New to FX - Forex Glossary

Forex Glossary

Appreciation: An increase in the value of a financial instrument; the rising of a price in response to market demand.

Ask price: The lowest price at which a financial instrument is offered for sale. In other words a price at which traders can buy a particular currency or financial instrument from a market maker

Base currency: The currency against which other currencies are quoted. For example, EURUSD: the value of 1 Euro is expressed in USD so the base currency is the Euro; GBPCHF: the value of 1 British Pound is quoted against the Swiss Francs, the base currency is the GBP

Bear market: Market condition in a longer period of time in which the prices of financial instruments are declining.

Bid price: A price at which market maker is willing to buy. In other words a price at which traders can sell a particular currency or financial instrument to a market-maker

Broker: An individual or a company that acts as an intermediary, handling investors' orders to buy and sell currencies. Some brokers charge commission for this service.

Bull market: A prolonged period in which the prices of financial instruments rise

IB: An introducing broker is a broker-dealer that contracts with a clearing firm to handle the execution and settlement of orders that the introducing firm receives from its clients or its own trading desk to buy and sell securities.

The clearing firm, not the introducing broker, receives payments and securities from the clients and handles record-keeping. The introducing broker, who earns a commission on the transaction, typically pays a fee for each trade and interest on margin loans the clearing firms make to the clients it introduces.

Cable: British Pound Sterling

CFD: The Contract for difference (or CFD) is a leveraged, margin traded product, which is usually described as a contract between two parties, the "buyer" and the "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. CFDs are derivative products that allow traders to take advantage of prices moving up or down, enabling them to speculate on underlyings without the need of the ownership of these specific underlying products. The underlying product is an instrument, traded on an exchange, which movements are mirrored by the CFD. Underlyings can be shares, bonds, futures, commodities etc.

Close a position: Closing a position refers to ending one's exposure to movements in the market price for a currency pair.

Commission: A transaction fee charged by a broker.

Commodity: In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining. http://en.wikipedia.org/wiki/Commodities

Cross Rate: An exchange rate between two currencies that does not involve the US dollar, such as EURJPY.

Currency: Any form of money issued by a government or central bank and used as legal tender.

Currency Risk: The probability of an adverse change in exchange rates.

Daily high: The highest price achieved by a given currency pair within a day.

Daily low: The highest price achieved by a given currency pair within a day.

Deficit: A negative balance of trade or payments.

Derivative: In financial terms, a derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying).[1] It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.

Day-trading: Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day. Traders that participate in day trading are called active traders or day traders. http://en.wikipedia.org/wiki/Day_trading

ECB: European Central Bank: The Central Bank of the European Monetary Union.

Economic indicator: Any kind of statistical data showing general trends in the economy. Common indicators include employment rates, Gross Domestic Product (GDP), CPI (inflation) and retail sales.

ECN Broker: Electronic Communications Network - a type of Forex company that provides a marketplace where all its participants, clients, market makers, traders are sending competitive bid and ask quotes into the system and they are trading between each other. That is the orders are matched between parties in real time in the system and for this commission is payable for the ECN broker. ECNs allow access for its clients to the DOM (Depth of the Market) and they operate with variable spreads.

FED: Federal Reserve: The Central Bank of the United States.

FIFO: First In First Out: one of the well-known inventory valuing methods. The items acquired the earliest will be sold out first.

Forex: The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

Fundamental analysis: For a currency trader, fundamental analysis focuses on key underlying economic and political factors to determine the direction of a currency's value. There are a number of fundamental indicators that are followed by traders that reflect the health and changes of an economy and gleam insight into future FOREX changes. In the long run, fundamentals drive price action by answering key questions regarding current events.

Futures: A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a futures exchange. Futures contracts are not "direct" securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position.

FX trading hours: Unlike most other trading markets, the FX market is open for trade 24 hours a day. Three major trading periods define the daily FX market, namely the Tokyo Trading Session, the London Trading Session, and the New York Trading Sessions. Generally, the FX market is most active when sessions overlap with a US/Europe overlap between 8 AM - 12 PM (New York Time) and a Europe/Asia overlap between 2 AM - 5 AM (New York Time).

Tokyo Trading Session: 7:00 PM - 4:00 AM (EDT)

London Trading Session: 3:00 AM - 12:00 PM (EDT)

London is the largest and most important trading center in the world. Most of the world's largest banks keep their dealing desks in London and the bulk of the FX trading occurs during the London session.

New York Trading Session: 8:00 am - 5:00 pm (EDT)

The second largest trading market is the New York market. The majority of the transactions in New York occur during the US/Europe overlap.

GTC: A Good Till Cancelled order is left pending until the trader decides to cancel it, or the order is executed. Most of the FX orders are like this.

Hedge: A position or a combination of positions that reduces the risk of the trader's primary position. Or a hedge is also a type of protective investment designed to offset adverse price movements in a given asset. Typically, a hedge is an offsetting position taken in a related security. http://www.fxwords.com/h/hedge.html

HIFO: High In First Out: one of the well-known inventory valuing methods. The items acquired on the highest price will be sold out first.

Index/Indices: A national index represents the performance of the stock market of a given nation - and by proxy, reflects investor sentiment on the state of its economy. The most regularly quoted market indices are national indices composed of the stocks of large companies listed on a nation's largest stock exchanges, such as the American S&P 500, the Japanese Nikkei 225, and the British FTSE 100.

Inflation: An economic condition whereby prices for consumer goods rise, eroding real value of the currency used i.e. the purchasing power. Hyper-inflation is a very rapidly accelerating inflation which is also known as galloping inflation.

Leverage: The textbook definition of “leverage” is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest. For example, in forex, you can control $100,000 with a $1,000 deposit. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000. The is your level of margin is 1%.

LIFO: Last In First Out: one of the well-known inventory valuing methods. The items acquired last are treated as the ones sold first.

Liquidity: The ability of a market to accept large transaction with minimal or no impact on price stability. Liquid markets are usually described ‘safer’, since investors are more certain that they are able to get into or out of a trade in any market condition.

LOFO: Low In First Out: one of the well-known inventory valuing methods. The items acquired on the lowest price will be sold out first.

Limit Entry Order: are entry orders to enter the market at a more favorable price than the market price. When buying a currency pair, the limit entry will be placed below the current market price. When placing an entry order to sell, the limit entry order will be placed above the current market price.

Long: A long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with going short. Similarly, a long position in a futures contract or similar derivative means that the holder of the position will profit if the price of the futures contract or derivative goes up. Note that it is important to consider the value of the option, not the value of the underlying instrument, as the value of a put option will increase when the value of the underlying instrument decreases. This is in contrast to short selling.

Lot: Spot Forex is traded in lots. The standard size for a lot is 100,000 units. There is also a mini lot size and that is 10,000 units. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Margin: Margin is the amount of money needed as a “good faith deposit” to open a position with your broker. It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades with the interbanks. After all margin is the required equity that an investor must deposit to collateralize a position.

Margin Call: In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market. Margin call is a request from a broker or a dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer. Alternatively the client can choose to close one or more positions.

Market Maker: A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices.

Pip: The smallest incremental move that an exchange rate can make. If the EUR/USD moves from 1.3656 to 1.3657, that is ONE PIP. A pip is the last decimal place of a quotation, given that four decimal places are used (as some quotations display five or more decimal places, indicating a fraction of a pip). Based on pips, you measure your profit or loss.

Resistance level: A price level at which you would expect selling to take place.

Roll over: Rollover refers to the interest traders may earn or be charged daily, for positions in the spot Forex market.

Every currency pair has an interest rate associated with it. Depending on the currency pair you trade, you will pay or earn interest at the end of the trading day at 5:00pm EST. To earn interest, you must buy a currency with a higher interest rate than the one they are selling.

For example: USD/HUF. In 2011, the US Dollar average yearly interest rate is 0.25% and the Hungarian Forint average yearly interest is about 6% . A trader that sells this pair would make the difference of at about 5.75% on the year by simply holding the position.

On the Spot Forex accounts, at the end of each trading day at 5:00pm EST, traders will see the rollover charge or income posted.

Short: Short selling (also known as shorting or going short) is the practice of selling assets, usually securities, currencies that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset. http://en.wikipedia.org/wiki/Short_%28finance%29

Spot Price: The current market price i.e. the present delivery price of a given instrument being traded on the spot market. Settlement of spot transactions usually occurs within two business days.

Spread: The difference between the bid and the offer (ask) price. The more buyers and sellers competing in the same space the lower the spreads (cost of trading) will be.

Stop entry order: The opposite of limit entry orders. Stop entry orders are orders to enter the market at a less favorable price. When buying a currency pair, the stop entry will be placed above the current market price. When selling a currency, the stop entry order will be placed below the current market price.

Stop entry orders are conducive to breakout strategies, where the trader believes that if the specified rate is reached, the trend's movement is confirmed and thus will continue in that direction.

Stop order: An Order to Buy or Sell a Security once a specific price is reached

Stop loss order: An order to close a position when a particular price is reached in order to minimize loss.

Support Level: A price level at which you would expect buying to take place.

STP: Straight Through Processing - a direct, fully automated connection is set between the STP and the liquidity providers i.e. trades are executed immediately without dealer intervention. All trades are routed to liquidity providers and the more liquidity providers an STP has the better fills are available for the clients. STP brokers can offer variable or also fixed spreads. STPs match the quotes of the liquidity providers, and get the best available price, put their mark up on the top of the best quote and they provide it to the clients. Why traders look for NDD (no dealing desk) brokers like STPs, is transparency, better and faster fills and anonymity.  STP brokers such as ECN brokers are interested to see their clients trading profitable, so that a broker can continue earning on spreads or in the other case on commission.

Take profit: An order to close a position when a particular price is reached to ensure a profit.

Ticker code: It used to uniquely identify a financial instrument listed and traded on an exchange.

Trailing stop: A feature attached to stop-loss orders, where the stop position is automatically moved as the market moves to trader's advantage. An example for this: a trader changes his stop to 1.3400 with a trailing stop of 50 pips. The trail is benchmarked from the moment the trail is confirmed. Should the market move 50 pips to the trader's advantage, then the stop will automatically move 50 pips to the trader's advantage. And the trailing stop will continue to move up in those 50 pip increments.

Technical analyses: An effort to forecast future market activity by analyzing market data through the use of charts, price trends, and volume.