basic forex glossary

Glossary, common terms for forex trading

A

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

B

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 currency.

Bid – the price at which a trader will sell a currency.

Broker – an agent who handles investors' orders to buy and sell currency. In the FOREX business, no commission is charged as the broker makes money through the spread.

C

Call Rate – the overnight interbank interest rate.

Cash Market – the market for the purchase and sale of physical currencies.

Central Bank – the institution that manages a country’s monetary policy.

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 the bank with whom a foreign deal is made.

Cross Rate – an exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.

D

Day Trading – refers to opening and closing the same position or positions within one day's trading.

F

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

Fixed Exchange Rate – official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention.

Flat / Square – to be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.

Floating Rate Interest – as opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.

Foreign Exchange Swap – transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).

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.

I

Initial Margin – the required initial deposit of collateral 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.

L

Limit Order –an order to buy at or below a specified price or to sell at or above a specified price.

Long Position – a market position where the Client has bought a currency he previously did not hold own.

M

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

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.

O

Offer – the price or rate that a seller is prepared to sell at.

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.

P

Pip (or Points) – the term used in currency market to represent the smallest incremental move an exchange rate can make.

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 his or her lifestyle.

S

Settlement – actual physical exchange of one currency for another.

Spot – a transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.

Spread – the difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.

T

Two-Way Price – rates for which both a bid and offer are quoted.

U

US Prime Rate – the rate at which US banks will lend to their prime corporate customers.

V

Value Date – settlement date of a spot or forward deal.

Volatility – a statistical measure of a market or a security's price movements over time. It is calculated by using standard deviation. Associated with high volatility is a high degree of risk