Forex Trading Glossary | Forex Traders Glossary

A

aggregate demand

It is an economic measurement of the total demand for all the finished goods and services in an economy/sector. It indicates how current price levels relate to a nation's real GDP (Gross Domestic Product).

appreciation

It refers to an increase in the value of one currency in relation to another currency in response to market demand.

arbitrage

The purchase of a financial asset in one market and concurrent sale in another market to benefit from the price differentials is known as arbitrage.

around

Dealer jargon is used in quoting when the forward premium/discount is near parity. For example, “two-two around” would translate into 2 points to either side of the present spot.

ask rate

The rate/price at which a financial instrument is offered for sale.

asset allocation

An investment strategy that aims to balance risk and reward by allocating funds to different stocks, bonds, commodities, currencies and other asset classes as per investors objectives.

B

back office

The departments check all the settlement and related processes

balance of trade

The difference in value between a country's exports and imports.

bar charts

Bar charts are used in financial markets to convey price movements into an easily readable chart. They are basically an OHLC graphical chart used for charting prices. There is a tick on the chart which provides the price for a given time period at open, high, low, and close.

base currency

A currency that appears in a forex pair quotation. There is always one currency in the forex market which is always quoted in relation to another as you are buying one while selling the other. The base currency will appear first, followed by the second (quote) currency. For instance, if you are looking at the EUR/USD pair, here the base currency is the Euro, and the quote currency is the US dollar.

bear market

A market characterized by falling prices.

bid rate

The maximum price that a buyer is willing to pay for.

C

cable

A nickname used for GBP/USD pair. The term originated because of the fact that the rate was originally transmitted via transatlantic cable beginning in the mid-1800s when GBP was the currency of international trade.

candlestick chart

Also called the Japanese candlestick chart, is a type of bar chart used essentially to describe the price movements of a security, derivative or currency. Each “candlestick” typically shows one day and represents the difference between opening and closing price. If opening price is higher than closing price, the candle/rectangle is shaded. If closing price is higher than the opening price that area of the chart is not shaded.

central bank

A government or quasi governmental organization that oversees a country's monetary policies and prints currencies. For example - The Federal Bank Reserve (U.S), The European Central Bank (Europe), Reserve Bank of Australia (Australia).

chartist

An individual (also known as a technical trader) who uses charts and graphs to interpret historical data in order to find trends and predict future price movements.

choice market

Also referred to as a locked market, it's a market with no spread. It means that a currency can be bought at the same price as it can be sold in the market.

clearing

Process of reconciling or settling purchases and sales of various financial instruments.

contagion

The tendency of an economic crisis to spread from one market to another.

collateral

Something has been given by a borrower to secure a loan or as a guarantee of performance.

commission

A transaction fee is charged by the broker from the traders/investors.

confirmation

Documents exchanged by counterparts to a transaction that states the terms of said transaction.

contract(unit or lot)

The standard unit of trading.

counterparty

One of the participants, either a bank or customer, with whom a financial transaction is made.

country risk

Risks associated with cross-border transactions such as legal and political conditions like war.

cross rates

Exchange rates between two currencies that do not involve the U.S Dollar. A cross rate is said to be nonstandard in the country where the currency pair is quoted.

currency

A means of exchange in the form of paper, metal or digital issued by a government/ central bank and used as legal tender.

currency risk

Risk of incurring losses due to an adverse change in exchange rates.

D

day trading

A trading strategy involving opening and closing positions within the same day.

dealer

A person who acts as a principal or counterpart to a transaction. The principal basically is on one side in the hopes of earning good profit by closing out the position in a subsequent trade with another party.

deficit

An amount by which the cost of a country's imports exceeds the cost of its exports or also called a negative balance of trade.

delivery

The settlement of a transaction by delivery of funds. OR The date of maturity of a contract, when the final settlement of a transaction is made by exchanging the currencies.

depreciation

The decline in a currency's value relative to another currency is either due to market conditions or other factors.

derivative

Derivatives derive their value from the price of an underlying asset and are often used by traders as an instrument to speculate on the future price movements of an asset without having to buy the asset itself. An option is the most common derivative instrument.

devaluation

A currency devalues when it's value declines in relation to one or more other currencies.

E

economic indicator

A statistical measure issued by the government or a non government institution that indicates the economic condition of an economy like GDP, Foreign investment, Trade deficits, Employment rates, etc.

end of day order

An order to buy or sell at a specified price that is only open until the end of the trading day, typically 5 PM/17:00 New York time.

euro

Currency of the European Monetary Union(EMU).

european central bank

Established in 1998, its the Central Bank for the European Monetary Union (EMU).

F

federal deposit insurance corporation(fdic)

An independent federal agency protecting consumers and the U.S. financial system. The FDIC is best known for deposit insurance as they help customers avoid losses in the event of bank failures.

federal reserve system

The most powerful financial institution in the world. The Federal Reserve System was founded by the U.S. Congress in 1913 with an aim of providing a stable monetary system and comprises a central government agency and 12 regional federal reserve banks.

fixed exchange rate

An exchange rate regime is where a currency's value is set by monetary authorities against the value of one or more currencies.

floating exchange rate

An exchange rate regime where the currency's value is fixed by the forex market based on demand and supply relative to other currencies.

flat/square

Dealer jargon is used to describe a position that has been completely reversed. For instance, you bought $100,000 and then sold $100,000, hence creating a flat position.

foreign exchange

Foreign Exchange is the exchange of one currency for the other. It is a global online network where traders buy and sell currencies. It has no physical location and operated 24 hours a day.

forward

Pre specified rate to lock in a price at a specific future time, based upon the interest rate differential between the two currencies involved.

forward contracts

An agreement between the two parties to buy or sell an asset at a specified rate on a pre-specified expiry date. Both parties are obliged to fulfill their end of the agreement.

forward rates(swaps)

Forward Rate is a cash price of 2 currencies interest difference for a fixed period and can be easily calculated provided the fixed interest rates of each currency and the current spot rate is given.

forward trading

Forward Trading is making the opposite trade of a spot trade at a given time. Traders often swap their trades forward ranging from a week to months. Even though the forward contract occurs on a future date, still the position can be closed out at any time. Then that closing part of the position is swapped forward to the same future value date.

forward points

Simply the pips which are added or subtracted from the current exchange rate to compute a forward price.

fundamental analysis

Method of analyzing the factors that may influence the price in the future. This form of analysis is based on external events and influences as well as industry trends where as technical traders derive information from charts and patterns.

futures contract

A legal agreement between two parties to trade at a predetermined price, on a predetermined date in the future. Futures are traded over an exchange and can be used to gain exposure to a wide range of assets.

G

gearing

When a trader is trading on a partial debt or margin.

group of five (g5)

Five leading industrial nations- France, Japan, the UK, Germany, and the US meet from time to time with the motive to discuss common economic problems.

group of seven (7)

The "Group of Seven" are 7 leading non-communist industrialized countries comprised of France, Germany, the UK, Germany, and the US plus Canada and Italy. They are now known as the G8 since the addition of Russia.

group of ten (g10)

Also called "The Paris Club" composed of Canada, Belgium, France, Germany, Italy, Sweden, Japan, the UK, the US, and the Netherlands. It was formed in 1962 to make the funds available to the IMF and assist member countries with balance of payment difficulties.

goldilocks economy

A term that is used to describe an economy that is not too hot or too cold and sustains moderate growth with a nominal rate of inflation, that allows a market-friendly monetary policy.

Good ‘til Cancelled (GTC)

An order is valid until it is canceled or completed irrespective of the amount of time when the order was placed.

H

hedging

A risk management strategy whereby investors ‘hedge’ to protect themselves from adverse price movements by taking two opposing positions and thereby reduce risk. In the context of currency transactions it would protect one against fluctuations in the forex exchange rate.

I

inflation

A continuous increase in the general price level of consumer goods erodes purchasing power.

initial margin

The initial deposit of collateral required to enter into a position is a guarantee of future performance.

inter bank rates

The foreign exchange rates at which large international banks quote other large international banks.

L

leading indicators

Economic variables are considered to predict future economic activity.

leverage

Leverage is offered by brokers to maximize trader's buying power. It can be described as ‘borrowed capital’ from a traders point of view and increases your potential returns since you can trade much bigger volumes with these funds than your limited capital. It is expressed in ratios such as 1:100, 1:300 and so on. So with a leverage of 1:100 a trader's buying power is magnified 100 times.
Disclaimer: Leverage amplifies possible returns as well as losses.

libor

The London Interbank offered Rate. It is the benchmark interest rate at which major global banks lend to each other.

limit order

An order to execute a trade at a specified price or better. For example, if the current price of EUR/USD is 1.08502/1.08522, then a limit order to buy EUR would be at a price below the market price,1.0820.

line charts

A price chart connecting single prices (all closing prices) for a selected time period.

liquidity

A currency pair's ability to be bought and sold in the market without causing a significant change in its exchange rate.

liquidation

Closing of an existing position through the execution of an offsetting transaction.

long position

A position is said to be ‘long’ if it appreciates in value when market prices increase. When one buys a currency pair, their position is long on that pair.

M

margin

Margin is the amount of money that is required to keep a margin position open. It is the difference between the full value of your position and the funds being lent to you by a broker/leverage provider.

margin deposit

A margin deposit is the initial amount of money a trader requires to put down in order to open a leveraged trading position. It can also be known as initial margin, deposit, or simply deposit.

margin call

A margin call can be described as an alert/request/call from your broker to notify you that your maintenance margin has fallen below the minimum and your position is at risk of being liquidated. So, in such a case a broker asks a client to top up their account to maintain the existing position open.

market maker

A dealer who maintains a firm bid and ask price and is ready to make two sided market for any financial instrument.

market risk

Exposure to changes in market prices.

mark to market

Adjusting/Evaluating all open positions in accordance with the current market prices.

maturity

The settlement or expiry date of a financial instrument.

N

narrow market

The exchange market is also characterized by a Thin Market where there is a low number of buyers and sellers and prices tend to be volatile.

O

offer

The same as the ask price, the price at which a dealer is willing to sell.

offsetting transaction

Offsetting can mean closing a position to cancel or offset some or all of the market risk of an open position.

one cancels the other order (oco)

When you put a stop order and a limit order and if either one is executed the other order will automatically be canceled.

open order

An order that has no specific expiration date and is executed when a specific market price is reached. They are generally associated with GTC orders.

open position

A position that is still active and not yet closed or reversed.

over the counter (otc)

OTC trading is for the securities of those companies which aren't listed on any central exchange and so buying and selling of such securities is done over the counter, that is, through private brokers and dealers, who directly negotiate with buyers and sellers.

overnight

A trade/position that stays open until the next business day.

P

pips

The smallest amount of change in a quoted forex price. Most major currencies define pips as the fourth decimal place, so a one-pip change is equivalent to 0.0001 except for the Japanese Yen where a pip is the second digit after the decimal point.

political risk

Due to changes or instability in government policy, adverse effects on an investor's positions/returns.

point & figure charts

The Point & Figure Chart doesn't take into consideration Time and completely focuses on price movements and trends in the asset.

position

The position is the financial term for a trade that is either currently active and able to incur loss/gain called an open position or a trade that has recently been closed known as a closed position.

premium

The amount by which the future or forward price exceeds the spot price.

pricetransparency

Elucidate quotes to which every market participant can have equal access

Q

quote

A price at which an asset was last traded or can be currently bought or sold and used for additional information only.

R

rate

The price of one currency in terms of the other, whose values change relative to each over time.

resistance

A commonly used technical analysis term that indicates a specific price level at which a currency will have the inability to cross over. Such a price acts as a ceiling.

revaluation

The opposite of devaluation, revaluation is an upward adjustment to a country's official exchange rate as a result of central bank intervention.

revaluation rates

These are market rates used as a base value by traders to assess whether profit/loss has been realized for the day or overall. Usually revaluation rate is the closing rate for the previous trading day.

risk

Potential of a negative outcome such as under performance, failure to achieve trading/investment goals or losing money or adverse changes.

risk capital

The amount of money an individual is able to invest, the loss of which shall not result in a substantial change to their lifestyle.

risk management

All techniques and strategies used to mitigate and/or control the inherent risks in trading and investment such as using stop losses, hedging,diversifying etc.

roll over

It is the simultaneous closing of an open position for today's value date and the opening of the same position for the next day's value date at a price reflecting the interest rate differentials between two currencies.

roll over rate

The interest paid or earned overnight for holdings the position/s, depending on the established margin and position in the market.

S

settlement

The transfer of ownership of a financial instrument to a buyer. The settlement of currency trades may or may not involve the actual physical exchange of one currency to another.

short position

A position is said to be short when a trader sells a security first with the intention of repurchasing it later when the price falls. Such a position is taken when he believes that prices are likely to fall in the near future.

slippage

Slippage occurs when the bid/ask spread changes between the time when an order is requested till the time the order is executed. This usually happens during periods of high volatility and occurs in all markets such as equity, bonds, currencies and futures.

spot/next

Also known as the next business day, it denotes the delivery of a purchased currency on a day after the spot date. They are short-term swaps where a currency is rolled out one further day i.e after the spot.

spot price

The current market price of a financial instrument.

spot (rate)

The current exchange rate at which a currency can be bought or sold. It is the rate quoted in the retail market with no adjustment for interest rate differential.

spot trade

It refers to the purchase and sale of a financial product for instant delivery on a specified spot date. Also known as a spot transaction and is typically settled electronically.

spread

A spread in trading means the range/difference between the bid and ask price quoted for a currency pair.

sterling

A term for the British Pound.

stop loss order

An order type to sell a currency when the price reaches or falls below the specified price. This is used to limit loss, usually when the price can not be actively monitored by the trader.

stochastic oscillator

The term Stochastic refers to the point of a current price in relation to its price range over a period of time. Stochastic Oscillator is a popular technical analysis indicator that states that during an upward trading market, prices tend to close near their high and vice versa.

support levels

This term indicates a specific price level at which a currency will have the inability to cross below. Support occurs when falling prices stop, change direction and begin to rise. Support level is often viewed as a “floor” which is supporting or holding up prices.

swap

Swap is a derivative contract through which two parties exchange cash flows or liabilities arising from two different financial instruments.

swift

Society of Worldwide Interbank Financial telecommunications. It provides a dedicated computer network that enables financial institutions worldwide to support fund transfer messages in a secure, standardized and reliable environment.

T

technical analysis

It involves the use of various technical indicators and analysis of market action through the study of charts, volume, trends, patterns, moving averages and various other technical indicators with the purpose of forecasting prices.

tick

A tick represents any single upcoming price quote, up or down.

ticker

It shows the current or recent history of a currency either in the format of a table or a graph.

trading

The act of buying, selling , exchanging stocks, bonds or currencies etc.

transaction cost

Cost of buying and selling a financial instrument.

transaction date

The Date on which a trade occurs.

trend

A trend is simply the tendency of a price to move in a certain direction, up/down/reverse/sideways. They are usually broken down into three categories - major, intermediate, and short-term trends.

trendline

This is a very commonly used technical indicator for uncovering trends. A trendline connects two or more lows or more highs with the lines projected out into the future. It is calculated by using the “least squares method” and is also called linear regression.

two way price

A two-way quote indicates both the current bid price and the current ask price of a security on a trading day.

U

uptick

An uptick occurs when a security's price rises in relation to the last tick. It is a new price quote at a price higher than the preceding quote.

uptick rule

A trading restriction in the US states that short selling is allowed only on an uptick. As per the rule, security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

us prime rate

The interest rate at which US banks will lend to their prime corporate customers.

V

value date

The date on which counterparts agree to settle their respective obligations. For spot currency transactions, the value date is usually two business days forward. Also known as the maturity date, it is the date on which a transaction is settled.

variation margin

Fund traders must hold in their accounts to keep a leveraged trade open. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.

volatility (vol)

Characterized by rapid and random price movements, it is a term used to refer to active markets that often present trade opportunities.

volume

Total number of contracts traded during a specific period.

W

weak dollar/ strong dollar

The term was weak and strong dollar are used in the foreign exchange market to describe the relative value and strength of the U.S. dollar against other currencies. The dollar is said to be weak when more dollars are required to buy one unit of another currency and strong when a few dollars are required to buy one unit of another currency.

whipsaw

A condition of extreme volatility when rapid growth of a price is followed by a drastic fall(or vice versa).