Commonly Used Forex Terms
Know the Language
In Currency Trading, traders often use technical language that can be intimidating when you're just starting out. When you see a word you don't understand, you should refer to this page. As you familiarize yourself with the language, you'll find that your understanding of Forex concepts as a whole will improve.
A record of transactions of goods and services owed to one person by another.
An intermediary or person hired to carry out transactions on behalf of another person.
Total demand in an economy, consisting of government spending, private/consumer and business investment.
Refers to requests for a broker to fill an order completely at a predetermined price or not at all. Refers to both buy and sell orders.
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.
Visible bids and offers on the market without the identity of the bidder and seller being revealed. Anonymous trades allow the high profile investors to execute transactions without the scrutiny and speculation of the market.
An increase in the value of a currency in response to market demand.
When a price differential arises, creating an opportunity to profit through buying and selling. Arbitrage is a "riskless" opportunity to profit, as there is no uncertainty involved. In regards to the foreign exchange market, arbitrage arises when a profit can be made through differentials in exchange rates. Arbitrage opportunities in the foreign exchange market are rare.
An option whose payoff depends on the average price of the underlying asset over a certain period of time. These types of option contracts are attractive because they tend to cost less than regular American options
The lowest price that shares will be offered for sale, such as the bid/ask spread in the foreign exchange market.
The number of shares a seller is willing to sell at his/her ask rate.
The diversification of one's assets into different sectors, such as real estate, stocks, bonds, and forex, to optimize growth potential and minimize risk.
An interest rate swap used to alter the cash flow characteristics of an institution's assets in order to provide a better match with its liabilities.
A person given the right or authority to act on behalf of another to carryout business transactions and implement documents.
A financial institution or bank authorized to deal in foreign exchange.
A procedure implemented to protect an option holder where the Option Clearing Corporation will automatically exercise an "in the money" option for the holder.
When the bid on an order is lower (or the ask price is higher) than the current market price for the security.
Refers to the administrative arm of financial service companies, who carry out and confirm financial transactions. Duties include accounting, settlements, clearances, regulatory compliance and record maintenance.
The net value of an account.
A record of all transactions made by one particular country with others during a certain time period. It compares the amount of economic transactions between a country and all other countries. This includes trade balance, foreign investments, and investments by foreigners.
Net flow of goods (exports minus its imports) between two countries.
The BIS is an international organization fostering the cooperation of central banks and international financial institutions. Essentially, the BIS, located in Basel, is a central bank for central banks. It monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.
In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts. In the FX markets, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.
The difference between the cash price and the futures price.
Measure of a bond's yield equal to 1/100th. A 1% change in yield is equal to 100 basis points and 0.01% is equal to one basis point.
Investor acting on the belief that prices or the market will decline.
Any market that exhibits a declining trend. In the long run they have a down turn of 20% or more.
The price an investor is willing to pay for an asset.
The difference between the bid and the ask price.
Refers to the first number to the left of the decimal point in an exchange rate quote, which changes so infrequently that dealers often omit them in quotes.
Bonds are debt instruments used to raise capital, which are issued for periods greater than one year. Bondholders are loaning money (investing in debt) to companies and governments, at the end of which they will be paid a specified interest rate. Bond prices are inversely related to interest rates, as interest rates rise, bond prices fall. There are numerous types of bonds, including treasury bonds, notes, and bills; municipal bonds and corporate bonds.
Recording of the total positions held by a trader or desk.
This accord established a fixed exchange rate regime, whose aim was to provide stability in the world economy after the Great Depression and the WWII. This accord fixed the exchange rates of major currencies to the US dollar and set the price of gold to $35. The accord required central bank intervention to maintain the fixed exchange rates. The US Central Bank was required to exchange dollars for gold, which eventually let to the demise of this system, when the demand for the dollar declined, as well as the gold reserves, forcing Nixon to stop the exchange of dollars for gold, effectively ending the system in 1971.
Individual or firm acting as an intermediary to bring together buyers and sellers typically for a commission or fee.
Investor who expects markets or prices to rise.
A market where prices are rising or are expected to rise.
Germany's Central Bank.
A recommendation to instigate a long trade if the price bounces from a certain level.
A recommendation to buy the currency pair if it breaks the current level specified.
A recommendation to enter the market when the exchange rate breaks through a specific level. The client placing a stop entry order believes that when the market's momentum breaks through a specified level, the rate will continue in that direction.
Term used to describe the exchange rate between the US dollar and the British Pound.
Chart depicting the daily high, low, opening and closing price, similar to that of a bar chart. If the close is lower than the open than the body of the candlestick is filled in, and if the open is lower than the close the body is left empty.
Markets in which capital (stocks, bonds, etc.) are traded. Usually for medium or long term investing.
An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest rate differential.
A banking organization, usually independent of government, responsible for implementing a country's monetary policy and for printing money.
Refers to a technical analyst or one who analyses charts/graphs and data to uncover potential trends.
Refers to the settlements/confirmations of trades.
Refers to getting rid of a position, either by buying back a short position or selling a long position.
A fee charged by broker or agent for carrying out transactions/orders.
A written document verifying the completion of a trade/transaction to include such things as date, fees or commissions, settlement terms and the price.
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 and soon spread to other East Asian economies. It now is used to refer to the recent crisis in and its effects on other Latin American countries.
The standard trading unit on certain exchanges. A standard lot in the forex market is $100,000.
Currencies that can be exchanged for other currencies or gold.
When an investor borrows money to sustain a position. There is a cost for borrowing derived from the interest parity condition, which is used to determine the forward price.
A participant, either a person or an institution, involved in one side of a financial transaction. With such transaction there is an associated risk (counterparty risk) involved that the counterparty will not be able to meet the terms outlined in the contract. This risk is usually default risk.
The risk that a government might default on its financial commitments/contracts, which typically causes harms to other areas of the financial sector, as well as those in other countries.
A recommendation to exit trades on a bounce out of a support level.
A recommendation to exit trades for profit on approach to a support level.
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 verifying that counterparty has enough credit. The check is initiated after the price has been determined.
Agreements that are made to avoid having to continually recheck credit, usually established between large banks and trading institutions.
Refers to the exchange rate between two countries' currencies. Cross rates usually refer to pairs quoted that do not include the domestic currency. For example, in the US, the EUR/JPY rate would be called a cross rate.
Notes and coins issued by the central bank or government, serving as legal tender for trade.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought euros and simultaneously sold dollars. You would do so in expectation that the euro will appreciate (increase in value) relative to the US dollar.
Risk associated with drastic changes/fluctuations in exchange rates in which one could incur a major loss.
Refers to the process of entering and closing out trades within the same day or trading session.
One who places the order to buy or sell. A dealer differs from an agent in that it takes ownership of the asset, and thereby is exposed to some risk.
An excess of liabilities over assets, of losses over profits, or of expenditure over income.
Term used to describe the exchange by both parties (buyer and seller) of the traded currency.
Refers to the process of borrowing and lending money. The deposit rate is the rate at which money can be borrowed or lent.
The decline in the value of an asset or currency.
A security derived from another and whose value is dependent the underlying security from which it is derived. Examples of derivatives are future contracts, forward contracts and options. Underlying securities can include stocks, bonds or currencies. Derivatives can be traded and are usually used to hedge portfolio risk.
When the value of a currency is lowered against the other, i.e. it takes more units of the domestic currency to purchase a foreign currency. This differs from depreciation in that depreciation occurs through changes in demand in the foreign exchange market, whereas devaluation typically arises from government policy. A currency is usually devalued to improve the balance of trade, as exports become cheaper for the rest of the world and imports more expensive to domestic consumers.
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. The exchange rate is managed through changes in the interest rate to attract/detract capital flows or through the buying and selling of the currency. 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.
When the cash flow of a country is vulnerable to changes in the exchange rate.
Markets where assets are traded in which the price is indicative of all current and relevant information and thus it is impossible to have undervalued assets.
Accounting measure, referring to the way traders record their positions. There are two ways that a trader can record his positions: the accrual system in which only cash flows are recorded and the mark to market method, in which the value of an asset is recorded at the end of each trading day at the closing rate or value.
The expected yearly earnings.
The new monetary unit of the European Monetary Union used by twelve countries in the European Union. It is now the legal tender of those countries as of January 2002. Those countries include Germany, France, Belgium, The Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Ireland, Finland and Greece.
An institution of the EU, whose primary goal is to establish a single currency (the euro) for the entire EU.
See Futures Commission Merchant.
A regulatory agency of the created to oversee that bank deposits are insured against bank failures. It was created in 1933 to restore confidence in the banking system. It insures up to US $100,000 per banking institution.
The central bank of the United States, responsible for monetary policy.
When the exchange rate of a currency is not allowed to fluctuate against another, i.e. the exchange rate remains constant. Typically, under fixed exchange rate regimes, currencies are allowed to fluctuate within a small margin. Fixed exchange rate regimes require central bank intervention to maintain the fixed rate.
An interest rate used for loans, mortgages and bonds that remain at the same rate throughout the period.
To either have no positions or positions that cancel each other out.
An interest rate that is allowed to adjust with the market. The opposite of a fixed interest rate.
The buying and selling of currencies.
Refers to how changes in the exchange rate affect the return on foreign investment.
A deal in which the price for the future delivery of a commodity is set in advance of the delivery. The Forward rate is obtained by adding the margin to the spot rate. It is used to hedge against adverse fluctuations in the exchange rate that can affect amount of profit or loss at that future date.
Refers to the pips that were added to or subtracted from the current exchange rate to obtain the forward price/rate.
FRAs are agreements that are made that allow for borrowing and lending at a constant interest rate for a specified period in the future.
Refers to the sales personnel (trading and other business personnel) in a financial company.
The analysis of economic indicators and political and current events that could effect the future direction of financial markets.
A Futures Commission Merchant engages in futures and options transactions. An FCM has a role in the futures market that is similar to that of a broker in the securities market.
Future contracts that commit both sides to an exchange/transaction of financial instruments, currencies or commodities at a future date and a predetermined price. Future contracts are similar to forward contacts, but future contracts can be traded in the futures markets. Can be used to hedge or speculate against the value of the asset at the expiry date.
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.
Strategy to reduce the risk of adverse price movements on one's portfolio and to protect against the volatility of the market. Hedging typically involves selling the good forward or taking a position in a related security. Hedging becomes more prevalent with increased uncertainty about current market conditions.
Refers to the daily traded high and low price.
Refers to the increase in prices (price level) and wages over time that decrease purchasing power. It is calculated from changes in the price index, usually a consumer price index or a GDP deflator.
The percentage of the price of a security that is required for the initial deposit to enter into a position. The Federal Reserve Board requires a minimum of 50% initial margin. For futures contracts, the market determines the initial margin.
The rate at which the major banks (Deutsche, Citibank, Bank of Tokyo) trade in foreign exchange.
The process of changing the form of debts held by banks or companies, in which they trade debts/loans fixed rates for floating rates (or vice versa) in another country.
The interest rate can be determined through the difference in the bid and offer price of an exchange rate. If you are looking at the EUR/USD exchange rate and the offer price is higher than the bid price, than Europe's interest rates are higher than US interest rates.
Organization defining the terms and conditions for trade in derivatives.
Such statistics as unemployment rates, CPI, Federal Funds Rate, retail sales, personal income, discount rate and the prime rate that are used to predict economic activity.
Stands for the London Interbank Offer Rate, and is the rate at which major international banks lend to one another. It is widely used as the benchmark for short-term interest rates.
London International Financial Futures Exchange, made up of the three largest future exchanges in the UK.
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. (ie 101.50)
Those assets, usually short dated assets like Treasury Bills that can easily be turned into money.
The process of closing out long or short positions by offsetting transactions. Also refers to the process of selling all assets of a bankrupt company to pay off first creditors and then shareholders.
The ability of a market to accept large transaction with minimal to no impact on price stability
Refers to the ownership of securities, commodities or currencies, in which there is no intent to sell due to speculation that the price will rise.
A percentage of the total value of a transaction that a trader is required to deposit as collateral. Buying on margin refers to investing with borrowed funds, and the margin requirement insures against heavy losses.
This is a call by a broker or dealer to raise the margin requirement of an account. The call is typically made after the value of a security (securities) has significantly declined in value.
A broker-dealer firm that owns shares of a security and is willing to buy and sell at the quoted bid and ask prices. The firm lists buy and sell prices to attract customers.
An order to buy or sell a stock at the best available price.
The risk associated with investing in the market and cannot be hedged or avoided.
The date that the security is due to be redeemed or repaid.
Terms used to signal when a trader wants to buy (mine) and sell (yours).
Highly liquid markets for short-term investing in monetary instruments and debts, typically maturing in less than one year. Because of large transaction cost relative to potential interest, transactions occur in large amounts and thus participants are mainly banks and other large financial institutions.
The difference between the values of assets and liabilities. For public companies this is referred to as shareholder equity.
Financing or the raising of money by a company that does not appear on the company's balance sheet, such as Interest Rate Swaps and Forward Rate Agreements.
The price (or rate) at which a seller is willing to sell at.
When a trader enters an equivalent but opposite position to an already existing position, thereby balancing his positions. An offsetting transaction to an initial purchase would be a sale.
An order that through its execution cancels the other part of the same order.
An order that has yet to be executed and is still valid. An open position puts a trader at risk if the market prices rise or fall, i.e. the trader is vulnerable to movements in the exchange rate.
An order to buy or sell that remains valid until it is executed or canceled by the customer. An order that is executed when the price of a share or currency reaches a predetermined price.
These are tradable contracts giving the right, but not obligation, to buy or sell commodities, securities or currencies at a future date and at a prearranged price. Options are used to hedge against adverse price movements or to speculate against price rises or falls. Holding options is riskier than holding shares, but offer potentially higher returns.
An instruction by a customer to a broker/trader to buy or sell at certain price or market price. The order remains valid until executed or cancelled by the customer.
A position that remains open until the start of the next business day.
A market not regulated by a stock exchange, such as the United States' NASDAQ. Over-the-counter refers to a stock not traded on an exchange, typically resulting from the company's inability to meet the requirements. Over-the-counter security transactions are made directly between brokers.
When a country fixes the exchange rate to another country's currency, usually to achieve price stability. Most countries that peg their currencies do so against the US dollar or the Euro.
The smallest amount an exchange rate can move, typically .0001.
A theory that explains changes in the economy as a result of political tactics before and after elections. To gain voter support politicians will often expand the economy prior to elections and implement reforms just after the elections to avoid punishment by the polity.
Risk that changes in government policies will negatively impact an investor. Political Risk is especially prevalent in third world countries.
The amount of currency or security owned or owed by an investor.
The amount added to the spot price of a currency to get the forward or future price.
Refers to the degree of access to information regarding bids and offers and respective prices. Ideally, every investor/trader would have equal access to all information.
The offer price of a security.
The price of one currency in terms of another (exchange rate).
Unrealized profit is a gain from an increase in the price of an asset that has not been cashed in. Realized profits are made from the cashing in of the unrealized gain.
Repos are short-term money market instruments. The trader sells a security (government security) and buys it back only after a short period of time, typically only overnight. Repos are primarily used to raise short-term capital.
A price level at which most investors expect prices to decline further. A price at which there is sufficient supply to turn a previously uptrend downward. With regards to the forex market, it is the level at which a currency cannot rise above.
The market rates that are used by traders in the evaluation of the gains and losses in their accounts each day.
Uncertainty in the possible outcomes of an action, i.e. possible returns on an investment. Risk is most commonly measured from the variance of possible outcomes. Higher risks are associated with higher rates of returns, typically in order to induce investment in riskier ventures.
The capital that an investor does not need to maintain his/her living standard.
Term to describe when a trader will use analysis and other trading techniques to avoid substantial risks to his portfolio.
Refers to a process of reinvesting in which, at the expiry, the settlement is postponed until a later date. The cost of the process is measured by the interest rate differential between the two currencies.
The actual finalization of a contract in which the goods, securities or currencies are paid for or delivered and the transaction is entered in the books.
The selling of a borrowed security, commodity or currency. Traders sell when prices are expected to fall.
A contract to sell securities, commodities or currencies at a future date and at a prearranged price. At the expiry date, if the spot price is below the contract price, the holder of the contract will make a profit and if the spot price is above the contract price, then there is the potential to make a huge loss.
A market in which commodities, securities or currencies are immediately delivered.
The current market price.
The difference between the bid and offer price that is offered by a market maker.
Refers to the currency, the Pound.
An order used to hedge against excessive loss in which a position is liquidated at a specific, prearranged price.
A price level at which there is sufficient demand to turn a downtrend up.
When a trader exchanges one currency for another, holding it for only a short period. Swaps are typically used to speculate on interest rate movements. It is calculated using the interest differentials between the two currencies.
The difference between the negotiated and fixed price of the swap. The size of the spread depends on market supply and participating parties' credit.
A technique used to try and predict future movements of a security, commodity or currency, based solely on past price movements and volume levels. It examines charts and historical performance.
A minimum price movement.
Depicts current or recent history of a currency, usually in the form of a graph or chart.
This term advises that price reaction to a certain level is critical. If this level breaks then the recommendation would be to run with the market direction (i.e. Buy a break above resistance level; sell a break below a support level). However, if a price stalls at this level and is rejected then the recommendation is to go with this also (i.e. Sell at a resistance level that is tested and holds, buy at a support level).
The costs that are incurred by a trader when buying or selling currencies, commodities, or currencies. These costs include broker commissions or spreads.
The date a trade occurs.
The number or volume of shares traded over a specific time period. The larger the turnover, the more commissions a broker will be making.
A price that includes both the bid and offer price. The NASD requires that market makers have both bid and ask prices for any security, currency or commodity in which they make a market. This is called a two-sided market.
A price quote that is higher than the preceding quote for the same currency.
A regulation requiring that if a security is to be traded short, the price in the trade prior to the short trade has to be lower than the price of the present short trade.
The interest rate that the major banks lend to major clients.
The date that payment is exchanged between two parties.
A call by a broker to increase the margin requirement of an account during a period of extreme market volatility.
Measures the volatility of a data set/data points from the mean. It is calculated by adding the squares of the standard deviations from the mean and dividing by the number of data points, i.e. taking the average of the standard deviations.
Refers to the tendency of prices/variables to fluctuate over time. It is most commonly measured using the coefficient of variation (the standard deviation divided by the mean). The higher the volatility, the higher the risk involved.
The number of shares or contracts traded for a certain security or an exchange during a period.
It is a right but not obligation to buy shares in a company at a future date and at a prearranged price. Warrants are tradable options.
Term used to describe sharp price movements and reversals in the market. A whipsaw would be if shortly after you bought a stock the price plummeted.
Term for a billion JPY.
Be aware that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Live Currency Rates
|EUR / USD||1.26440||▲|
|USD / JPY||107.213||▲|
|GBP / USD||1.60421||▼|
|USD / CHF||0.95395||▼|
|USD / CAD||1.12411||▼|
|EUR / JPY||135.561||▲|
|AUD / USD||0.87679||▼|