When it comes to the world of Forex, there are many terms that will you will that you may not have heard before. In this article we’ll give you some of the most common Forex terms, and what they mean.
Asian Central Banks
Refers to the central banks or monetary authorities of Asian countries. These institutions have been increasingly active in major currencies as they manage growing pools of foreign currency reserves arising from trade surpluses. Their market interest can be substantial and influence currency direction in the short-term.
23:00 – 08:00 GMT.
Refers to the AUD/USD (Australian Dollar/U.S. Dollar) pair. Also “Oz” or “Ozzie”.
The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF (U.S. Dollar/Swiss Franc) rate equals 1.6215, then one USD is worth CHF 1.6215. In the forex market, 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 bid and the ask (offer) price.
The price at which the market is prepared to buy a product. Prices are quoted two-way as Bid/Ask. In FX trading, the Bid represents the price at which a trader can sell the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Bid price is 1.4527, meaning you can sell one US Dollar for 1.4527 Swiss francs. In CFD trading, the Bid also represents the price at which a trader can sell the product. For example, in the quote for UK OIL 111.13/111.16, the Bid price is £111.13 for one unit of the underlying market.*
A tool used by technical analysts. A band plotted two standard deviations on either side of a simple moving average, which often indicates support and resistance levels.
An individual or firm that acts as an intermediary, bringing buyers and sellers together for a fee or commission. In contrast, a dealer commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.
Taking a long position on a product.
The GBP/USD (Great British Pound/U.S. Dollar) pair. Cable earned its nickname because the rate was originally transmitted to the US via a transatlantic cable beginning in the mid 1800s when the GBP was the currency of international trade.
The Canadian dollar, also known as Loonie or Funds.
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.
A Contract for Difference (or CFD) is a type of derivative that gives exposure to the change in value of an underlying asset (such as an index or equity). It allows traders to leverage their capital (by trading notional amounts far higher than the money in their account) and provides all the benefits of trading securities, without actually owning the product. In practical terms, if you buy a CFD at $10 then sell it at $11, you will receive the $1 difference. Conversely, if you went short on the trade and sold at $10 before buying back at $11, you would pay the $1 difference.
A fee that is charged for buying or selling a product.
A period of range-bound activity after an extended price move.
The standard unit of forex trading.
The second listed currency in a currency pair.
The market is ready to sell-off hard.
A pair of currencies that does not include the U.S. dollar.
The two currencies that make up a foreign exchange rate. For example EUR/USD (Euro/U.S. Dollar).
Speculators who take positions in commodities and then liquidate those positions prior to the close of the same trading day.
Making an open and close trade in the same product in one day.
A financial contract whose value is based on the value of an underlying asset. Some of the most common underlying assets for derivative contracts are indices, equities, commodities and currencies.
Price action consisting of lower lows and lower highs.
The currency of the Eurozone.
07:00 – 16:00 (London).
A market that is thought to have traveled too far, too fast.
The Federal Reserve Bank, the central bank of the United States, or the FOMC (Federal Open Market Committee), the policy-setting committee of the Federal Reserve.
First in first out (FIFO)
All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.
Federal Open Market Committee, the policy-setting committee of the US Federal Reserve.
Written record of FOMC policy-setting meetings are released three weeks following a meeting. The minutes provide more insight into the FOMC’s deliberations and can generate significant market reactions.
Forex or FX
The simultaneous buying of one currency and selling of another. The global market for such transactions is referred to as the forex or FX market.
The assessment of all information available on a tradable product to determine its future outlook and therefore predict where the price is heading. Often non-measurable and subjective assessments, as well as quantifiable measurements, are made in fundamental analysis.
A quick market move in which prices skip several levels without any trades occurring. Gaps usually follow economic data or news announcements.
Gearing (AKA leverage)
Gearing refers to trading a notional value that is greater than the amount of capital a trader is required to hold in his or her trading account. It is expressed as a percentage or a fraction.
GMT (Greenwich Mean Time)
Greenwich Mean Time – The most commonly referred time zone in the forex market. GMT does not change during the year, as opposed to daylight savings/summer time. In english speaking countries, this is a synomym for UTC, Coordinated Universal Time, which is the standard by which time is measured in todays society.
Little volume being traded in the market; a lack of liquidity often creates choppy market conditions.
An economic condition whereby prices for consumer goods rise, eroding purchasing power.
Adjustments in cash to reflect the effect of owing or receiving the notional amount of equity of a CFD position.
Also known as margin, this is the percentage or fractional increase you can trade from the amount of capital you have available. It allows traders to trade notional values far higher than the capital they have. For example, leverage of 100:1 means you can trade a notional value 100 times greater than the capital in your trading account.*
A market which has sufficient numbers of buyers and sellers for the price to move in a smooth manner.
08:00 – 17:00 (London).
Nickname for the Canadian dollar or the USD/CAD (U.S. Dollar/Canadian Dollar) currency pair.
A standard lot represents 100,000 units of any currency. The value of the deal always corresponds to an integer number of lots. However, most brokers allows you to trade a “Mini-Lot” which is 10,000 units of any currency or a “Micro-Lot” which is 1,000 units of a currency.
The longest-term trader who bases their trade decisions on fundamental analysis. A macro trade’s holding period can last anywhere from around six months to multiple years.
A request from a broker or dealer for additional funds or other collateral on a position that has moved against the customer.
A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial product.
An order to buy or sell at the current price.
A series of technical studies (e.g. RSI, MACD, Stochastics, Momentum) that assesses the rate of change in prices.
New York session
8:00am – 5:00pm (New York time).
The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Offer. The Offer price is also known as the Ask. The Ask represents the price at which a trader can buy the base currency, which is shown to the right in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs.
In CFD trading, the Ask represents the price a trader can buy the product. For example, in the quote for UK OIL 111.13/111.16, the product quoted is UK OIL and the ask price is £111.16 for one unit of the underlying market.*
An active trade with corresponding unrealized Profit and Loss, which has not been offset by an equal and opposite deal.
An instruction to execute a trade.
The Forex quoting convention of matching one currency against the other.
The parabolic SAR is a technical indicator used to determine the price direction of an asset, as well as draw attention to when the price direction is changing. It was developed by Welles Wilder, creator of the relative strength index (RSI).
Waiting for certain levels or news events to hit the market before entering a position.
The smallest unit of price for any foreign currency, pips refer to digits added to or subtracted from the fourth decimal place, i.e. 0.0001. For all JPY pairs, pips refer to digits added to or subtracted from the second decimal place, i.e. 0.01.
The net total holdings of a given product.
The difference between the cost price and the sale price, when the sale price is higher than the cost price.
A price that may act as a ceiling. The opposite of support.
An individual investor who trades with money from personal wealth, rather than on behalf of an institution. (Odds are if you are reading this, you are a retail investor.)
Exposure to uncertain change, most often used with a negative connotation of adverse change.
The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.
An indicator of the status of your open positions; that is, unrealized money that you would gain or lose should you close all your open positions at that point in time.
The Securities and Exchange Commission. This is a government agency in the United States.
Taking a short position in expectation that the market is going to go down.
Simple moving average
Also known as “SMA” – A simple average of a pre-defined number of price bars. For example, a 50 period daily chart SMA is the average closing price of the previous 50 daily closing bars. Any time interval can be applied.
The difference between the price that was requested and the price obtained typically due to changing market conditions.
The difference between the bid and offer prices.
A nickname for the British pound or the GBP/USD (Great British Pound/U.S. Dollar) currency pair.
Stop entry order
This is an order placed to buy above the current price, or to sell below the current price. These orders are useful if you believe the market is heading in one direction and you have a target entry price.
Stop loss order
This is an order placed to sell below the current price (to close a long position), or to buy above the current price (to close a short position). Stop loss orders are an important risk management tool. By setting stop loss orders against open positions you can limit your potential downside should the market move against you. Remember that stop orders do not guarantee your execution price – a stop order is triggered once the stop level is reached, and will be executed at the next available price.
A price that acts as a floor for past or future price movements.
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.
The process by which charts of past price patterns are studied for clues as to the direction of future price movements.
09:00 – 18:00 (Tokyo).
Stands for “take profit.” Refers to limit orders that look to sell above the level that was bought, or buy back below the level that was sold.
A trailing stop allows a trade to continue to gain in value when the market price moves in a favorable direction, but automatically closes the trade if the market price suddenly moves in an unfavorable direction by a specified distance. Placing contingent orders may not necessarily limit your losses.
Price movement that produces a net change in value. An uptrend is identified by higher highs and higher lows. A downtrend is identified by lower highs and lower lows.
The percentage return from an investment.