FX Dictionary

These Basic Terms will See you Through your Trading Career and Should be Saved for your Reference

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A

Account History

Listing of all transactions (trading and non-trading) completed for a given account.

Arbitrage

The simultaneous purchase and sale of an equivalent security in different markets, with the goal of profiting from pricing inconsistencies. In the context of currency trading, arbitrage applies to a mismatch in paired exchange rates between three currencies (triangular arbitrage) or an inefficiency between identical securities listed in different markets that arises from exchange rate fluctuation.

Ask

The price at which a trader will buy a currency. Also known as the offer, it is the price a seller is willing to sell at.

Aussie

Slang term for the Australian dollar.

B

Back Office

The departments and processes related to the settlement of financial transactions.

Bar Chart

A chart type consisting of four points: high price and low price (represented by a vertical bar), opening price (represented by a small horizontal line to the left of the bar), and closing price (represented by small horizontal line to the right of the bar).

Base Currency

The currency used as the base to quote a pair. For instance in the EURUSD pair, the EUR is the base currency, in the USDJPY, the USD is the base.

 Bear(ish)

Someone who believes the prices/market will decline.

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

Bid

The price at which a trader will sell a currency.

BOC

Bank of Canada, Canadian central bank.

BOE

Bank of England, UK’s central bank.

BOJ

Bank of Japan, Japanese central bank.

Bollinger Bands

Technical analysis tool used to measure the highness or lowness of the price relative to previous trades, consisting of three bands: middle band (simple moving average), upper band (given number of standard deviations above the middle band), and lower band (given number of standard deviations below the middle band)

Broker

An agent who executes investors' orders to buy and sell currency. In the FX business, no commission is charged as the broker earns its shares thanks to the spread and performance fees if applicable.

Bull

Someone who believes the prices/market will rise.

Bull Market

A market characterized by rising prices.

C

Call Rate

The overnight interbank interest rate.

Candlestick Chart

Type of chart that uses shaded bars to indicate trading range (i.e. high and low price) as well as the opening and closing prices for consecutive time periods.

Capital

Financial assets, or the financial value of assets such as cash.

Cash Market

Spot market, as opposed to the futures market.

Central Bank

The institution that manages a country’s monetary policy.

Commission

Transaction fee charged by a broker.

Convertible Currency

Currency which can be freely exchanged for other currencies or gold, without special authorization from the appropriate central bank.

Counter party

The customer or bank with whom a foreign deal is made. The term is also used, in interest and currency swaps-markets, to refer to a participant in a swap exchange.

Cross Rate

An exchange rate between two currencies, usually made 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.

Currency Swap

Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time, and to exchange principal amounts, in different currencies, at a pre-agreed exchange rate at maturity.

Currency Option

Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.

 

D

Day Trading

Refers to opening and closing the same position or positions within one day's trading.

Depth of Market

The volume of buy and sell orders waiting to be transacted for a particular currency pair at a particular point in time.

E

ECB

European Central Bank.

Economic Calendar

Type of calendar that is intended to inform financiers and traders about the scheduled major economic indicators, government reports and speeches by influential people.

Exotics

Currencies that are not actively traded; used in contradistinction to "major currencies."

Exposure

Net of all long and short positions for a particular currency (pair).

F

Fast Market

Strong pressure in the market, in which prices are moving too quickly to be disseminated.

Federal Reserve (Fed)

The Central Bank of the United States.

Fixed Exchange Rate

Exchange rate regime in which a currency is pegged by the Central Bank so that it cannot fluctuate against other currencies. Currencies can be pegged to other currencies or commodities, such as gold.

Flat/Square

A situation in which a position is closed, or two positions exist that cancel each other out.

Foreign Exchange (Forex or FX)

The buying and selling of currencies.

Fundamental Analysis

Thorough analysis of economic and political data with the goal of determining future movements in a financial market.

Fundamental Trader

A currency trader that relies on fundamental analysis.

G

GTC

"Good Till Cancelled", an order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

H

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.

High/Low

Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

I

Initial Margin

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

Interbank Rates

Foreign Exchange rates (or interest rates) quoted by large multinational banking institutions.

Interest (Rate(

Cost of using/borrowing money, expressed as a rate per period of time.

J

Joint Account

Bank or investment account owned by two or more people.

k

Kiwi

Slang term for the New Zealand Dollar.

L

Limit Order

An order to buy at or below a specified price or to sell at or above a specified price.

Line Chart

Most basic type of chart, which plots a series of price levels over time and connects them with lines.

Liquid Market

When there are plenty of lots of a particular currency being bought and sold every day.

Long Position

A market position where the Client has bought a currency he previously did not own. Normally expressed in base currency terms, e.g., long Dollars.

Loonie

Slang term for a Canadian Dollar.

Lot

Standardized quantity in forex, composed of 100,000 units of a particular currency pair.

M

Margin

Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.

Margin Call

A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that's a client) brings margin deposits up to a required minimum level, to cover an adverse movement in the price in the market.

Market Maker

A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.

MetaTrader

Popular online trading platform designed for financial institutions dealing with forex and derivatives markets.

Middle Rate

Refers to the price halfway between the bid and ask quote offered by dealers.

O

Offer

The price, or rate, that a willing seller is prepared to sell at.

One Cancels Other Order (O.C.O. Order)

A contingent order where the execution of one part of the order automatically cancels the other part.

Open Position

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Over The Counter (OTC(

Used to describe any transaction that is not conducted over an exchange.

Overnight Trading

Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am on the following day.

P

Pip (or Points(

The term used in currency markets, 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, GBP/USD, USD/CHF and 0.01 in the case of USD/JPY).

Political Risk

The uncertainty in return on an investment, due to the possibility that a government might take actions, which are detrimental to the investor's interests.

Profit & Loss or (P & L)

The actual "realized" gain or loss from trading activities. May also include "unrealized" gains and losses from open positions

Q

Quote

Provision of a bid/ask spread for a currency pair.

Quote Currency

Currency listed second in a currency pairing.

R

Resistance

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

Risk Capital

The amount of money that an individual can afford to invest, which if lost, would not affect their lifestyle.

Rollover

Where the settlement of a deal is rolled forward to another value date, based on the interest rate differential of the two currencies.

S

Same Day Transaction

Any position that is opened and closed on the same trading day.

Sell Stop Order

Type of limit order, whereby the limit price is placed below the current market price. Once triggered, the order is executed at the market price.

Selling Rate

Ask or offer rate.

Selling Short

The act of selling a currency pair such that one is short the base currency and long the quote currency, with the goal of profiting from depreciation.

Short Position

An open position that aims to capture gains from currency depreciation.

Simple Moving Average (SMA)

Technical analysis indicator commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles, that gives equal weight to all data points.

Slippage

Refers to the phenomenon whereby the actual fill price differs from the expected fill price, as a result of a fast-moving market or broker error.

Soft Market

Describes a market characterized by more sellers than buyers.

Spike

Larger than expected price movement, caused by a news announcement or broker error.

Spread

Difference between the bid and ask price for a given currency pair. Also known as Bid Ask Spread.

Stable Market

Refers to a market or currency pair that can accommodate large volumes without causing equally large price fluctuations.

Stochastic Oscillator

Technical analysis tool designed to compare the closing price of a currency to its price range over a given time period.

Stop Order

An order to buy or sell when the price rises to/above or falls to/below a specified stop price. When buying, a stop order is used to make an investment, but only when an upward trend has been established. When selling, a stop order is used as protection from a sudden fall in the share price, or to lock-in profits already made, and is also known as a stop loss order.

Stop Price

The price at which a stop order is triggered. For purchases, the stop price acts as a minimum price you will pay if an investment is made. For sales, the stop price acts as the maximum price you will receive if a holding is sold.

Support

Level or floor that halts a currency's downward progress, as a result of strong buying pressure at that level.

Swap

Type of derivative in which two parties agree to exchange one stream of cash flows against another.

Swissy

Slang term for the Swiss Franc.

T

Take-Profit Order (T/P)

An order specifying the exact rate or number of pips from the current price point at which point a current position should be closed, and gains will be locked in.

Technical Analysis

An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.

Trading Platforms

Software applications used for trading forex online.

Trailing Stop Order

Order entered with a stop parameter that creates a moving or trailing activation price. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price.

Trend

The current direction of the market, either up, down, or sideways.

U

Unemployment Rate

Economic indicator defined as the percentage of those in the labor force who are unemployed.

Unrealized Profit & Loss

Gains and losses that exist hypothetically, in positions that have not yet been closed.

US Prime Rate

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

V

Value Date

Settlement date for a currency contract, usually two business days after the trade date.

Volatility

A statistical measure of a market, or a security' price movements, over time, and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.

W

Wire Transfer

Electronic transfer of funds from one bank to another.