, forward trading can be
customised according to the needs of the two parties and
involves more flexibility. Also, there is no centralised
exchange.
Fundamental Analysis – Analysis of political and
economic conditions that can affect currency prices. This
type of analysis is used for long-term investments.
Hedging –
The practice of undertaking one investment activity in order
to protect against loss in another, e.g. selling short to
nullify a previous purchase, or buying long to offset a
previous short sale. While hedges reduce potential losses,
they also tend to reduce potential profits.
Leverage or Margin – The ratio of the value of a
transaction to the required deposit. A common margin for
forex trading is 100:1 – you can trade currency worth 100
times the amount of your deposit.
Limit Order – An order to buy or sell when the price
reaches a specified level.
Long Position
- A market position where the Client has bought a currency
he previously did not hold/own. This is normally expressed
in base currency terms.
Lot
– The size of a forex transaction. Standard lots are worth
about 100,000 US dollars.
Major Currency – The US dollar, euro, German mark,
Swiss franc, British pound, and the Japanese yen are the
major currencies.
Minor Currency – The Canadian dollar, the Australian
dollar, and the New Zealand dollar are the minor currencies.
Margin Call
– A demand for additional funds. A requirement by a clearing
house that a clearing member (or by a brokerage firm that a
client) brings margin deposits up to a required minimum
level to cover an adverse movement in price in the market.
One Cancels the Other (OCO)
– Two orders placed simultaneously with instructions to
cancel the second order on execution of the first. This may
be used to avoid loss and even make profit if the market
moves opposite to the anticipated trend, for example.
Open Position – An active trade that has not been
closed.
Pip (or Points) - The term used in currency market to
represent the smallest incremental move an exchange rate can
make. Depending on context, normally one basis point (0.0001
in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case
of USD/JPY).
Quote Currency – The second currency in a currency
pair. In the currency pair USD/EUR the euro is the quote
currency.
Resistance - A price level at which you would expect
selling to take place.
Rollover –
Extending the settlement time of spot deals to the current
delivery date. The cost of rollover is calculated using swap
points based on interest rate differentials.
Short - To
go 'short' is to have sold an instrument without actually
owning it. Holding a short position is to sell a currency
with expectations that the price will decline so it can be
bought back in the future at a profit.
Spot - A
transaction that occurs immediately, but the funds will
usually change hands within two days after deal is struck.
Spread -
The difference between the bid and offer (ask) prices; used
to measure market liquidity. Narrower spreads usually
signify high liquidity.
Stop Loss Order
- An order to buy or sell at the market when a particular
price is reached, either above or below the price that
prevailed when the order was given. This is the most
commonly used order for reducing trade losses.
Technical Analysis – Analysis of historical market
data to predict future movements in the market. This type of
analysis is used for short-term investments.
Tick – The minimum change in price.
Transaction Cost – The cost of a forex transaction –
forex transactions are typically commission-free and the
cost is represented by the spread between bid and ask
prices.
Volatility - A statistical measure of a market or a
security's price movements over time that is calculated by
using standard deviation. Associated with high volatility is
a high degree of risk.
There are also less commonly used forex
terms that were not mentioned here. However, those forex
terms mentioned above should be sufficient to give an
elementary understanding of the forex market’s trading
expressions.
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