Forex Glossary

A-B-C-D-E-F-G-H-I-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z


A

ABA: American Bankers Association, code used to define a bank.

Aggressor: A trader who deals with existing market price(s).

Appreciation: Increase in value of a underlying asset.

Arbitrage: Simultaneous purchase of one currency against the sale of another in two different markets in order to profit from price distortion.

Ask: Also known as ‘Ask Price’, ‘Ask Rate’ or ‘Offer, is the price at which a currency is offered for sale.

Ask Price: See ‘Ask’

Ask Rate: See ‘Ask’

B

Back Office: Department where settlements of transactions take place

Balance of Payment: System that enables the tracking of a countries economic transaction.

Base Currency: The currency at which other currencies are quoted against. E.g.: GBP/USD where pound is the base currency.

Basis point: One hundredth of a percentage point. Difference between 7.55% and 7.85% is referred to as a 30 basis point move.

Bear Market: Is a prolonged period of time where price in the market is on a decline.

Bid: Price at which a buyer is ready to buy a particular currency while selling the other simultaneously.

Bid/Ask Spread: Is the difference between the ‘Bid’ and ‘Ask’ price.

Break-Even: Price at which premium is recovered.

Broker: An agent, who executes orders to buy and sell currencies either for a ‘Commission’ or on a ‘Spread’.

Bull Market: Is an extended period of time where price is on an incline.

Buy Limit Order: taking a position in the market where order is executed at a specified price.

C

Cable: Term used to refer to GBP/USD.

Candlestick chart: A type of chart that displays the high, low, open and close on a daily basis.

Carry: Cost associated in keeping a foreign-exchange position over-night.

Central Bank: An institution owned by the government that controls the nation’s monetary policy and printing of the money.

Chartist: Person who studies graphs and charts of past data to predict trends and price movement.

Closed position: Transaction that liquidates the position of a currency, thus leaving the trade with a zero commitment to the market.

Commission: Fee charged by an institution to a customer when placing a trade.

Confirmation statement: Confirmation sent to customer by a dealing house when a transaction has taken place.

Consolidation: A period in the trading activity where the price moves sideways.

Cross-Rate: Exchange rate between two currencies other that the US dollar.

Currency: Type of money that a country uses which is issued by the government.

D

Day Order: Any ‘Buy’ or ‘Sell’ order if not executed expires automatically at the end of the day it was entered.

Day Trader: A trader who takes a position in the market and liquidates that position before the close of the day.

Day Trading: refers to a specific type of trading where a position is opened and closed in the same trading day.

Dealer: An individual or firm that trades from his or her own accounts while acting as a principal in the buying and selling of securities.

Depreciation: A continuous fall in value if a currency.

Devaluation: Is where the government reduces the value of a currency in respect to another monetary unit.

E

EMS: European Monetary System is a system put forward to eliminate exchange risk between member states of the EMS.

Equity: Dollar value of an account.

Euro: The currency of the countries forming part of the European Union.

Exchange: A group of people dealing with the activity of buying and selling stock, futures etc.

ECB: European Central Bank that is responsible for the monetary policy of the European Union.

F

FOMC: Federal Open Market Committee is the regulatory agency that overlooks the setting of interest rates and credit policies of the Federal Reserve Bank.

FRB: Federal Reserve Bank is the central bank of the Unites States Of America and is responsible for the implementation of the country’s monetary policy and regulation of the banks.

Fill: Completing a transaction of either buying or selling a currency pair

Finex: Currency market part of the New York Cotton Exchange

Fiscal Policy: Taxation and spending policies implemented by the government

Floating Exchange rate: Rate that reflects the supply and demand of a currency

Foreign Exchange Market: They are markets where currency are traded internationally

Forward: A deal where settlement is made at a future date agreed upon.

Forward Outright: A deal that is set to mature on any day past the spot value date.

Forward Points: Is the difference between the forward and spot rate

FX: Short for Foreign Exchange

G

G7: Comprises of the top leading industrial countries in the world: United States, Germany, France, Italy, Canada, Japan and United Kingdom.

Gap: Is a change in price levels between the close and open of two consecutive days.

Globex: A global after hour’s electronic trading system.

Gold Standard: A monetary standard under which the currency of a country is backed by a reserve of gold.

Good Till Cancel Order: A ‘Buy’ or ‘Sell’ order, which is held by a broker until it is filled or cancelled.

H

Hard Currency: A globally traded currency in which investors have confidence in and where the country is economically and politically safe.

Hedge: Common strategy used by fund companies, to offset market risk by eliminating loss due to price fluctuations.

I

IMF: International Monetary Fund was formed in the 1940s and currently has 181 members. Its main goal is to promote international trading and stabilize exchange rates of member countries.

Implied Rates: The interest rate determined by the difference between spot and forward rates.

Inconvertible Currency: Currency that can’t be exchanged for other currencies.

Inflation: Is a sustained increase in the general price of goods and services in an economy.

Initial Margin: A deposit that needs to be made by the client to the clearinghouse to cover a position in the market.

Interbank Rates: Foreign exchange rates that are charged between two big banks for loans.

Interest Rate Risk: Amount of mismatches and maturity gaps among transactions in the foreign exchange books.

Interest Rate Swap: A contractual agreement between two parties to swap interest rate payment from each other.

International Fisher Effect: This theory states that investors will hold assets denominating in depreciating currencies only if the interest rates are high enough to balance any currency losses.

Intra-Day-Limit: The daily limit set on a dealer’s currency position.

ISO codes: International Organization for Standardization is standardized currency codes

J

J-Curve Theory: The effect of devaluation on a country’s trade balance will trigger export gains in the long term rather than in the short-term period.

Jobber: A trader who targets mainly short term trades for small profits, rarely carrying a position overnight.

Jurisdiction Risk: The risk that a loss may be incurred in placing funds in the jurisdiction of a foreign legal authority.

K

Key Currency: Currency used in international trade settlement and described as the act of orienting the currency of a small country to that of a major trading partner.

Key Reversal Day: Where the daily price range on the bar chart of the reversal day fully engulfs the previous days range and where the close is clearly outside the preceding day’s range.

Kiwi: The name given to the New-Zealand dollar.

L

Lagging Indicator: An economic indicator that tends to change after the overall economy has changed.

Limit Order: An order to execute a transaction at a specified price considered as the limit. Note that if it were a buy limit this would be the limit or lower and vice versa for a sell limit.

Leading Indicators: An economic indicator that changes before the economy starts to follow.

Leverage: The use of a small amount of any financial instrument (e.g. cash) to control a bigger amount thus increasing potential return on investment.

Line Chart: The line connecting single prices for each of the time period selected.

LIBOR: London Interbank Offered Rate, rate charged by one bank to the other when lending money.

Long-Position: This is referred to when a currency is bought. Example buying Eur/Usd means going long on Euro and going short on dollar.

M

M1: Is a measure of money supply that constitutes of currency in circulation plus demand deposits at commercial banks.

M2: Money supply measure consisting of M1 and includes demand deposits, time deposits and money market mutual funds.

M3: Is a measure of money supply that is composed of M2 and private sector time deposits and all balances in institutional money market mutual funds.

Maintenance: A set minimum margin that an investor must keep on deposit in his margin account.

Margin: The amount of money provided by client that is needed to maintain a position.

Margin Account: An account that allows leverage buying on credit and borrowing on currencies already in the account. Buying on credit and borrowing are subject to standards established by the firm carrying the account. Interest is charged on any borrowed funds and only for the period of time that the loan is outstanding.

Margin Call: A call for additional funds to be deposited in a margin account so as to meet the margin requirements in possible adverse price movement.

Mark-to-Market: The theoretical value of an open position at the current market price.

Market Close: Refers to the time of day that a market closes. It is important to note tat there is no official market close in the Fx market. Banks and traders commonly refer to 5:00 PM EST as the market close.

Market Maker: A person or firm that provides liquidity by creating and maintaining a market in an instrument.

Market Rate: The current quote of a currency pair.

Market Risk: The risks that occur when the value of an investment in the market moves downwards.

Maturity: The date at which a foreign exchange contract expires.

MM: Short for Money Market. It consists of financial institutions and money dealers.

Momentum: It can is described as the energy of a currency pair to be moving in a particular direction for an extended period of time.

N

Naked Intervention: A special type of intervention undertaken by the Central Bank in the foreign exchange market consisting solely of foreign exchange activity. This type of intervention has a monetary effect on the money supply and long-term effect on foreign exchange.

Netting: A process that enables institutions to settle only their net positions with one another at the end of the trading day. This is done by a single transaction and not trade by trade.

Next Best Price Stop-Loss Order: A stop-loss that is executed after the requested level is reached.

Non-Farm Sector: Jobs in government, manufacturing, services, construction, mining, retail and others.

Nostro Account: A foreign currency account that a bank holds with another bank.

O

Offer: The rate at which a seller is prepared to sell at.

Offered Market: A temporary situation where offers will exceed the bids.

Open Interest: This is the total number of futures contract that has not been fulfilled by delivery.

Open Order: Order that remains active unless closed or cancelled by customer.

Open Market Operations: It is the operation of the central banks in the market to influence exchange and interest rates.

Open Position: The transaction of buying or selling a currency that has not yet been closed by the customer.

Order: Instructions sent by customer to broker to buy or sell a currency.

OTC: Over the Counter is considered an unregulated exchange where transactions are conducted directly between dealers and principals.

Oscillators: Quantitative method that distinguishes between overbought and oversold conditions.

Overnight Position: A position that is kept overnight by a trader.

P

Parity: A currency in parity with each other is when the value of one currency = value of the other currency = 1.

Pegged: Is referred to as the date a dividend or bond interest is meant to be paid.

Pip: The term used to describe a minimum fluctuation or smallest increment of price movement in the foreign exchange world.

Price Transparency: The ability for both buyer and seller in the market to know the price and have equal access to information pertaining to the market.

Prime Rate: Rate that commercial banks charge customers, which is based purely on the discount rate.

Principal Value: Initial amount of money invested by client.

Q

Quota: Limit of import or export imposed by a country.

Quote: General price given for information purposes only.

R

Random Walk Theory: An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information

Rally: A sudden price recovery after a substantial decline in price.

Rate: Price of one currency against another currency.

Rate of Change: A momentum oscillator where by the oldest closing price is divided into the most recent one.

Ratio Spread: A compound option strategy where the number of long options is different from the number of short options.

Reserves: Funds set aside by government for future use. They constitute of a mixture of convertible foreign currency, gold and SDR.

Reserve Currency: Currency kept in reserve by the government in paying international debt. These are normally dollar, euro and the sterling.

Resistance: The level where price bounces back and fourth forming a strong opposition not allowing price to break above that level.

Revaluation: Is the increase in a country’s fixed exchange rate.

Reversal: This occurs at the end of a trend where price starts to charge direction in an upward or downward movement.

Risk: Is the degree of uncertainty in relation to an investment where high volatility and leverage contributes to riskiness.

Risk/Return: The amount of money an investor is ready to risk to profit from the market.

Risk Management: These are techniques used by investors to minimize risk and substantial loss of money.

Rollover: Referred to as an overnight swap where open position is forwarded to the next valid value date.

S

Scalping: The strategy of buying and selling in a short time lapse. The time duration is anywhere between 1-10 minutes

SDR: stands for Special Drawing Rights and is defined as a standard basket of the major currencies in fixed amounts used in the financial world.

Sell Limit Order: An order to execute a transaction at a specified price referred to as the limit or higher.

Selling Rate: Is the rate at which banks are willing to sell foreign currency.

Selling Short: Strategy used where trader sells a position and buys it back at a lower price in the future thus making a profit.

Settlement Date: This is the final stage of a transaction or the maturity date of a trade where actual delivery of the currency is made.

Settlement Price: This is the price at the close of each trading session set by the clearing-house where trading companies determine net gains and losses.

Settlement Risk: Form of credit risk that occurs due to the time zone separating the nations for non-settlement of transaction.

Short Position: When a currency is sold, it is referred to as a short position. Selling Eur/Usd means going short on Euro and long on Dollar.

Short Covering: Is the purchase of securities in order to close out an open short position.

SIMEX: Singapore International Monetary Exchange.

Spot: Transaction of either buying or selling that comes to settlement in two days.

Spot Next: A foreign exchange deal that matures one business day pass the spot date.

Spot Price: Current market price of a spot transaction.

Spot Rate: Current market rate of a spot transaction.

Spread: Is the pips or points that separates the bid and ask price of a currency. Difference is called the spread.

Stable market: A market that does not experience major currency moves. Thus buying and selling is in balance.

Sterling: Also known is ‘Cable’, is a term used to describe the British Pound.

Stop Loss Order: This is an order used to exit, at a specified price, in a losing trade.

Stop Order: Order to buy or sell a currency once price goes pass a desired level.

Stagflation: Situation where a country is experiencing low growth in the economy and at the time is affected by high inflation.

Support Levels: Level at which demand exceeds supply. Usually described as a level where buying pressure is high.

Swap: This is a foreign exchange deal that consists of a spot deal and a forward outright deal.

SWIFT: Society of Worldwide Interbank Financial Telecommunication. This is a global electronic network set up to send standardized payment instructions for foreign currencies among international banks.

Swissy: Term used to refer to the Swiss Franc.

T

Take Profit Order: A point placed by trader, where when reached, position is closed and profit is taken

Tan Book: Economic report prepared by the Federal Reserve for FOMC meeting.

Technical Analysis: The study of past price pattern to predict the future performance of a particular currency.

Thin Market: Occurs when trading volume and liquidity of a particular market is low.

Tick: Minimum change in price, either up or down.

Tier One: It is the bank’s core capital (bank equity) that supports bank lending.

Tight Money: This is a situation where money or loans are very difficult to obtain due to circumstances resulting in central banks monetary policy decisions.

Tomorrow Next: Also known as Tom Next. This is a foreign exchange trading strategy that seeks simultaneous buying of a currency for delivery the following day and selling for the spot day and vice-versa.

Trade Deficit/Surplus: This is the difference between value of imports and exports.

Transaction Date: Date at which a trade occurs.

Treasury Bills: Short-term U.S. government obligations sold at a discount from face value. Treasury bills generally are issued with 13-, 26- or 52-week maturities.

Trend: The general direction of the market broken down into an up-trend, downtrend or sideways trend.

Turnover: Total money value of all transactions in a given time period.

Two-Tier market: A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way Price: Quote in a foreign exchange transaction where both buying and selling rates are indicated.

U

Under-Valuation: Is where exchange rate is below its purchasing power parity.

USDX: Currency index that consists of the weighted average of the prices of ten foreign currencies against the US dollar: Deutsche Mark, Japanese Yen, French Franc, British Pound, Canadian Dollar, Italian Lira, Dutch Guilder, Belgian Franc, Swedish Krona, and Swiss Franc.

US Prime Rate: Rate at which US banks lends to its prime corporate customer.

V

Value at Risk: Expected loss form an adverse market movement with specified probability over a particular period of time.

Value Date: Date at which both parties of a particular transaction agrees on settlement. This occurs two business days after the trade has occurred.

Variation Margin: This is fund required by trading party in order to fully cover any unrealized profit.

Volatility: Degree at which price of currency tends to fluctuate within a certain period of time.

W

Whipsaw: Generally occurs in a volatile market where price fluctuates up and down for a period of time until specific direction is taken.

World Bank: An organization that focuses mainly on foreign exchange reserves and the balance of trade.

Y

Yard: In the foreign exchange market, it is referred to as billion.