Forex Glossary

Below is a glossary of some key forex terms that will come up as you are demo or live trading. New terms and concepts will continuously be added to the glossary.

A

Arbitrage
The act of discovering a price discrepancy for a commodity or a financial instrument on different markets and profiting by simultaneously buying at the lower price and selling at the higher price.
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Ask
The price at which the broker/dealer is willing to sell. Also known as the "Offer" price. This is the price where the retail trader will typically buy a currency pair.
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Aussie
Trader's slang term for the Australian Dollar.
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B

Back Office
The department at a broker which processes and clears the actual trades.
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Bank of Canada
The Central bank of Canada
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Bank of Japan (BOJ)
The Central Bank of Japan
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Bar
Graphical representation of the price range during a time period on a Forex chart. On a 1 hour chart each bar represents the price range for an hour; on a 1 minute chart each bar represents the price range for 1 minute.
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Base Pair
The currency in which other currencies are quoted in a pair. In the EURUSD pair the US Dollar is the base pair.
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Basis Point
1/100 of a percent. The term is used extensively in the bond market. If the yield on a bond moves from 3.24% to 3.26% the yield is said to have increased by 2 "basis points".
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Bid
The price at which the broker/dealer is willing to buy. This is the price where the retail trader will typically sell a currency pair.
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Bid/Ask Spread
The difference in pips between the bid and ask prices at any given moment. The "spread" changes based on market conditions.
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Big Figure
Trader's slang for the first 2 figures in a currency's price. Since these figures tend not to change in normal trading they are often omitted in dealer quotes. Many displays show the first 2 figures in large numerals which is where the phrase first came from.
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Broker/Dealer
A firm that acts as an intermediary between traders matching buy and sell orders and facilitating the transaction, usually for a fee.
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Bundesbank
The Central Bank of Germany. Along with the Bank of Japan and the US Federal Reserve, the German Bundesbank exerts a huge influence on currency markets.
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C

Cable
Trader's slang for the British Pound.
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Candle
A graphical representation of price movement on a chart for a specific period of time. A filled candle for a specific time period represents that the closing price was lower than the opening price while a hollow candle represents that the closing price was higher than the opening. Extensions on the candles also known as the wicks represent the high and low for the specific time period.
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Carry Cost
The cost of holding an open position past the end of the trading day. The cost is usually assessed at 5pm New York time.
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CFTC
Commodities Futures Trading Commission. The US regularatory agency that oversees commodity, futures and options markets. The CFTC has recently taken a leading role in regulating Forex markets.
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Chart
A graph representing the movements of one currency pair over a specified period of time. Charts provide bars showing movements over periods as short as 1 minute or as long as 1 month. The bars displayed on charts can be set to display as points on a graph, hi/low bars, or candles depending on how the trader wishes to view the data.
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Clearing
The process a broker dealer's back office uses to settle a trade.
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Commission
A fee that is charged for a broker/dealer for facilitating a transaction between two parties.
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Country Risk
Changes in the policies or structure of the government that may adversely affect the value of the country's currency and thus the value of an investor's position.
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Cross Pair
A currency pair that does not include the US Dollar. By dealing with a cross pair a trader does not have to convert funds into US Dollars at any point in the transaction.
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Counterparty
The party on the opposite side of a trade.
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Counterparty Risk
The risk that the party on the other side of the trade will not be able to pay for a position sold to them or, conversely, will not be able to deliver a position purchased from them.
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Currency Option
A contract in which one party agrees to give a second party the option (but not the obligation) to buy or sell a currency at a predetermined price at some point in the future.
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Currency Pair
A currency pair is a trading unit that allows you to take a position in one currency relative to another currency with the expectation that the currency you bought will appreciate in value relative to the currency you sold. The first currency in the pair is called the "Base" currency; the second currency is called the cross currency.

Suppose the Euro is trading at 1.2200 US Dollars and you believe the Euro is going to appreciate against the Dollar. You would buy (or go "long") on the EURUSD pair. You have just simultaneously bought Euros and sold US Dollars.

If you are correct and the Euro appreciates to 1.2700 you would sell Euros you bought at 1.2200 at the new rate of 1.2700.

All Forex trading is done in terms of currency pairs. The following pairs are commonly traded:
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Currency Pairs

Symbol		Currencies		Traders Term
EURUSD		Euro / US Dollar		EuroDollar
GPBUSD		British Pound/US Dollar		Cable
USDJPY		US Dollar / Japanese Yen		DollarYen
USDCHF		US Dollar / Swiss Franc		DollarSwiss or "Swissie"
USDCAD		US Dollar / Canadian Dollar		DollarCanada
AUDUSD		Australian Dollar / US Dollar		AussieDollar
EURGBP		Euro / British Pound		EuroSterling
EURJPY		Euro / Japanese Yen		EuroYen
EURCHF		Euro / Swiss Franc		EuroSwiss
GBPCHF		British Pound / Swiss Franc		SterlingSwiss
GBPJPY		British Pound / Japanese Yen		SterlingYen
CHFJPY		Swiss Franc / Japanese Yen		SwissYen
NZDUSD		New Zealand Dollar / US Dollar		NewZealandDollar or "Kiwi"
USDZAR		New Zealand Dollar / US Dollar		DollarZar
Commodities
GLDUSD		Spot Gold		Gold
SLVUSD		Spot Silver		Silver

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Currency Risk
A form of risk that international businesses face because they deal in different currencies. Because the value of currencies can fluctuate a business' financial results can be affected if they are not properly hedged.
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D

Day Trading
Speculative trading in which the trader takes positions that are expected to be closed out before the end of the trading session.
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Drawdown
The decline in value of an account due to trading positions moving against the account. Often when systems or trading records are discussed the "maximum drawdown" is disclosed to further define the nature of the trading model.
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Dealer
An individual or firm that takes one side of a position hoping to profit by closing the position at a future point with a different trader. Dealers are different than brokers, who bring buyers and sellers together and facilitate the trade but do not take on the position themselves.
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E

Economic Indicator
A statistic that indicates the condition of a country's economy. Economic indicators are often released by government agencies on a regular basis.
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Economic Calendar
The schedule of economic indicators due to be released by various central banks and government agencies.
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Exotics
Currency pairs that are not among the eight most commonly traded pairs. The USDZAR is an exotic pair. Exotic pairs are often marked by thin volume and higher spreads.
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F

Fast Market
A market condition where both buyers and sellers are aggressively participating in the market. During a fast market prices tend to become volatile and there is a greater danger of slippage in quotes.
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Federal Reserve
The Central Bank of the United States.
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Flat
Holding no positions. Being "flat" makes assigning a value to your account easier because there are no floating positions whose prices may fluctuate.
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Forward
A contract that specifies a predetermined rate for settling a currency contract at a future date.
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Fundamental Analysis
Analysis of outside forces both political and monetary to determine the direction of the market.
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FX
A common abbreviation for the Forex market.
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G

G7
The seven leading industrial countries: The United States, Germany, Japan, France, Great Britain, Canada, and Italy.
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H

Hedge
Taking positions in offsetting financial instruments to reduce the risk associated with a single position. Hedging a position reduces the financial risk of a position moving against a trader generally at the cost of reducing profitability if the position moves in the trader's favor.
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I

Indicator
A statistical tool used to determine the condition of the market to assist the trader in making determinations regarding future price movement. Hundreds of known indicators have been developed that measure different technical areas of the market.
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K

Kiwi
Trader's slang for the New Zealand Dollar.
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L

Leverage
The multiple that the contract size exceeds the margin the customer provides to trade. If the contract value being traded is $100,000 and the customer is required to put up $1,000 in margin, the leverage is said to be 100:1 - in other words the customer is trading contract(s) worth 100 times the amount of margin they are putting up.
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LIBOR
London Interbank Offer Rate, a closely watched rate that the largest banks charge to lend to each other.
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Limit Order
An order placed to buy only when a currency falls to a specific price or, conversely to sell when a currency rises to a specific price.
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Liquidity
A term describing the market's ability to accept new orders without disrupting prices. If there are many buyers and sellers active in the market then liquidity is high and spreads (the amount between bid and ask levels) will decrease. If there are fewer players in the market trading will become less efficient and spreads will tend to increase.
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Long
A situation in which a trader has more buy positions than sell positions and thus profits if the price rises.
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Loonie
Trader's slang for the Canadian Dollar
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M

Margin
Funds a trader is required to put up in order to speculate on a particular trading instrument.
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Margin Call
Notice from a broker or dealer to a customer that additional funds must immediately be placed in the customer's account due to an insufficient margin ratio. Most often this occurs because a position or positions have moved against the customer, thus reducing the account value. Customers who do not add the required funds risk having their positions liquidated by the broker or dealer.
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Market Order
An order to buy/sell at the current market price.
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Market Risk
A risk that stems from dealing on a market. Market risk is a general risk in doing business on any given market and cannot be hedged.
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MT4
Common abbreviation for MetaTrader 4, one of the most widely used Forex trading platforms, which provides the ability to perform automated trading.
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N

Naked
The condition where one side of a hedge is eliminated this exposing the trader to the risk of loss due to fluctuation in price. If a trader holds offsetting positions at 2 different brokers and one broker closes the trader's position due to a margin call, the trader is "naked" because he is exposed to profit or loss on the position at the second broker.
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R

Range
The difference in pips between the highest and lowest prices for a currency in a day.
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Rate
The price of one currency quoted in terms of another.
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Resistance
A term used by technical traders to describe a price level that a currency's price cannot move above. Often the currency will make repeated attempts to move above the price without success. Technical traders can identify the resistance level because the continued failure to cross the price level causes a pattern that is identified by a straight line on the currency's chart. Resistance exists above the market price; the opposite market force - support - exists below the market price. Technical traders believe that there is selling pressure at the resistance levels that the price cannot cross.
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Roll Over
The process in which settlement of a currency transaction is pushed forward to a future date, often incurring a fee from the broker/dealer.
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S

Short
A situation in which a trader has more sell positions than buy positions and thus profits if the price falls.
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Spread
The difference in pips between the bid and ask price. When there are many traders participating in the market, liquidity is high and spreads become smaller.
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Stop Loss
An order type that specifies that a position is closed if the market falls (or in the case of a sell position rises) to a certain preset level. Setting a stop loss gives a trader a measure of protection against a position moving against him, though the danger exists that in a volatile market the stop loss may not be executed at the exact price specified.
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Support
A term used by technical traders to describe a price level that a currency's price cannot move below. Often the currency will make repeated attempts to move below the price without success. Technical traders can identify the support level because the continued failure to cross the price level causes a pattern that is identified by a straight line on the currency's chart. Support exists below the market price; the opposite market force - resistance - exists above the market price. Technical traders believe that support levels reflect buying pressure in the markets.
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Swissie
Trader's slang term for the Swiss Franc.
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SWAP
The sale or purchase of a specified amount of currency at a forward exchange rate.

T

Take Profit
An order type that specifies for a trade to be closed at a certain in profit level. These orders are typically above the entry price on long positions and below the entry price on short positions. Setting a take profit gives a trader an opportunity to close out a position in profit, though the danger exists that in a volatile market the take profit may not be executed at the exact price specified.
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Technical Analysis
A method of trading that uses statistical tools to analyze the market and determine if the price is following long recognized patterns of movement that technical traders believe to predict future price levels. Technical analysis discounts news events and other 'fundamental' information regarding a currency, assuming that all available information is immediately reflected in a currency's price.
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Tick
The smallest unit of price movement.
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Trading Session
Currencies trade 24 hours a day in different parts of the world. When trading closes in one part of the world it opens in another zone. The recognized trading sessions are the London, New York, Tokyo and Sidney sessions. Some sessions like the London and New York sessions overlap so that trading is occurring in both places at the same time for several hours per day.
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Trend
The tendency of a currency to move in one general direction (either higher or lower) over an extended period of time. Currencies can trend for both technical and fundamental reasons. An upward trend is defined by consistently higher lows on the chart. A downward trend is defined by consistently lower highs on the chart.
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P

Periodicy
On MT4 charts, the time period the chart covers. Charts can be set to display price information with periodicities of as little as one minute or as much as one month.
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PIP
The unit of foreign exchange, often thought of as the 4th decimal place in non-Yen based pairs. If a the EUR/USD moves from 1.2122 to 1.2124 it is said to have increased by 2 pips.
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W

Whipsaw
A market condition where the price moves erratically for a specific amount of time. More likely to occur in volatile markets.
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Wire Transfer
An order to a bank or broker to electronically transfer funds from one account to another, often at a different financial institution.
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Y

Yard
Trader's slang term for a billion. It is thought that the term came into use to reduce the chance of the words "million" and "billion" being mistaken for each other during trading.
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