Glossary of Terms
A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X - Y - Z
A
Ask: The price at which sellers offer currencies to buyers
B
Base Currency: The currency which is the base for quotes. For example, the euro is the base currency for EURUSD quotes, while the US dollar is the base currency for USD/JPY.
Bear Market: A market in which prices decline sharply against a background of widespread pessimism.
Bid: The rate at which traders can currently sell a particular currency.
Broker: An agent who handles investors' orders to buy and sell currency. For this service, a commission may be charged which, depending on the broker and the amount of the transaction, may or may not be negotiated.
Bull Market: A market characterized by rising prices.
C
Cable: Dealers' slang for the GBPUSD (Sterling/US Dollar) exchange rate.
Central Bank: A government or quasi-governmental organization that manages a country's monetary policy. An example is the Federal Reserve, which is the US Central Bank.
Commission: A transaction fee charged by a broker.
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 that does not involve the US dollar, such as EURJPY.
Currency: Something (as coins, treasury notes, and bank notes) that is in circulation as a medium of exchange. A currency is represented by a three character ISO code e.g. USD, EUR.
Currency Market: See Foreign Exchange Market.
Currency Pair: Exchange rate relationship between two currencies, where one currency is expressed in terms of the other e.g. EURUSD is a currency pair where Euro is expressed in terms of the Dollar.
D
Day Trading: Refers to opening and closing the same position within one day's trading.
Dollar Rate: The exchange rate of a foreign currency as quoted against the US Dollar (USD).
E
Economic Indicator: A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), CPI (inflation) and retail sales.
Exchange Rate: The amount of one currency needed to buy another.
Exotic Currency: Exotic currencies are currencies that are not common in the foreign exchange market and are usually from developing countries such as parts of Asia, the Pacific, the Middle East and Africa. It is not as easy to trade exotic currencies because the market does not have the same amount of activity for them as it does for main currencies. The main currencies include ‘majors' and ‘minors'.
Exposure: The risk which an investor accepts when buying and selling in foreign currency.
F
Financial Institution: An organization primarily established to offer and perform financial services. Examples of financial institutions include brokerages and banks.
Flat: To be neither long nor short is the same as to be flat. One would have a flat book if they have no positions or the positions cancel each other out.
Foreign Exchange: The simultaneous buying of one currency and selling of another in an over-the-counter market. Also known as FX or Forex.
Foreign Exchange Market: A market where currencies are bought and sold against each other. Foreign exchange markets exist wherever and whenever currencies are bought and sold, and are not necessarily confined to cities.
Forward: A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX 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. The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the FX spot rate.
Fundamental Analysis: Analysis of economic and political information with the objective of determining future movements in a financial market.
Futures Contract: An obligation to exchange a good or an instrument at a set price on a future date. The main difference between a future and a forward is that futures are typically traded on an exchange to a fixed settlement date.
FX or Forex: An abbreviation for Foreign Exchange.
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: A transaction strategy used by traders and investors in foreign exchange to protect an investment or portfolio against currency price fluctuations. A current sale or purchase is offset by contracting to purchase or sell at a specified future date in order to defer a profit or loss on the current sale or purchase. In this way risk due to currency price fluctuations is effectively reduced.
High/Low: The highest traded price and the lowest traded price for the underlying instrument for the current trading day.
I
Interbank Rates: The Foreign Exchange rates at which large international banks quote other large international banks.
L
Limit Order: An order to buy at or below a specified price or to sell at or above a specified price.
Liquidity: The ability of a market to accept large transaction with minimal or no impact on price stability.
Long Position: A market position where a trader has bought a currency they previously did not own. A long position is normally expressed in terms of the base currency.
M
Majors (or Major currencies): Major currencies are the ones most commonly traded. Major currencies are the seven most frequently traded currencies, which include the USD, EUR, JPY, GBP, CHF, CAD and AUD.
Minor (or Minor currencies): All currencies other than 'Majors' are called 'Minors' and include the NZD (the new Zealand dollar) and the ZAR (the south African rand).
Margin: Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.
Market Maker: A financial institution or individual making consistent buy and sell quotations in a selection of currencies. A market maker must hold or have ready access to the amounts quoted, that is, carry an inventor.
O
Offer: See Ask.
O.C.O Order: One Cancels Other 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 date.
Overbought: A situation where price movement has risen 150% faster or stronger than normal, rising too far in response to net buying. A price movement that becomes overbought is expected to soon make a contrarian move. In other words, the price of the currency pair is expected to soon fall
Overnight Trading: Refers to a purchase or sale between the hours of 9.00pm and 8.00am on the following day.
Oversold: A situation where price movement has fallen 150% faster or stronger than normal, declining too far in response to net selling. A price movement that becomes oversold is expected to soon make a contrarian move. In other words, the price of the currency pair is expected to soon rise.
P
Portfolio: A selection of securities held by an investor or financial institution. Portfolios are designed primarily to spread investment risk.
Price Movement: The change in the price of a currency over a specified time period.
Price Point/ Pip: 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, GBP/USD, USD/CHF and 0.01 in the case of USD/JPY).
R
Resistance: A price level at which you would expect selling to take place.
Retail Prices: Currency prices which reflect commissions and special charges that a bank or exchange agency demands to convert currencies for non corporate customers. These commissions and special charges vary among countries, banks, and exchange agencies.
Risk: The potential loss that an investor accepts when she makes an investment. Risk can also be defined statistically as the annualized standard deviation of returns. See Exchange Rate Risk.
S
Short Position: A market position where the trader has sold a currency he does not previously own. A short position is normally expressed in terms of the base currency.
Spot: A transaction that occurs immediately, but the funds will usually change hands within two days after the deal is struck.
Spread: The difference between the bid and the ask of a currency price.
Square: See Flat.
Stop-Buy: A buy order for a currency that is above the current "market", or current price, that becomes a market order when the specified price is reached. Stop-buys are used by traders to establish positions in markets which they perceive to be rising in value.
Stop-Loss: A price specified by a trader at which he closes his position (buys or sells currencies to exit the market) to ensure that in case of a loss (prices don't move in the expected direction), he is able to keep his loss in line with his risk profile.
Support Levels: A price level at which you would expect buying to take place.
T
Technical Analysis: An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
V
Volatility: A measure by which an exchange rate is expected to fluctuate or has fluctuated over a given period. Volatility figures are often expressed as a percentage per annum
