Forex Glossary

A

Appreciation – Currencies appreciate when traders and investors on the foreign exchange market push up a currency’s value. Appreciation is marked by a rise in value against one currency, or against a basket of world currencies.

Arbitrage – A process by which an investor makes two opposite trades to make a profit on differences in pricing, interest rate policy (a carry trade, for example) or in hedging their position.

Ask Price – A price at which someone is willing to sell their currency for another. The ask price is also used in carry interest calculations, where the “ask” value is how much a bank will lend the currency to an investor, trader, or business.

At Best – An order to be processed at the best possible price currently available; a market order.

At or Better – An order that is to be processed at a certain price, or at a price more favorable to the buyer or sell.

B

Balance of Trade – The difference between exports and imports for a particular country (the United States) or a group of countries (the European Union). A country which imports more than it exports runs a negative balance of trade, also known as a trade deficit. A country which exports more than it imports has a positive balance of trade, or a trade surplus.

Bar Chart – Also known as an OHLC (Open, High, Low, and Close) chart, each bar reflects data about the movement of the market within the period the bar is supposed to represent.

Base Currency – A base currency is the pair in which a currency is denominated, and is the first currency in a pair. In the EURUSD pair, for example, the Euro is the base currency.

Bear Market – A phrase used to define a market with falling values. In the stock market, a 20% move down is considered to be a bear market. The foreign exchange market, which does not commonly move as fast as others, has differing percentage movements that constitute a bear market.

Bid Price – The price a buyer is willing to pay for a currency pair, or the rate at which an interbank will pay a trader for their currency holdings.

Bid/Ask Spread – The difference of the ask price minus the bid price. The spread is how spot forex brokers earn their money.

Broker – A single entity or person who completes transactions on behalf of buyers and sellers.

Bretton Woods – The agreement that would put the dollar on the gold standard, Bretton Woods came about from a group of 44 allied nations who decided to use the dollar for all international trade.

Bull Market – A name given to a market that rises by 20%.

C

Cable – Slang for the currency pair GBPUSD.

Candlestick Chart – A candlestick chart is similar to a OHLC bar chart, but shows rising and falling prices with color indicators, rather than bars.

Central Bank – A bank that sets interest rate policy for an entire country or a group of countries. In the United States, the Federal Reserve is the American central bank.

Closed Position – A position is a trade; thus, a closed position is a trade that has been closed with the trader no longer taking a position in the market

Contagion – The result of an interconnected financial market, contagion describes what happens when problems in one region spread elsewhere around the world.

Collateral – A sum of money or property used to back a loan.

Contract – A unit on the options exchange is a contract, on the spot currency markets, this unit is referred to as a “lot” of 100,000 individual units of currency.

Counter Currency – Listed second in a pair, the counter currency is the USD in the pair EURUSD.

Cross Currency Pairs – A currency pair that does not include the most commonly traded currency: the US Dollar. Examples: AUDJPY, EURAUD, GBPEUR

Currency – Money issued in the form of paper or credit to complete transactions in an economy.

Currency Risk – Used mostly by carry traders, currency risk is used to describe the risk in a potential change in currency values.

D

Day Trader – Traders who buy and sell intra-day, and do not commonly hold trades for a period of more than one trading day.

Depreciation – A decline in a currency value, or currency pair.

Devaluation – The name given to a process through which a central bank or government seeks to manipulate down the value of a currency against one or many other currencies.

E

End Of Day Order (EOD) – An order set for a position that is guaranteed only until closing time. If the order cannot be filled, it does not carry over to the next trading day.

European Central Bank (ECB) – The central bank in charge of setting monetary policy for all countries in the European Union.

F

Federal Reserve (Fed) – The American central bank.

Foreign Exchange – A market where currencies are bought and sold for one another.

Forward – An agreement set to deliver currency for a certain price in the future, also known as a forex future trade.

Fundamental Analysis – Using a careful analysis of economic conditions to evaluate a currency.

G

G7 – The seven leading industrial countries.

Going Long – Buying a currency pair under the idea that it will appreciate in value.

Going Short – Selling a currency now to hopefully buy back at a lower price at some time in the future.

Gross Domestic Product – The value of all goods and services produced in a single economy. Economists use the equation C + I + G + Y where C equals consumption, I equals investment, G equals government spending, and Y equals exports minus imports.

H

Hedge – A trade taken for the sole purpose of reducing downside risk.

I

Inflation – An economic event marked by rising prices for consumer goods. The Consumer Price Index (CPI) is the official measure of inflation in an economy.

Initial Margin – The amount of money required to purchase a futures contract, or other financial product, with leverage.

Intervention – Defined by the activity of a central bank or government agency to manipulate their currency values in the broad market.

K

Kiwi – Slang for the New Zealand Dollar (NZD) used among many traders.

L

Leading Indicators – Econometrics which suggest the direction for the economy into the future.

Leverage – The amount of money that can be borrowed to take a position. With 50:1 leverage, investors can buy $50 of currency for every $1 they have available.

LIBOR – The London Inter-Bank Offered Rate is the rate at which global banks lend money to one another.

Limit order – A restricted order for purchase or sale of a currency at a specified price.

Liquidity – A liquid market is one in which buyers and sellers can move in and out of large positions without swinging the market in another direction. The forex market is said to have more liquidity than any other.

Long position – A purchase order intended to create a profit on rising currency values.

Lot – A lot is 100,000 units of currency—100,000 dollars, euros, pounds, or any other currency.

M

Margin Call – A demand from a broker to an investor to put more money in their account or be forced to close a leveraged position.

Market Maker – A dealer who buys and sells at bid and ask prices to offset orders coming from different sources.

Market Risk – The risk that a specific market will affect the value of a position is known as market risk.

Mark-to-Market – An accounting method for giving assets a value equal to the current market value.

O

Offsetting transaction – An order which offsets another; a long order can be offset in whole or in part with a short position.

Open position – A trade in which a trader is currently invested.

Over the Counter (OTC) – Describes transactions that do not take place on the forex market, but instead between individual buyers and sellers. A currency exchange at an airport, for example, is an OTC transaction. Some other OTC transactions involvecurrency ETFs, which are bought and sold on the New York Stock Exchange, but do not have an immediate impact in the currency markets.

Overnight Position – A trade not closed at the end of the market.

P

Pips – The smallest measurable unit in forex, often the fourth decimal place, or the fifth significant digit.

Political Risk – Risk to a changing political environment.

Premium – The difference between current spot prices and futures prices for a currency pair.

Q

Quote – A price quoted for a currency pair. A quote is usually a bid/ask price.

R

Rally – A prompt movement in a currency pair or financial instrument.

Range – Also known as the trading range, this describes the difference between the highest and lowest price points during a specific period.

Risk Management – Methods used to reduce various risks including political, economic, and market risk.

Round trip – A complete trade.

S

Short Position – A trade meant to profit on falling values.

Sterling – Another name for British Pounds.

Stop Loss Order – An order which seeks to limit a potential loss by closing the trade at a predetermined price is a stop loss order.

Support Levels – A price at which the market is expected to rise.

T

Technical Analysis – An evaluation process that includes prices as a determining factor for future price movement is technical analysis, the supposed opposite of fundamental analysis.

Tick – The smallest possible movement in a price. A tick can be smaller than a single pip by one decimal place.

Transaction Cost – The total cost of commissions, spreads, and other fees or market expenses in buying or selling a financial instrument.

Turnover – The total amount of money that trades hands in a given period. Turnover may also describe the frequency at which investors turnover their full account—a trader with $100,000 who completes orders worth $200,000 has a turnover ratio of 2.

U

Unrealized Gain/Loss – A rise in fall in price of an investment that has not yet been sold is said to be unrealized.

US Prime Rate – Rates at which triple A rated corporations access money in the commercial paper market.

V

Volatility – A number used to describe how fast the markets change in value in a certain period of time.

W

Whipsaw – A rapid reversal in market prices is said to be a whipsaw market. Whipsaw markets usually happen after the release of large data, especially the Non-farm payroll report in the United States.