In this lesson we'll look at the basic definitions you're bound to come across as you delve deeper into understanding the markets and how best to explore them.
I had considered whether it would be best to somehow gently ease you into these terms by exercises and referring you for instance, intermittently to a glossary of terms, or include them in a future lesson, but realized that in my own experience I had a very stop start learning process which meant that a lot of the time I was faced with words that I had never heard of or had heard of but was uncertain of their meaning, or thought I knew the meaning when in fact I didn't. I found it so much better once I found a consolidated source of terms, read through them and slowly they began to stick.
Here's where I break from tradition and right up front provide the definitions and terms that you'll consistently be confronted with on this journey.
Many of my readers are at a very fundamental stage and I thought it best then to speak to everybody at the same level.
The simple fact is, if we are going to talk the talk we must learn to speak the lingo.
There is no real way of glamorizing these terms just the realization that you will have to get to grips with many of these to understand not only future lessons but also the markets.
Think of this as a warm up session before going on a jog!
Later on we'll start to look at how information is presented to you in the market and how to interpret it.
Take a deep breath because you'll need to review this lesson and draw on it in your future lessons.
The First Tool
The most Common Definitions you'll come acrossBid/Ask Spread (or "Spread")
The distance, usually in pips, between the Bid and Ask price. The tighter the spread is better it is for the trader.Cost of Carry (or "Interest" or "Premium")
The cost of holding an open position which is often quoted in terms of dollars or pips per day.Currency Futures
Futures contracts are traded on an exchange. Futures are always quoted in terms of the currency value with the Dollar as a benchmark. The exchange standardizes the parameters of the futures contract.Drawdown
The size of a decline in account value. This is expressed either in percentage or Dollar terms and is measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) this is so even if the trader's account was never in a loss position from the start.Fundamental Analysis
This involves a Macro or strategic assessments of where a currency should be trading. It is based on any criteria other than price action. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.Leverage
Expressed as a multiple, this is the amount, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (a "lot size" or "contract value") is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).Limit
An order to buy at a specified price when the market moves down to that price, or: An order to sell at a specified price when the market moves up to that price.Liquidity
Another word for the efficiency and cost effectiveness with which positions can be traded and orders executed. It acts as a function of volume and activity in a market.The more liquid a market the more frequent price quotes are provided at a smaller bid/ask spread.
Margin
The amount of funds required in a clients account in order to open a position or to maintain an open position. For example, 1% margin means that $1,000 of funds on deposit is required for a $100,000 position.Margin Call
This is a requirement by a broker for a deposit more funds in order to maintain an open position. The position which does not have sufficient funds on deposit will simply be closed out by the broker and his is often referred to as a "margin call". This procedure will allow the client to avoid further losses.Market Order
An order to buy at the current Ask price.Offer
The Price at which a broker or dealer is willing to sell. This is the same as "Ask".Pip
The smallest price increment in a currency ("ticks" in the futures markets). For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.Premium (also "Interest" or "Cost of Carry")
The cost of holding an open position, which is often quoted in terms of dollars or pips per day,Spot Foreign Exchange (the "Interbank" market)
This refers to currencies traded between two counterparties, who are often major banks. This is generally traded on margin. It is particularly traded by institutions and professional money managers.Stop
An order to buy at the Ask only when the market moves up to a specific price, or: An order to sell at the market only when the market moves down to a specific price.Technical Analysis
This involves an analysis applied to the price action of the market in order to develop trading decisions and is done irrespective of fundamental factors. Common technical studies include Bollinger Bands, Moving Averages, Parabolic SAR, MACD, RSI, Momentum, Stochastic, Slow Stochastic, CCI ("Commodity Channel Index"), ATR ("Average True Range"), Rate of Change, Standard Deviation. These we'll learn about in the more advanced stages of our lessons and as they are terms normally banded about in the Forex community its good at this stage to at least be aware that they exist.Currency Pairs
Symbols: Currency Pair Trading Terminology you'll come across:| USDJPY | US Dollar / Japanese Yen | "Dollar Yen" |
| USDCHF | US Dollar / Swiss Franc | "Dollar Swiss" "Swissy" |
| USDCAD | US Dollar / Canadian Dollar | "Dollar Canada" |
| USDZAR | US Dollar / South African Rand | "Dollar Zar" "South African Rand" |
| GBPUSD | British Pound / US Dollar | "Cable" |
| EURUSD | Euro / US Dollar | "Euro" |
| AUDUSD | Australian Dollar / US Dollar | "Aussie Dollar" |
| NZDUSD | New Zealand Dollar / US Dollar | "New Zealand Dollar" "Kiwi" |
| EURGBP | Euro / British Pound | "Euro Sterling" |
| EURJPY | Euro / Japanese Yen | "Euro Yen" |
| EURCHF | Euro / Swiss Franc | "Euro Swiss" |
| GBPCHF | British Pound / Swiss Franc | "Sterling Swiss" |
| GBPJPY | British Pound / Japanese Yen | "Sterling Yen" |
| CHFJPY | Swiss Franc / Japanese Yen | "Swiss Yen" |
| GLDUSD | Spot Gold | "Gold" |
| SLVUSD | Spot Silver | "Silver" |
More specific definitions: I've included many that aren't necessarily going to be covered in the course as you are bound to hear them on the news or come across them while trading. Here goes…
- Account
- A record of transactions of goods and services owed by a party to another
- Accrual
- An apportionment of premiums and discounts on forward exchange transactions. These would relate directly to deposit swap (Interest Arbitrage) deals and cover the period of each deal.
- Actualize
- The underlying assets or instruments traded specifically in the cash market.
- ADX
- Measures: 1. the strength of a prevailing currency trend 2. If there is direction in the forex market. Plot zero on up, a reading above 25 can usually be considered directional.
- Adjustable Peg
- The exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to currency. Often the currency is the dollar. The rate may be changed from time to time.
- Adjustment
- Official action. This is normally as a result of change in the internal economic policies in order to correct a payment imbalance or an official currency rate.
- Agent Bank
- This can either be: 1) A bank acting for a foreign bank. 2) In the Euro market -the agent bank is the one appointed by a syndicate to handle the administration of a loan.
- Aggregate Demand
- The total demand for goods and services in the economy. It consists of government spending, business investment and private spending
- Aggregate risk
- In respect of both forex spot and forward contracts the risk is the size of exposure of a bank to a single customer.
- Aggregate Supply
- Refers to the total supply of goods and services in the economy specifically from domestic sources (including imports) which are available to meet the aggregate demand.
- Agio
- This refers to the difference in the value between currencies. It is also used to describe percentage charges for conversion from cash, or conversion from a weak currency into a strong currency.
- All or None
- A limit price order. This instructs a broker to fill the entire order at the stated price or not to do so at all.
- American Option
- This is an option that can be exercised anytime during its life. And represents the majority of exchange-traded options. Anonymous trading
- Refers to the situation where visible bids and offers on the forex market are made without the identity of either the bidder or seller being revealed. It prevents scrutiny and speculation of the market, when high profile traders execute transactions.
- Appreciation
- Term used to describe an increase in the value of a currency when it responds to market demand.
- Arbitrage
- The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market in order to take advantage of countervailing prices in different markets as a means to profit from small price differentials.
- Arbitrage channel
- Refers to the range of prices within which there will be no possibility to arbitrage between the cash and futures.
- Around
- A term used in quoting forward "premium / discount". "Six-six around" would mean six points on either side of the presiding value.
- Ascending Triangles
- A triangle consisting of two or more equal highs forming a horizontal line at the top, representing a bullish continuation pattern that is shaped like a right triangle.
- Asset Allocation
- A means of optimizing growth potential and minimizing risk through diversification of assets in different sectors, such as real estate, bonds, stocks, and forex.
- Asset Swap
- An interest rate swap. It is used to change the cash flow characteristics of an institution's assets. This then would provide a match with its liabilities.
- Asset
- This, in the context of foreign exchange, refers to the right to receive from counterparty an amount of currency. This refers either to a balance sheet asset (e.g. a loan) or if at a specified future date, refers to an unmatched forward or spot deal.
- At best
- This is simply an instruction given to a dealer to buy or sell at the best rate that can be obtained.
- At or Better
- This is an order to deal at a specific rate or a better rate.
- Authorized Dealer
- A financial institution or bank which is authorized to deal in foreign exchange.
- Back Office
- The Processes (e.g. record keeping) and departments related to the settlement of financial transactions.
- Back Testing
- A means of designing a trading strategy based on historical data. This data is then applied to fresh data to tests its effectiveness. A frequently, used method of testing technical analysis.
- Backwardation
- The amount by which the spot price exceeds the forward price.
- Balance
- The total amount, whether credit or debit, of money in a forex account.
- Balance of Payments
- A record of all transactions made by a country with other countries over a fixed period in time period. A comparison is drawn between the amount of economic transactions between such country the other countries. Such record will include trade balances for investments, and investments by foreigners.
- Balance of Trade
- Net flow of goods between two countries, calculated by using formula: exports minus imports
- Bank for International Settlements (BIS)
- This is an international organization which facilitates the cooperation of central banks and international financial institutions. Located in Basel, Switzerland, it is a central bank for central banks. It collects data on international banking activity and will then promulgates rules concerning international bank regulation.
- Band (A system used in the ERM).
- The permitted range in which a currency may move.
- Bank line (a "line")
- Line (amount) of credit granted by a bank to a customer.
- Bank Rate
- The rate at which a domestic banking system. Lends money from its central bank.
- Bar Chart
- A means of representation by using a chart where specifically on a daily bar chart each bar represents a day's activity. A vertical bar is drawn from the day's highest price to the day's lowest price. Closing price and opening price would be represented by ticks on the bar. Various bars can each represent different periods in time.
- Base currency
- The currency in which an investor or issuer keeps its book of account. The US Dollar is normally considered the "base" currency for quotes in the forex markets, and as such, quotes are expressed as a US$1 unit per the other currency quoted in the pair. However, exceptions to this rule are the British Pound (GBP), the (EUR) and the Australian Dollar (AUD).
- Basis
- This refers to the difference between the cash price and futures price.
- Basis point
- 1/100 of one pip (.01%) for most currencies. For the Japanese Yen (JPY), a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.
- Basis trading
- A method of trading, by which traders take opposite positions in the cash and futures market, in order to profit from a favorable move of the basis.
- Basket ("a unit account")
- A group of currencies normally used to manage the exchange rate of a currency.
- Bear market
- A market distinguished by widespread pessimism and a sustained period of declining prices.
- Bear
- An Investor trading with the belief that prices or the market will decline.
- Bid
- The price at which a buyer offers to purchase a currency.
- Bollinger Bands
- An interpretation is prices tend to stay within the upper and lower bands. This we'll look at in a future lesson.
- Book
- The summation of all currency positions held by a dealer, desk, or room. Also a total of the assets and liabilities. A short and open book describes where the average maturity of the book is less than that of the assets. Passing the Book refers to transferring the trading of the Banks positions to another office at the close of the day, e.g. from Paris to New York
- Broker
- A person that facilitates between buyers and sellers for a commission, payable by the initiator of the transaction.
- Bull market
- A sustained period of generally rising prices.
- Bull
- An investor harboring the belief that currency prices are going to rise.
- Bundesbank
- The Central Bank of Germany.
- Buying Rate
- Rate at which the forex market and a market maker is willing to buy a currency.
- Cable
- A Forex term for the US Dollar/British Pound rate.
- Candlestick Charts
- A chart that is Identical to a bar chart in the information conveyed, but which is presented in an entirely different context. A candlestick captures the open, high, low and close of the trading period in a single candle. For our purposes we are going to concentrate on Candlestick charts as the basis for our analysis and you'll learn these in greater detail very soon.
- Capital Markets
- Markets in which capital (stocks, bonds, etc.) are traded
- Capital Risk
- The risk a bank bears when it pays to the counter party with out knowing whether the other party will be able to meet its side of the bargain.
- Carry
- The interest cost of financing securities or other financial instruments held.
- Carry Trade
- An investment position of buying a higher yielding currency with the capital of a lower yielding currency.
- Cash Delivery
- Same day settlement.
- Cash market
- The market in the actual financial instrument on which a futures or options contract is based.
- Cash
- Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for forex services on these markets because of time zone problems i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.
- Cash and Carry
- The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible in other words selling an asset and buying a future.
- Cash Settlement
- A procedure for settling futures contract
- Central Bank
- A banking organization, usually independent of government, responsible for the implementation of a country's monetary policy and for printing money.
- Central Rate
- Foreign exchange rates against the ECU adopted for each currency within the EMS.
- Chartist
- An individual who uses charts and graphs and interprets historical data to find trends and predict future movements as well as, aid in technical analysis. In many respects we will be aiming to become Chartists.
- Clean float
- An exchange rate that is not materially affected by official intervention.
- Close a Position (Position Squaring)
- Refers to getting rid of a position, either by buying back a short position or selling a long position.
- Commission
- The fee that, a broker may charge clients, for dealing on their behalf.
- Confirmation
- A written document to the other party describing all the relevant details of the transaction.
- Contagion
- Term used to describe the spread of economic crises from one country's market to other countries within close geographic proximity. This term was first used following the Asian Financial Crisis in 1997, which began in Thailand and so spread to other East Asian economies.
- Contract
- An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (Futures contract).
- Continuation
- Represents an extension of the trend. The trend continues to have momentum, and hence it moves on wards without reversal.
- Conversion Account
- A general ledger account representing the uncovered position in a particular currency (Position Accounts).
- Conversion
- The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.
- Conversion arbitrage
- A transaction where the asset is purchased and the purchaser buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiration.
- Convertible currency
- Currencies that can be exchanged for other currencies or gold.
- Copey
- Slang for the Danish krone.
- Correction
- A move in price against the current established trend.
- Correspondent Bank
- The foreign banks representative who regularly performs services for a bank which has no branch relevant canter, e.g. to facilitate the transfer of funds.
- Cost of Carry
- The cost associated with borrowing money in order to maintain a position.
- Counterparty
- The other organization or party with whom the exchange deal is being transacted.
- Counter value
- Where a person buys a currency against the dollar, it is the dollar value of the transaction.
- Country risk
- The risk associated with government intervention (does not include central bank intervention). Examples are political events such as war, or civil unrest.
- Cover
- To take out a forward foreign exchange contract. Also to close out a short position by buying currency or securities.
- Covered Arbitrage
- Arbitrage between financial instruments denominated in different currencies, using forward cover to exchange risk.
- Covered Margin
- The interest rate margins between two instruments denominated in different currencies after taking account the cost of forward cover.
- Crawling peg
- A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with economic or market indicators.
- Credit Checking
- Before making a large financial transaction, it imperative to check whether the counterparty has enough available credit to carryout/honor the transaction. Credit checking refers to the process of verification. The check is initiated after the price has been determined.
- Credit Netting
- Arrangements that exist to maximize free credit and speed the dealing process.
- Credit Risk
- Risk of loss that may arise on outstanding contracts should a counter party default on its obligations.
- Cross deal
- A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
- Cross rates
- Rates between two currencies, neither of which is the US Dollar.
- Cup with Handle
- Named after the resemblance the formation on the chart bears to a cup and handle, this pattern offers an explanation into where a bullish trend in the price of a currency can begin.
- Current Account
- The net balance of a country's international payment arising from mainly exports and imports.
- Day trader
- Speculators who buy and sell currencies during the same trading day, ending the day with no opened position.
- Deal date
- The date on which a transaction is agreed upon.
- Deal Ticket
- The primary method of recording the basic information relating to a transaction.
- Dealer
- One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts.
- Deficit
- A negative balance of trade (or payments); expenditures are greater than income/revenue.
- Deflator
- Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.
- Delivery date/Value Date
- The date of maturity of the contract, when the exchange of the currencies is made
- Delivery Risk
- A term to describe when counterparty will not be able to complete his side of the deal, although willing to.
- Depreciation
- A fall in the value of a currency due to market forces rather than due to official action.
- Derivative
- A security whose value is dependent on the value of another security. Examples of derivatives are future contracts, forward contracts and options. Underlying securities can include stocks, bonds or currencies.
- Devaluation
- The deliberate downward adjustment of a currency's value versus the value of another currency normally confirmed by official announcement.
- Desk ("Trade Desk")
- Term referring to a group dealing with a specific currency or currencies.
- Details
- All the information required to finalize an FX transaction, i.e. name, rate, dates, and point of delivery.
- Devaluation
- Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.
- Direct quotation
- Quoting in fixed units of the foreign currency against variable amounts of the domestic currency.
- Dirty Float
- An exchange rate system in which the currency is not pegged, but is "managed" by the central bank to prevent extreme fluctuations in the exchange rate. This system is contrasted with a Pure Float in which there is no central bank intervention and the exchange rate is entirely determined by the market and speculation. Also known as "Man Float."
- Easing
- Modest decline in price.
- Economic Exposure
- The risk on a company's cash flow arising from foreign exchange fluctuations.
- Economic Indicator
- An economic statistic used to indicate the overall health of an economy, such as GDP, unemployment figures and trade balances. Used in fundamental analysis of the forex market, to speculate against the direction of an exchange rate.
- Economic Exposure
- When the cash flow of a country is vulnerable to changes in the exchange rate.
- ECU
- European Currency Unit.
- EDI
- Electronic Data Interchange.
- Effective Exchange Rate
- An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.
- Efficient Markets
- Markets where assets are traded in which the price is indicative of all current and relevant information it is impossible to have undervalued assets.
- Efficient Market Theory
- The theory that the current market price reflects all information and expectations regarding the pair in question. The theory also assumes that the market cannot overprice or under price an asset, and hence the current price is the correct valuation at the time.
- EFT
- Electronic Fund Transfer.
- Elliot Wave Theory
- A theory based on the notion that the market moves in waves, which consist of trends followed by corrections. The Elliot Wave Theory states that there are 5 waves within an overall trend.
- EMS
- European Monetary System.
- End of Day (or Mark to Market)
- Traders account for their positions by accrual or mark-to-market. Accrual accounts only for cash flows when they occur and therefore it only shows a profit or loss when realized. The mark-to-market method values the trader's book at the end of each working day. It does so by using the closing market rates or revaluation rates. Any profit or loss is booked. The trader then starts the next day with a net position.
- Envelopes
- Envelopes place lines at fixed percentage points either above or below a moving average line. The upper and lower limits specify entry and exit points.
- Equilibrium
- A balance between demand and supply for any currency pair in the marketplace.
- Euro
- The currency of the European Monetary Union (EMU).
- European Central Bank
- The Central Bank for the European Monetary Union.
- European Monetary System
- A system designed to stabilize exchange risk between member states. It permits currencies to move in a measured fashion within agreed bands (the parity grid).
- European Monetary Union
- An institution of the EU. Its primary goal is to establish a single currency (the euro) for the EU.
- Exchange control
- Rules used to preserve or protect the value of a countries currency.
- Exotic
- A traded currency less broadly traded.
- Exponentially Weighted Moving Average (EMA)
- These place greater weight on more recent data and will be analyzed in a future lesson.
- Exposure
- A potential for gain or loss because of movement in the foreign exchange rate.
- Fast market
- Rapid movement in a market caused by strong interest by buyers and/or sellers.
- Fed Fund Rate
- The interest rate on Fed funds.
- Fed
- The central bank of the United States, responsible for monetary policy.
- Federal Reserve System
- The central banking system in the United States.
- Fibonacci Numbers
- Derived from a sequence of numbers in which each successive number is the sum of the two previous numbers, They are frequently used in hypothesizing which currencies investment capital will gravitate toward. There four popular Fibonacci studies are arcs, fans, retracements, and time zones. Fibonacci numbers are common in the forex market and we will look in greater detail at this in our more advanced studies.
- Fisher Effect
- The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.
- Fixed exchange rate
- An official exchange rate set by monetary authorities for one or more currencies.
- Flag and Pennant
- Shaped like a flagpole with a pennant, this formation is characterized by an upward movement with an l slope followed by a period of consolidation. It is considered a bullish pattern overall. Flexible exchange rate
- Exchange rates with a fixed parity against one or more currencies with frequent revaluations.
- FOMC
- Federal Open Market Committee, the committee that sets money supply targets in the US.
- Foreign Exchange
- The purchase or sale of a currency against sale or purchase of another.
- Forex
- Term used referring to the foreign exchange market.
- Forex Club
- Groups formed in the major financial centers to encourage educational and social contacts between FX dealers
- Forward Outright
- A commitment to buy or sell a currency for delivery on a specified future date or period.
- Forward Rate
- Forward rates are quoted in terms of forward points, which represent the difference between the forward rates. The forward points are either added or subtracted from the exchange rate to determine the Forward rate.
- Free Reserves
- Total reserves held by a bank less the reserves required by the authority.
- Front Office
- The sales personnel (trading and other business personnel) in a financial company.
- Fundamental Analysis
- The analysis of economic indicators and political and current events that could effect the future direction of financial markets. In the foreign exchange market, fundamental analysis is based primarily on macroeconomic events.
- Futures
- A way of trading financial instruments, currencies or commodities for a specific price on a specific date in the future. Unlike options, futures give the obligation (not the option) to buy or sell instruments at a later date. They can be used to speculate against the future value of the underlying product.
- FX
- Foreign Exchange.
- G7
- The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.
- G10
- The G7 and Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes involved.
- Gap
- A mismatch between maturities and cash flows in a bank or individual dealer's position book. Gap exposure is effectively interest rate exposure.
- Going long
- The purchase of a stock, commodity, or currency for investment or speculation.
- Going short
- The selling of a currency or instrument not owned by the seller.
- Gold Standard
- The original system for supporting the value of currency issued.
- Good-till-Canceled (GTC)
- Refers to an order given by an investor to a dealer to buy or sell a security at a fixed price that is considered "good" until the investor cancels it.
- Grid
- Fixed margin within which exchange rates are allowed to fluctuate. Gross Domestic Product (GDP)
- Total value of a country's output, income or expenditure produced within the country's borders.
- Gross National Product
- Gross domestic product plus "factor income from abroad" (income earned from investment or Abroad).
- Hard currency
- Any one of the major world currencies that is well traded and easily converted into other currencies.
- Head and Shoulders
- A pattern resembling two peaks (the shoulders) with a higher peak between the two shoulders (the head).
- Hedge
- An investment position or combination of positions that reduces the volatility of a portfolio value. One can take an offsetting position in a related security. Instruments used are varied and include forwards, futures, options, and combination of them.
- Hedged position
- One open buy position and one open sell position in the same currency.
- High/Low
- Refers to the daily traded high and low prices of a given currency pair.
- Historical Volatility
- A measure of the change in price over a specified time frame. A Higher volatility suggests that the currency is more likely to trade within a wider range. Reduced volatility suggests that the currency will trade in a narrower range.
- Hit the bid
- Acceptance of purchasing at the offer or selling at the bid.
- IMF
- International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loan.
- IMM
- International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currencies and financials Implied volatility
- A measurement of the market's expected price range of the underlying currency futures. This is based on option premiums.
- Implied Rates
- The interest rate determined by calculating the difference between spot and forward rates.
- Indicative quote
- A market-maker's price which is not firm.
- Inflation
- An economic condition where there is an increase in the price of consumer goods, which results in he erosion of purchasing power.
- Initial margin
- The margin required by a forex firm to initiate the buying or selling of a determined amount of currency.
- Interest parity
- One currency is in interest parity with another when the difference in the interest rates is equalized by the exchange margins. For instance, if the operative interest rate in Australia is 4% and in the UK 8%, a forward premium of 4% Australian Dollars against sterling would bring about interest parity.
- Internationalization
- Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.
- Leading Indicators
- These include statistics such as unemployment rates, CPI, Federal Funds Rate, retail sales, personal income, and the prime rate that is used to predict economic activity. LIBOR
- The London Interbank Offer Rate. The interest rate that the largest international banks will lend to each other.
- Limit order
- A request to buy or sell a foreign currency at a specified price or better.
- Liquid and Illiquid Markets
- The ability of a market to buy and sell at ease with no impact on price stability. A market is liquid if the spread between the bid and the offer is small. This also occurs with the presence of buyers and sellers with more players creating tighter spreads. Illiquid markets have fewer participants; thus, the spreads are wider.
- Maintenance margin
- The minimum margin which an investor must keep on deposit in a margin account at all times.
- Market order
- An order to buy or sell a financial instrument immediately at the best possible price.
- Mid-price or middle rate
- The price half-way between the two prices, or the average of both buying and selling prices off the market makers.
- Mine and Yours
- To announce that an FX trader wants to buy he/she may say or type "Mine" (i.e. taking an Offer). To sell he will say "Yours"(i.e. "hitting the bid." )
- Minimum price fluctuation
- The smallest increment of market price movement possible in a given futures contract.
- Momentum
- This is designed to measure the rate of price change, not the actual price level. Consists of the net difference between the current closing price and the oldest closing price from a predetermined period.
- Monetary Base
- Currency in circulation plus banks' required and excess deposits at the central bank.
- Money Market
- Highly liquid markets for short-term investing in monetary instruments and debts, typically maturing in less one year.
- Moving Average
- A method of smoothing a set of data, widely used in price time series. Although there are different types, the simple moving average (SMA) and the exponential moving average (EMA) are the most widely used.
- Negative or bearish divergence
- Occurs when the direction of the price of a currency varies from the condition of an indicator.
- Net Position
- The amount of currency bought or sold which have not yet been offset by opposite transactions.
- Net Worth
- Amount of assets which exceed liabilities; may also be known as stockholders equity or net assets. For an individual, the total value of all possessions such as houses, stocks, bonds, currencies and other securities, minus all outstanding debts such as mortgage bonds and short and long term oans.
- Odd Lot
- A non standard amount for a transaction.
- Off-Balance Sheet
- Financing or the raising of money by a company that does not appear on the company's balance sheets such as Interest Rate Swaps and Forward Rate Agreements.
- Offer
- The price, or rate, that a willing seller is prepared to sell at. The best offer is the lowest such price available.
- Offset
- The closing-out or liquidation of a futures position.
- Offshore
- The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with foreign banks. This is known as an off shore banking unit.
- Open Order
- An order to buy or sell that remains valid until executed or canceled by the trader.
- Open Position
- A deal not yet reversed or settled and the investor is subject to exchange rate movements.
- Options
- An agreement that allows the holder to have the option to buy/sell a specific currency at a certain price within a certain time. There are two types of options -call and put. A call is the right to buy while a put is the right to sell.
- Overbought
- A term used to characterize a market in which currency prices have risen at a pace that is above typical market acceleration, and which is therefore due for a retracement.
- Oversold
- The opposite of overbought; exists when the price of a currency decelerates at an abnormally fast rate.
- Overnight limit
- Net long or short position in one or more currencies that a dealer can carry over into the next dealing day . Overnight
- A deal from a day until the next business day.
- Over The Counter (OTC)
- The description of any transaction not conducted over an exchange.
- Parabolic SAR (Stop and Reversal)
- The Parabolic SAR (stop-and-reversal) is a time/price trend following system used with trailing price stops. This we'll look at in a future lesson .
- Parity
- Foreign exchange dealer's slang for "your price is the correct market price". Official rates in terms of SDR or pegging currency.
- Parities
- The value of one currency in terms of another.
- Pegging
- A form of price stabilization; typically used to stabilize a country's currency by making it fixed to the exchange rate of another country.
- Political Risk
- Risk that changes in government policies will negatively impact an investor. Political Risk is especially prevail ant in third world countries.
- Position
- The amount of currency or security owned or owed by a forex trader or investor.
- Premium
- In the forex market, it is the amount of points added to the spot price to determine a forward or futures price.
- Price Transparency
- Refers to the degree of access to information regarding bids and offers and respective prices. Ideally an investor/trader would have equal access to all information.
- Profit Taking
- The unwinding of a position to realize profits.
- Quote
- An indicative price. The price quoted for information purposes but not to deal.
- Rally
- A recovery in the price of a currency following a period of decline.
- Range
- The difference between the highest and lowest price of a future recorded within a trading session.
- Rate (exchange rate).
- The price of one currency in terms of another
- Reaction
- A decline in prices following an advance.
- Realized and Unrealized Profit
- Unrealized profit is a gain from an increase in the price of a currency.
- Rectangle
- A rectangle is a continuation pattern denoting a trading range characterized by strong support and resistance lines. These are often known as trading ranges Resistance Point or Level
- A price recognized by technical analysts as a price level which a currency pair has trouble bridging through it to the upside, but which is likely to result in a significant price increase if broken. Various levels of resistance appear for different time frames.
- Retracements (corrections)
- Used to denote a temporary reversal in the overall trend of the market to accommodate for excessive acceleration or deceleration of a movement in the price of a currency.
- Revaluation
- Increase in the exchange rate of a currency as a result of official action.
- Revaluation rate
- The rate for any period or currency which is used to revalue a position or book.
- Risk management
- Term to describe when a forex trader will use analysis and other trading techniques to avoid substantial risk to his portfolio.
- Risk Position
- An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.
- Rollover
- An overnight swap, specifically the next business day against the following business day (also called Tomorrow abbreviated to Tom-Next).
- Round trip
- Buying and selling of a specified amount of currency.
- Rounding Top and Bottom
- A pattern where a rounding top signifies a rounded resistance line and overall trend. On the other hand, a rounding bottom is a bullish for which the bottom curve can serve as a support line. Mostly suited to longer-term analyses.
- RSI (Relative Strength Index)
- The RSI is a price-following oscillator that ranges between 0 and 100. This divergences noted are indicators of an impending reversal. We will explore this further in a future lesson"
- Selling rate
- The rate at which a bank is willing to sell a foreign currency.
- Settlement date
- The date of settlement of forex contracts.
- Settlement Risk
- An instance where payment is made to a counter party before the counter value payment has been made. There is a risk Is that the counter party's payment will not be received.
- Short sale
- The sale of a specified amount of currency not owned by the seller at the time of the trade. These are usually made in expectation of a decline in the price. Short-term interest rates
- Normally a 60 to 90 day rate.
- Sidelined
- A major currency that is lightly traded. This could be due to major market interest in another currency.
- Slippage
- Refers to the negative (or depreciating) pip value between where a stop loss order becomes a market order.
- Soft Market
- More potential sellers than buyers. Here rapid price falls are likely.
- Spike (high or low)
- A significantly lower low or higher high within a data series. The Points at which a currency spikes often signal a potential reversal in the direction of the trend.
- Spot
- This is the most common foreign exchange transaction. A Spot or Spot date refers to the spot transaction value date It requires settlement within two business days, subject to value date calculation.
- Spot next
- The overnight swap from the spot date to the next business day.
- Spot price/rate
- The price at which the currency is currently trading in the spot market.
- Spread
- The difference between the bid and offer price that is offered by a market maker. Square
- Purchase and sales are in balance and thus the dealer has no open position.
- Squawk Box
- A speaker connected to a phone. This is often used in broker trading desks.
- Squeeze
- Action by a central bank to reduce supply. This is done in order to increase the price of a currency.
- Stable market
- An active market which can absorb large sale or purchases of currency without significant price moves.
- Standard
- A term referring to certain normal amounts and maturities for dealing.
- Stochastics
- This theorizes that as currency prices rise, closing prices tend to be near the value. Conversely, as prices fall, closing prices are near the low for the period. Stochastic studies are made of two lines, %K, which moves between a scale of 0 and 100. The %D line is the moving average over a specified period of time of the %K . The %K line measures where the closing price of a currency is compared to the price range for a given number of periods.
- Stop-Loss order
- Order to buy or sell at the best available price after a given price threshold has been reached.
- Support levels
- The opposite of resistance; a point in a chart where a currency pair has repeatedly had trouble falling below. When a currency pair "tests" support but does not break it, buyers have outnumbered sellers. On the other hand, sellers control momentum if support is broken and the currency pair continues to plunge downward.
- Symmetrical triangle ( a coil)
- This often forms during a trend as a continuation pattern. It contains at least lower highs and two higher lows. At the time these points meet, the lines converge as they are extended and the symmetrical triangle forms.
- Thin market
- A market in which trading volume is low. Here bid and ask quotes are wide and the liquidity of the instrument traded is low.
- Tick
- A minimum change in price, up or down.
- Today/Tomorrow
- Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa
- Trade date
- The date on which a currency trade occurs.
- Tradable amount
- Smallest transaction size acceptable.
- Transaction date
- The date on which a trade occurs.
- Transaction
- The buying or selling of currencies. This results from the execution of an order.
- Trend Lines
- A straight line drawn across a chart that indicates the overall trend for the currency pair. In an upward trend, This is drawn below, and acts as a support line; the opposite holds true for a downward trend. Should the currency breaks the trend, the trend is considered to be invalid.
- Triple Top
- A pattern in which a currency has reached a price three times previously yet has been unable to sustain movement beyond those three peaks. A triple top signifies a strong resistance level.
- Two-tier market
- A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa
- Two-way quotation
- When a dealer quotes both buying and selling rates for forex transactions.
- Uncovered
- Another term for an open position. Under-valuation
- An exchange rate is normally considered to be undervalued when it is below its purchasing power.
- Up tick
- A new price quote for the same currency that is higher than the preceding quote.
- US Prime Rate
- The interest rate at which US banks will lend to their prime corporate customers.
- Value Date
- The date that payment is exchanged between two parties. For a spot transaction, the exchange generally takes two business banking days.
- Value Spot
- Normally settlement for two working days calculated from day 1.
- Variation Margin
- A call by a broker to increase the margin requirement of a forex account. This would occur during a period of extreme market volatility.
- Volatility
- A statistical measure of the market or a currency's price movements, over time. This is calculated by using standard deviation. Higher volatility equates to greater fluctuation in price.
- Vostro Account
- A local currency account maintained with a bank by another bank.
- Warrant
- A warrant is a form of traded option. It is a right but not obligation to buy shares in a company at a future date. This is done at a prearranged price.
- Wash trade
- A matched deal which results in neither a gain nor a loss.
- Whipsaw
- A term used to describe a condition in a highly volatile market . Here a sharp price movement is quickly followed by a sharp reversal.
- Working day
- A day on which the banks are open for business, in a currency's principal financial center For our purposes with regards forex transactions, a working day only occurs if the bank in both financial centers is open for business.
- Yard
- Slang for a billion. (I like this term!)
In the next lesson we'll look at Forex itself, what it is, what role it plays in the market and systems that players use in their investment strategies. Can't wait, this will really be interesting! Look out for lesson 2.
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