Terms You Need
to Know

Average Directional Index (Technical Indicator).

The sum of government spending, personal consumption expenditures, and business expenditures.

A currency is said to “appreciate” when it strengthens in price in response to market demand.

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 small price differentials between markets.

Dealer jargon used in quoting when the forward premium/discount is near parity. For example, “two-two around” would translate into 2 points to either side of the present spot.

The rate at which a financial instrument if offered for sale (as in bid/ask spread).

Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor’s objectives.

Average True Range (Technical Indicator).

Australian Dollar (ISO code).

The departments and processes related to the settlement of financial transactions.

The value of a country’s exports minus its imports.

Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period.

In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts.

Bolinger Bands (Technical Indicator).

Breakeven.

A market distinguished by declining prices.

The rate at which a trader is willing to buy a currency.

The difference between the bid and offer price, and the most widely used measure of market liquidity.

Dealer expression referring to the first few digits of an exchange rate.

Bank of Canada.

Bank of England.

Bank of Japan.

In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions.

Basis Point.

An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

An agreement that established fixed foreign exchange rates for major currencies.

A market distinguished by rising prices.

Germany’s Central Bank.

In the forex market currencies are always priced in pairs.

Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s.

CANADIAN DOLLAR (ISO CODE).

A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

Chicago Board of Trade.

Commodity Channel Index (technical indicator) also Consumer Confidence Index (economic indicator).

A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank. Others include the ECB, BOE, BOJ.

Chartered Financial Analyst.

Contract For Difference.

Commodity Futures Trading Commission (regulatory).

Swiss Franc (Confederation Helvetia Franc).

An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.

A market with no spread. All trades buys and sells occur at that one price.

The process of settling a trade.

Chicago Mercantile Exchange.

Chinese Yuan (ISO code).

A transaction fee charged by a broker.

The tendency of an economic crisis to spread from one market to another. In 1997, financial instability in Thailand caused high volatility in its domestic currency, the Baht, which triggered a contagion into other East Asian emerging currencies, and then to Latin America. It is now referred to as the Asian Contagion.

The standard unit of trading.

The standard unit of trading on certain exchanges.

Commitments of Traders (market report).

One of the participants in a financial transaction.

Risk associated with a cross-border transaction, including but not limited to legal and political conditions such as war etc.

Consumer Price Index (economic indicator).

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the U.S. dollar, the currency in which most exchanges are usually quoted.

Commodity Selection Index (technical indicator).

Commodity Trading Advisor.

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

In most currency pairs the quoted currency is USD (U.S. dollar). For example, in the EURUSD pair the base currency is EUR, and the quoted one- USD. But there are a few exceptions, where the base currency is the USD - for example, USDCHF (U.S. dollar / Swiss franc).

The probability of an adverse change in exchange rates.

Refers to positions which are opened and closed on the same trading day.

- Drawdown
- Due Diligence
- Dealing Desk (see NDD).

An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

A negative balance of trade or payments.

An FX trade where both sides make and take actual delivery of the currencies traded.

A fall in the value of a currency due to market forces.

A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.

The deliberate downward adjustment of a currency’s price, normally by official announcement.

Dow Jones Industrial Average.

Expert Advisor.

European Central Bank.

Electronic Communication Network also Electronic Currency Network.

Economic indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy, and are therefore responsible for the underlying shifts in supply and demand for that currency.

Exponential Moving Average (technical indicator).

An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM EST.

Exchange Traded Fund.

Euro (ISO code). Since 2002 the Euro has been the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU). Members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain, and Portugal.

Elliott Wave (theory).

Fundamental Analysis.

Futures Commission Merchant.

Forex Dealer Member.

Federal Reserve System.

The regulatory agency responsible for administering bank depository insurance in the US.

The central bank of the United States, with responsibility for implementing the country's monetary policy and regulating member banks of the System. The Fed was created in 1913 and is composed of 12 regional Federal Reserve Banks and a national Board of Governors.

First In, First Out.

Official rate set by monetary authorities for one or more currencies.

Floating exchange rates refer to the value of a currency as decided by supply and demand.

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.

Federal Open Market Committee.

(Forex, FX) is the simultaneous buying of one currency while selling for another. This market of exchange has more buyers and sellers and daily volume than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

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.

A forward contract fixes the exchange rate for future delivery at a date to be agreed by both participants. A deposit (or a minimum margin) is usually required in forward transactions. For example, if I want to lock in today's rate to buy $10,000 USD at 1.5820 Canadian for the next 4 months, I will have the ability to purchase up to $10,000 USD at this rate.

A Forward Rate refers to a cash price of 2 currencies interest difference for a fixed term. Forward rates can be calculated easily given the fixed term interest rates of each currency and the current spot rate.

Forward trading is making the opposite trade of a spot trade in a given period of time. Often investors will swap their trades forward for anywhere from a week or two up to several months depending on the time frame of the investment. Even though a forward trade is on a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date.

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

Focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.

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 Contracts – ETC), versus forwards, which are considered Over the Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

Foreign Exchange.

Great Britain Pound Sterling (ISO code).

Gross Domestic Product (economic indicator).

Also known as margin trading. A term used in the relationship of actual equity versus controlling equity.

Greenwich Mean Time.

Was a term coined back in the mid-1900s to describe an economy that was not too hot and not too cold. This typically describes an economy that enjoyed steady growth with a nominal rate of inflation.

An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.

Are five leading industrial nations (France, Japan, Germany, the UK, and US), which meet from time-to-time to discuss common economic problems.

Are 7 leading non-communist industrial nations composed of G5 plus Canada and Italy.

Is also known as The Paris Club which includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, UK, and US. These nations signed an accord in 1962 to increase the fund available to the IMF and aid member countries with balance-of-payments difficulties.

A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions, it would protect one against fluctuations in the foreign exchange rate. (see Forward Contract).

Higher Low (chart).

- Introducing Broker
- Interbank
- Interactive Brokers
- Inside Bar.

International Monetary Fund.

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

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

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

International Organization for Standardization.

Japanese Yen (ISO code).

Statistics that are considered to predict future economic activity.

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

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).

The Line Chart connects single prices for a selected time period.

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

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

Lower High (Chart).

Lower Low (chart).

Linearly Weighted Moving Average (technical indicator).

A position that appreciates in value if market prices increase. When one buys a currency, their position is long.

Moving Average (technical indicator).

Moving Average Convergence Divergence (technical indicator).

The required equity that an investor must deposit to collateralize a position.

The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value, which allows for this high leverage.

In the event that funds in the account fall below margin requirements, brokerage firms will automatically close all open positions.

A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the client. If the equity balance in your account falls below the margin requirement, a margin call will be generated. In the event that an account exceeds its maximum allowable leverage, ALL open positions are liquidated immediately, regardless of the size or the nature of positions held within the account.

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

Exposure to changes in market prices.

Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.

The date for settlement or expiry of a financial instrument.

- Market Maker
- Money Management.

Metatrader Version 4.00 (trading platform).

Multiple Time Frame.

National Association of Securities Dealers Automated Quotation.

Occurs when there is light trading and greater fluctuations in prices relative to volume. This is often interchanged for THIN MARKET.

Non-Disclosure Agreement.

Non-Dealing Desk.

National Futures Association (regulatory).

Non-Farm Payroll (economic indicator).

New York Stock Exchange.

New Zealand Dollar (ISO code).

One-Cancels-the-Other (order type).

A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.

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

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

Open, High, Low, Close (chart).

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

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

Used to describe any transaction that is not conducted over an exchange.

A trade that remains open until the next business day.

Point and Figure (chart).

Price Action.

Pin Bar abbreviation of Pinocchio Bar (chart).

Price Interest Point, also Performance Index Paper. Measures the amount of change in the exchange rate for a currency pair. The cost of the base currency is measured by the quoted currency with certain accuracy. This accuracy or the minimum increment value of the currency price change is called a pip.

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

Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

The Point & Figure Chart disregards Time and focuses entirely on price activity.

The netted total holdings of a given currency.

Pivot Point.

Producer Price Index (economic indicator).

Price Pivot Zone.

Parabolic Stop and Reversal (technical indicator).

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

Describes quotes to which every market participant has equal access.

Quantitative Analysis.

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

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

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

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

The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.

Exposure to uncertain change, the variability of returns significantly the likelihood of less-than-expected returns.

The amount of money that an individual can afford to invest, which, if lost, would not affect their lifestyle.

Risk management enables you to implement a set of rules and measures to ensure any negative impact of a forex trade is manageable.

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.

The daily rollover interest rate is the amount a trader either pays or earns, depending on the established margin and position in the market. To avoid rollovers, simply make sure positions are closed at the established end of the market day.

Risk/Reward (ratio).

Relative Strength Index (technical indicator).

Relative Vigor Index (technical indicator).

Stop and Reversal.

Securities and Exchange Commission (regulatory).

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.

An investment position that benefits from a decline in market price. When one sells a currency, their position is short.

Stop Loss (order).

Simple Moving Average (technical indicator).

Smoothed Moving Average (technical indicator).

A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa by means of swap for spot value day against the next working day.

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

In FX Markets, Spot refers to the cash price without interest factored in.

When you trade foreign exchange you are always quoted a spot price 2 business days in advance. This is under normal conditions where there are no bank holidays in the traded currencies countries or is not over a weekend.

The difference between the bid (buy) and offer (ask, sell) prices; in other words the spread is the commission that the brokerage house makes on each trade. This can vary widely between currencies and between brokerage firms. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Standard & Poor’s.

Support/Resistance.

Slang for British Pound.

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.

This technical analysis indicator is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, prices tend to close near their low.

Stochastic Oscillator (technical indicator).

Straight Through Processing.

A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below. Recurring failure for the price to move below that point produces a pattern that can usually be shaped by a straight line. It is the opposite of Resistance levels.

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

Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.

An effort to forecast prices by analyzing market action through chart study, volume, trends, moving averages, patterns, formations, and many other technical indicators.

Time Frame.

Minimum price move.

Shows current and/or recent history of a currency either in the format of a graph or table.

Trend Line.

Simultaneous buying and selling of a currency for delivery the following day.

Take Profit (order).

Buying or selling of goods and services among countries called commerce. Forex Trading is the trading of Foreign Currencies.

The cost of buying or selling a financial instrument.

The date on which a trade occurs.

Simply the direction of the market, usually broken down into three categories: major, intermediate, and short-term trends. Three directions are also associated.

This is a Technical Analysis indicator also called or linear regression, which is a statistical tool used to uncover trends. It is calculated by using the "Least Squares" method. There are two ways to use the linear regression line: a. Trade in the direction of the Trend line. b. Construct a parallel trend channel above and below the Trend line to be used as support and resistance levels.

Trailing Stop (order).

True Strength Index (technical indicator).

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

When both a bid and offer rate are quoted for an FX transaction.

A new price quote at a price higher than the preceding quote.

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.

The interest rate at which US banks will lend to their prime corporate Clients.

United States Dollar (ISO code).

United States Dollar Index (ISO code).

Universal Time, Coordinated.

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.

Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.

Degree to which the price of currency tends to fluctuate within a certain period of time. The standard deviation of a price series is commonly used to measure price volatility.

Represents the total amount of trading activity in a particular stock, commodity, or index for that day. It is the total number of contracts traded during the day.

World Bank.

Dollar is said to be weak (relative to a previous time period) against another currency when more dollars are required to buy one unit of another currency. The dollar is strong or has gained in strength when fewer dollars are required to buy one unit of another currency. For example, if $1 buys 10 FF in 1989 but today $1 buys only 6 FF then the dollar has weakened against the franc.

Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

Slang for a billion.

Return on capital investment.