Glossary

Ask (offer) price – Ask is the market selling price.  This is the price that a trader can buy the base currency.  In the quotation, it is always shown on the right side of the quotation, for instance in this quote 1.2527-1.2532, 1.2532 is the offer.

Base currency – The first currency in a currency pair.  If someone is discussing the EUR/USD pair, the EUR is the base.  The exchange rate shows how much the base currency is worth as measured against the second currency in the pair.  For instance, if the USD/CHF rate equals 1.5215, then one USD is worth CHF1.5215.

Bid price – Bid is the market buying price.  This is the price that a trader can sell the base currency.  It is shown in the left side of the quotation, for example in this quote: 1.2527-1.2532, 1.2527 is the bid.

Big figure quote – A quote without the last two digits.  Examples: USD/JPY rate of 121.05/121.10, the big figure is 121.  EUR/USD rate of 0.9225/0.9230, the big figure is 0.92. Interbank traders will often not state the big figure as they assume that the other trader already knows what it is.

Business day – Any day on which the large commercial banks that trade currencies are open for business.

Cable – Trader slang for the British pound

Carry trade – A longer term trading style that focuses on profiting on the interest rate differential between countries.

Cash settled – The closing out of a currency contract with the exchange of cash based upon the difference in the value of when the position was opened and closed, rather than the physical delivery of the currency.

Cleared funds – Funds freely available.          

Closed position – The process of closing a position by offsetting an equal open position.  This will make you flat.

Confirmation – A notification sent by a dealer describing the terms of a trade.

COT – Commitment of traders report published by the Commodity Futures Trading Commission (CFTC ) Counter Currency- The second currency in a currency pair.

Cross rate – An exchange rate between two non-U.S. currencies.

Currency pair – The two currencies that make up a foreign exchange rate; for example, USD/CHF          

Currency trading – Exchanging the legal tender of one country for another.

Customer – The party that executes an agreement with a Forex dealer.

Daily cut-off – The point in time that signals the end of the trade date.

Dollar value – The amount of USD which would be generated by the conversion of the relevant Foreign Currency into U.S. dollars.

ECB – European central bank

Eligible foreign currencies – Currencies that the dealer may agree to buy from or sell to its customers.

Elliott Wave – A technical discipline used to predict market movements that was discovered by R.N. Elliott in the 1930’s, the theory states that markets move in a series of waves. Impulse waves subdivide into five waves (labeled 1,2,3,4,5) and corrective waves subdivide into three waves (labeled A,B,C)

Equity – The amount in a customer’s account calculated as if all the opened positions will liquidated at the current market quotes. 

Euro zone – The 12 countries of Europe that have combined their currencies into a single currency, the Euro.  They have separate sovereignties but a combined central bank,  the ECB.

FX/Forex – The foreign exchange market.

Fair market value – The fair price for a financial instrument that is determined in an open market environment.

Fed – The United States Federal Reserve.

Fibonacci  – A number sequence named after an Italian mathematician.  The ratios derived from this number sequence can be used in the Forex market to project support and resistance.

Filled trade – A trade that is completed for a customer’s account.  Once filled, an order cannot be cancelled.

Floating profit (loss) – Unrealized profit (loss) in an open position.

Foreign currency – The currency of a country other than the United States.

Foreign exchange contract – A contract for the purchase or sale of a foreign currency.

Foreign exchange rate – The price between two currencies that is determined by  supply and demand.

Free margin – Available funds in the customers account not being used to support existing positions, which can be used to open new positions.

Fundamental Analysis – Analysis based on economics and politics.

Gartley pattern – A technical pattern mentioned on page 222 of H.M. Gartley’s book, “Profits in the Stock Market.”

“GTC order” or “good-till-cancelled order” – A trade order placed for an indefinite amount of time.

Initial margin requirement or opening margin requirement – The minimum capital required to establish a new position.

Kiwi – Trader slang for the New Zealand dollar.

Leverage – The ratio of the amount represented by the Forex contract compared to the required security deposit (margin).

Limit order –An order to buy or sell a currency pair at a specified price.  A limit order to buy will be executed when the ask price equals or is less than the price specified in the limit order.  A limit order to sell will be executed when the bid price equals or is greater than the price specified in the limit order. 

Liquidating order – An order to close an open position.

Long position – When the base currency in the pair is bought.  When you buy the base, you sell the counter.

Loss – Loss incurred as a result of a Forex transaction.

Lot –A unit to measure the amount of a Forex deal.  Many dealers trade in multiples of 100,000 units of the base currency.

Margin – The amount of cash or other collateral (T-bills) that the dealer requires a Customer to deposit in the customer’s account in connection with the customer’s open positions.

Margin call – A demand for the deposit of additional margin as described in the dealers customer agreement.

Mark to market – The process of recalculating the value of open positions in an account, assuming all open positions were liquidated.

Market order – An order to buy or sell at the current market price.  An order to buy is at the ask price; an order to sell is at the bid price.

Market rate/quote – The current quote of a currency pair.

Maturity – The date on which payment of a financial obligation is due.

Notice of withdrawal – A request by a customer to withdraw funds from his or her account.

One-cancels -other order (OCO)   – Two orders that are linked with each other.  If one order is filled, then the other order is cancelled.

Open position – An open trade that has not been offset and closed by an equal and opposite trade.

Order – An instruction by a customer to the dealer to attempt to execute a trade for the customer’s account.

Overnight position – An open position that is not closed by the end of a trading day.

Pip – The smallest unit of price for a foreign currency pair; for example, for USD/CHF one point (or pip) equals .0001 Swiss Francs and for USD/JPY one pip equals 0.01 Japanese Yen.          

Profit/loss or “P/L”  –The actual gain or loss in U.S. dollars resulting from closed positions, plus the gain or loss on open positions that have been marked to market.

Quote – A bid and offer in a currency pair.

Resistance level – This is the price at which a currency pair goes up to, but does not go above.  At the resistance level, the upward movement turns into a downward movement as there becomes more selling than buying.

Rollover – The process involved to maintain an open position past the regular settlement date. The cost of this process is measured by the interest rate differential between the two currencies.

Short position –Selling a currency in which you anticipate a decline in value.  At a lower price, you cover your short by buying it back.  When the base currency is sold, the second currency in the pair is purchased.

Spot contract – A contract where settlement is in two business days.

Spot market – The cash market in which commodities, securities or currencies are to be delivered within a few days (unlike the futures or forward market, where instruments are delivered at a future date).

Spread – The difference between the ask (offer) and bid price in a quote.  The spread is the reason why a newly opened position will often be negative.  If a trader buys a particular pair they will pay the ask (offer) price, but the mark to market will be based on the bid.

Stop/loss order – An order to buy or sell for the purpose of liquidating an open position when the open position has declined in value.  Stop orders can occur at rates below (or above) the specified stop loss price.

Support level – This is the price level at which a pair goes down to, but does not fall below.  At the support level, reversals are expected as there becomes more buying than selling.

Technical analysis –Studies historical price movement with the aim to forecast future direction. 

Technical correction – An adjustment to a price not based on market sentiment or fundamentals but technical analysis.

Trade date – The date on which the contract is entered into between the dealer and the Customer, except in the case of any contract entered into after the daily cut-off.

Unrealized gain/loss – The theoretical gain or loss on open positions valued at current prices.  Unrealized gains/losses become profits/losses when position is liquidated.

Used margin – The value in the customers account required for current open positions.

Value date – The settlement date specified in the confirmation that relates to a particular trade.  A value date must fall on a business day in the country of the traded currency.