Forex Glossary

A – C D – G H – N O – S T – Z

 

 

 

 

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Appreciation – The increase in value of a currency relative to another. A currency is said to "appreciate" when its price goes up relative to another currency in response to market demand.

Arbitrage – The simultaneous buying and selling of an instrument taking an equal and opposite position in an attempt to generate profits without risk. An arbitrageur attempts to capitalize on small price discrepancies between financial markets or instruments.

Around – Jargon currency dealers use when quoting when the premium or discount of a forward contract is near parity. Example: "two-two around" would mean 2 points to either side of the present spot price.

Ask Rate – The exchange rate at which a base currency is offered for sale versus another (as in the bid/ask spread). Example: EURUSD ASK = 1.2550 means that the Euro is being offered for sale at 1.2550 USD.

Asset Allocation – The practice of subdividing an investor's funds into different asset classes to achieve diversification.

Back Office – The department or system in charge of the settlement of currency transactions.

Balance of Trade – The difference between exports and imports of a given country.

Base Currency – The currency that is being quoted relative to another, which is listed first in a currency symbol. For example, in the EURUSD pair, the Euro is the base currency and is quoted in terms of USD. Whereas in the USDJPY, the US Dollar is the base currency and is quoted in terms of Japanese Yen.

Bear Market – A market that has experienced a prolonged decline in prices.

Bid/Ask Spread – The difference between the bid and ask (offer) price. The tighter or narrower the spread, the more liquid the underlying financial instrument. The EURUSD is the most liquid currency pair, which normally exhibits the smallest spreads.

Big Figure – Also known as "handle" and often abbreviated as "big fig," is the first few digits of an exchange rate. Since these digits rarely change during most market conditions, they are generally omitted when quoted by dealers, especially when the market is very fast paced. For example, if USDJPY is trading at 78.32 bid x 78.34 ask, the big figure is considered 78, but if EURUSD is quoted at 1.2515/1.2516, the big figure would be 1.25. In this last example, the exchange rate might be quoted verbally as "15/16;" in other words, without the first 3 digits (big figure).

Book – The total positions of a trading desk or professional trader.

Broker – A firm that acts as an intermediary or middleman in the transaction between two customers. A broker earns a commission or fee for matching a buyer and a seller. A "dealer," on the other hand, puts up its own capital and takes one side of the position, hoping to earn the spread (difference between the Bid and Ask prices) by closing the position with another party.

Bretton Woods Agreement of 1944 – An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged (fixed) the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned it and established a floating exchange rate for the major currencies.

Bull Market – A market consisting of a continuous uptrend in prices (as opposed to a "Bear Market").

Bundesbank – The Central Bank of Germany.

Cable - Nickname given to the British Pound – US Dollar currency pair (GBPUSD). This nickname came about because the exchange rate was transmitted via a transatlantic cable beginning in the mid 1800's.

Candlestick Chart - A commonly used chart in technical analysis that consists of "candles" instead of "bars." Also known as Japanese Candlesticks, the candles provide the direction of the close by using colors (one color for a closing price higher than an opening price and a different color for the opposite). Normal color pairs used for the candles are red-green and black-white.

Central Bank – A government or quasi-governmental organization that manages a country's currency, money supply, and interest rates. For example, the central bank in the United States is the Federal Reserve, and in Germany, the Bundesbank.

Chartist - Also known as a "Technician" or "Technical Trader," an individual who analyzes charts to determine what future prices might do.

Clearing – The process of settling a trade or transaction.

Contagion – The transmittal of a financial or economic crisis from one market or country to another. The high use of leverage in today's global markets increases the risk of a contagion and the rate at which the crisis can spread if a contagion occurs. The 1997 Asian financial crisis is an example of a financial contagion.

Commission – A fee or charge per transaction that a broker charges a customer. A commission can be a fixed amount, like 10 USD per standard lot of base currency traded or a variable amount, such as 25 USD per million USD traded.

Confirmation – A document or electronic statement providing proof that a transaction between two parties has been completed. The confirmation includes the details of the transaction, such as opening and closing times, prices, order size, etc.

Contract – A standardized unit of trading. Contracts are also referred to as "lots," which represent 100,000 units of the underlying instrument. A contract can also be 1,000,000 (1M) units.

Counterparty – Each participant to a financial transaction or trade. Each currency transaction involves two counterparties.

Country Risk – The risk of investing in a country. This includes, but is not limited to, the risk associated with the legal and political condition of the particular country in question.

Cross Rate – The exchange rate between any two currencies that are considered non-standard in the country where the currency pair is quoted. For example, in the US, a GBP/JPY quote would be considered a cross rate, whereas in UK or Japan it would be one of the primary currency pairs traded.

Currency – Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

Currency Risk – the risk of loss due to the change in price (or exchange rate) of a currency an asset or investment is based in.

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Day Trading – The opening and closing of positions within the same trading day.

Dealer – A party to a transaction who puts up its own capital and takes one side of the position, hoping to earn the spread (difference between the Bid and Ask prices) by closing the position with another party. A "broker", on the other hand, acts as a middleman between the buyer and seller.

Delivery – A currency transaction where the counterparties make and take delivery of the currencies traded.

Depreciation – A decrease in the exchange rate or price of a specific currency due to market forces.

Derivative – A contract whose price depends on the value of another underlying physical instrument, security or futures contract; e.g., a currency option.

Devaluation – The deliberate downward adjustment of a currency's price relative to other exchange rates, normally by official announcement by a country's government or central bank.

Economic Indicator – A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

European Monetary Union (EMU) – The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. On January 1st, 1999 the transitional phase to introduce the Euro began. The Euro now exists as a banking currency and paper financial transactions and foreign exchange are made in Euros. This transition period will last for three years, at which time Euro notes an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, the national currencies of the member countries will cease to exist. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

EURO – the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU).

European Central Bank (ECB) – the Central Bank for the new European Monetary Union.

Federal Deposit Insurance Corporation (FDIC ) – The regulatory agency responsible for administering bank depository insurance in the US.

Federal Reserve (Fed) – The Central Bank for the United States.

Flat/Square – Dealer jargon used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.

Foreign Exchange – (Forex, FX) – the simultaneous buying of one currency and selling of another.

Forward – The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

Forward Points – The pips added to or subtracted from the current exchange rate to calculate a forward price.

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 instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange-Traded Contacts – ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

Good 'Til Cancelled Order (GTC) – An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.

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Hedge – A position or combination of positions that reduces the risk of your primary position.

Inflation – An economic condition whereby prices for consumer goods rise, eroding purchasing power.

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

Interbank Rates – The Foreign Exchange rates at which large international banks quote other large international banks.

Leading Indicators – Statistics that are considered to predict future economic activity.

LIBOR – The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Limit Order – An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 102.00/05, then a limit order to buy USD would be at a price below 102. (i.e., 101.50)

Liquidity – The ability of a market to accept large transaction with minimal to no impact on price stability.

Liquidation – The closing of an existing position through the execution of an offsetting transaction.

Long Position – A position that appreciates in value if market prices increase.

Margin Call - A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer.

Market Maker – A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.

Market Risk – Exposure to changes in market prices.

Mark-to-Market – Process of reevaluating all open positions with the current market prices. These new values then determine margin requirements.

Maturity – The date for settlement or expiration of a financial instrument.

Momentum Investor – A market participant who increases market exposure when the market is rising and decreases exposure or goes short when the market is declining.

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Offer – The rate at which a dealer is willing to sell a currency.

Offsetting Transaction – A trade with which serves to cancel or offset some or all of the market risk of an open position.

One Cancels the Other Order (OCO) – A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.

Open Order – An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.

Open Position – A deal not yet reversed or settled with a physical payment.

Over the Counter (OTC ) – Used to describe any transaction that is not conducted over an exchange.

Overnight – A trade that remains open until the next business day.

Pips – Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.

Political Risk – Exposure to changes in governmental policy which will have an adverse effect on an investor's position.

Position – The netted total holdings of a given currency.

Premium – In the currency markets, describes the amount by which the forward or futures price exceed the spot price.

Price Transparency – Describes quotes to which every market participant has equal access

Quote – An indicative market price, normally used for information purposes only.

Rate - The price of one currency in terms of another, typically used for dealing purposes.

Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

Revaluation - An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.

Risk - Exposure to uncertain change, most often used with a negative connotation of adverse change.

Risk Management – the employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

Roll-Over – Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.

Settlement - The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

Short Position – An investment position that benefits from a decline in market price.

Spot Price – The current market price. Settlement of spot transactions usually occurs within two business days.

Spread - The difference between the bid and offer prices.

Sterling - slang for British Pound.

Stop Loss Order – Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.

Support Levels – A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.

Swap - A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.

Swissy - Slang for Swiss Franc.

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Technical Analysis – An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc.

Tomorrow Next (Tom/Next) – Simultaneous buying and selling of a currency for delivery the following day.

Trade Deficit - The amount a countries imports exceeds the value of its exports.

Transaction Cost – the cost of buying or selling a financial instrument.

Transaction Date – The date on which a trade occurs.

Turnover - The total money value of all executed transactions in a given time period; volume.

Two-Way Price – When both a bid and offer rate is quoted for a FX transaction.

Uptick - a new price quote at a price higher than the preceding quote.

Uptick Rule – In the U.S., a regulation whereby a 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

Value Date – The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.

Variation Margin – Also known as maintenance margin, these are funds a trader must deposit in his account as a result of unfavorable movements in price in order to avoid forced liquidation of his open positions.

Volatility - The statistical tendency of a a currency to fluctuate in price.

Whipsaw – When the price of a given currency pair moves rapidly in one direction and is quickly followed by a volatile move in the other direction. Also refers to a trader being stopped out by a whipsaw in price.

Yard - A financial term representing a billion units of a given currency.