Whether you’re a new trader or an experienced pro, it helps to have a solid glossary at your fingertips to provide a quick explanation on a particular term.
In the context of banking, it refers to a summary of all balances. In the meaning of securities, a summary of all transactions and positions (long and short) between a brokerage and a client.
Relationship between two companies when one company holds substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company.
The total amount of exposure a bank or broker has with a client for in spot and forward foreign exchange contracts.
A fee charged to exchange money from one currency to another.
Also known as algo-trading, or black-box trading. Algorithmic trading is the use of mathematical models designed to automatically react to changing market conditions in real-time, opening, and closing positions according to pre-set parameters without human intervention. Algorithmic trading has been widely adopted by large financial institutions such as investment banks and hedge funds but has recently been made available to retail traders through platforms such as cTrader and NinjaTrader.
This is the simultaneous buying and selling of foreign exchange pairs to realize a profit from a discrepancy between foreign exchange rates in the market at the same time in different markets. For instance, selling an asset that is overpriced in one market to buy it in another market where it is cheaper. Essentially arbitrage results from price inefficiencies and has become extremely difficult for individual traders to exploit. This is because large financial institutions employ advanced algorithmic trading programs that are designed to scan the markets for these inefficiencies and quickly take advantage of them.
The Asian session is the time when the Asian markets are open for business, it the earliest session of the trading day and the first to open after the weekend. The term is often used interchangeably with the Tokyo session, however, with China, Australia, New-Zealand, and Russia also trading during these hours, the Asian session is longer than the Tokyo session, running between 11 pm and 8 am GMT. These hours change when daylight savings time is observed.
This is the price at which the foreign exchange pair or CFD is offered.
An item that has value; an investment such as stocks, options, or Forex.
The abbreviation for the Australian dollar and U.S. dollar (AUD/USD) currency pair or cross. The currency pair tells the reader how many U.S. dollars (the quote currency) are needed to purchase one Australian dollar (the base currency).
The Aussie is a market nickname for the Australian dollar (AUD).
A settlement system used by banks and brokers to process and report transactions.
A common type of charting method which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line to the right of the bar.
The base currency is the first currency in a pair. The given exchange rate refers to how much of the second currency in a pair (the quote currency) is required to purchase a unit of the base currency.
A view was taken by a trader going ‘short’ in the expectation of a decrease in the price of a currency.
A bear market is characterized by pessimism, falling prices, and wide-spread selling of underlying assets. The situation is often self-perpetuating because falling prices cause investors to want to cut their losses and also sell, which exacerbates the downward trend. A drop in the value of 20% or more which is sustained for two months is often regarded as an official entry into a bear market.
A bearish reversal occurs when an upward-trending or bullish, the market begins to move in the opposite direction.
Bearish sentiment is the negative feeling surrounding the value and prospects of underlying assets. Bearish sentiment precedes bear market entry and encourages investors to start selling.
The price at which a buyer is willing to buy in the market. The best bid is the highest bid price available.
Represents the difference between the buy (bid) and sell (ask) price of a foreign exchange pair.
Developed by John Bollinger in the 1980s, Bollinger Bands is a quantitative method, which combines a moving average with the instrument’s volatility. The bands were designed to gauge whether the prices are high or low on a relative basis. They are plotted two standard deviations above and below a simple moving average. The bands look like an expanding and contracting envelope model.
An asset class in its own right, a bond is fixed-income security in which an issuer borrows money from an investor, agreeing to pay a predefined interest rate and settle the debt at a specified later date. Bonds can be issued by corporations, municipalities, and governments. Interest is paid on them every six months and they are said to mature when the amount lent is due.
A price gap occurs at the beginning of a new trend, many times at the end of a long consolidation period. It may also appear after the completion of major chart formations.
Breakouts are more commonly used to refer to the occasion of an asset’s price pushing through a confirmed level of resistance, though it can sometimes also be used to refer to downward motion through a known support level. When an asset breaks through a resistance level this mark then becomes the asset’s new support. When it pushes through a support level this becomes its new resistance.
In trading, brokers are individuals or companies that act as intermediaries between buyers and sellers, bringing them together and facilitating their trading activities for a commission and/or spread markup.
A company that offers trading services to the public.
A view was taken by a trader going ‘long’ in the expectation that the currency will appreciate.
A bull market is characterized by optimism, rising prices, and wide-spread buying of underlying assets. The situation is often self-perpetuating because rising prices cause investors hoping to profit to also buy, which further reinforces the upward trend.
A bullish reversal occurs when a downward-trending or bearish, the market begins to move in the opposite direction.
Bullish sentiment is a positive feeling and growing investor confidence surrounding the value and future performance of an underlying asset or market. This positive feeling often precedes a bull market and encourages other investors to buy.
An order to execute a transaction at a specified price (the limit) or lower.
The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.
The rate at which a customer is prepared to buy a currency at, this is also known as the Bid Rate.
Buying and selling in the foreign exchange market always happen in the currency which is quoted first. “Buy Dollar/Yen” means buy the dollar/sell the Yen. Traders buy when they expect a currency’s value to rise and sell when they expect a currency to fall.
A term used in the foreign exchange market for the US Dollar/British Pound rate.
A type of chart that consists of four major prices: high, low, open, close. The body (jittai) of the candlestick bar is formed by the opening and closing prices. To indicate that the opening was lower than the closing, the body of the bar is left blank. If the currency closes below its opening, the body is filled. The rest of the range is marked by two “shadows”: the upper shadow (uwakage) and a lower shadow (shitakage).
In currency trading, a carry trade is a strategy in which a low-yielding currency (one with a low-interest rate) is sold and the funds raised are used to purchase a high-yielding currency. The purpose of this type of trade is to profit on the interest rate differential of the two currencies. Leverage is commonly used to dramatically increase the profits earned through carrying trades.
A Central Bank provides financial and banking services for a country’s Government and Commercial Banks. It implements the Government’s monetary policy, as well, by changing interest rates.
Contracts for Difference are derivative instruments that allow traders to speculate on the changing values of a host of underlying assets without having to take ownership of them. In a contract for the difference, a buyer and a seller agree that the seller will, upon expiration of the contract, pay the buyer the difference between the value of the asset at the time the contract is agreed and the value at the time it expires. If the difference is negative then the buyer must instead pay the difference to the seller. When trading CFDs traders buy (or go long) when forecasting a rise, and sell (or go short) when forecasting a drop in value.
An individual who studies graphs and charts of historical data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.
In technical analysis chart patterns are certain formalized shapes that traders try to identify when charting an asset’s ever-changing market price. These patterns are thought to be reliable indicators of future price movement.
A closing order is an order to automatically close an open position when an asset’s price reaches a predefined level. Closing orders are employed to automatically lock profits in or prevent losing positions from unnecessarily eating into risk capital.
The rate at which a position can be closed based on the market price at the end of the day.
The fee that a broker may charge clients for dealing on their behalf.
Commodities are goods of standardized quality and quantity that are traded over an exchange. Commodities fall into two broad categories: hard commodities such as crude oil, gold, silver, and platinum that are extracted from the earth, and soft commodities such as wheat, corn, coffee, and sugar that are cultivated and harvested. The standardization of commodities, also known as a basis grade, ensures that regardless of where a commodity originates from, it will be of a standard quantity and above a minimum quality to make it interchangeable with the same product from all other producers trading on a given exchange.
A month-to-month economic indicator, which gauges changes in the cost of living by measuring price changes in a common basket of goods and services that most people use, such as food, clothing, transportation, and entertainment.
The agreed exchange rate at which the currency pair may be exchanged on its settlement date.
The money that a country uses. Currencies can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another.
The two currencies that are involved in a transaction.
Day trading is the practice of buying and selling an underlying asset within a single trading day, taking advantage of market fluctuations, usually by employing large amounts of leverage, to profit from relatively small movements in price. The most common markets for day traders are the Forex and stock markets. Day traders are important as their activities provide liquidity to the markets in which they trade; they also maintain market efficiency by arbitrage. In today’s markets, the overwhelming majority of intra-day trades are made by automated trading algorithms.
In Forex trading a Dealing Desk is operated by brokers who act as Market Makers. Dealing Desks intervene between traders and liquidity providers. This allows them to set the levels of liquidity offered to traders and the prices, as well as being able to take the opposite side of a trader’s position. They make the market the client trades on and manage their risk exposure accordingly
A decline in the value of a currency in terms of foreign currency due to market demand rather than official action such as Central Bank Intervention.
A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes. It has been estimated that the derivatives market could be worth as much as $1.2 quadrillion, dwarfing the annual gross world product (GWP) which, by comparison, was only around $70 trillion in 2012.
A downward change in the official parity of an exchange rate from the rate at which it was previously set. This term is inappropriate in the context of a floated currency i.e. the EUR.
The “dollar” always represents the U.S. dollar. All other “dollar” currencies should be described specifically. i.e. The Australian Dollar or Singapore Dollar.
In economics a dove refers to a central banker or economic advisor who is in favor of policies that keep interest rates low, reasoning that inflation is not an imminent threat to the country or economic bloc in question. When these individuals make statements in the press to this effect, these statements are referred to as being ‘dovish’.
The size of a drop in the value of an account from its peak to its low.
Electronic Communication Networks allow traders to receive the best bid and ask prices when trading by aggregating prices from several liquidity providers and always offering the best two. ECN orders are routed straight through to the interbank network, completely anonymously, without any intervention from a dealing desk. When trading over an ECN network a trader may receive a bid and ask prices from different providers if these are the most competitive on the market.
A statistic that is used to gauge current economic conditions.
The economic calendar refers to the schedules dates of significant releases or events that may affect the movement of individual security prices or markets as a whole. Investors and traders use the economic calendar to plan trades as well as to be alert to chart patterns and indicators that may be caused or affected by these events. Click here to view the economic calendar for various countries.
Elliot Wave Principle
A system of empirically derived rules for interpreting the action in the markets. It refers to a five-wave/three-wave pattern which forms one complete bull market /bear market cycle of eight waves.
1. When trading, your equity is your account balance, plus or minus the unrealized profit and loss from any positions you currently still have open. It is calculated as follows: Equity = Balance +/- Floating Profit/Loss.
2. A stock or other security that represents ownership of a given asset.
This is the expression used to describe the value of one currency in terms of another. For example, in the exchange rate of EUR/USD 1.14111, one Euro is equal to 0.8762 United States cents.
The date on which a transaction expires which is usually 2 business days before the settlement date.
Exponential moving averages trace an asset’s average price over a pre-set number of periods, but unlike simple moving averages (SMA), EMA calculations give more weight to the most recent data. As a result, EMAs react faster to changes in price than SMAs do. Two of the most popular EMAs in technical analysis are the 12 and 26-period moving averages.
Named after 13th-century mathematician Leonardo Fibonacci, the Fibonacci numbers are an integer sequence in which each number is the sum of the previous two. The sequence is closely related to the golden mean and its ratios are to be found in many places in nature, from shell spirals and tree branches to the ratios of the human body’s appendages and joints.
In technical analysis, Fibonacci retracements are support and resistance lines drawn on an asset’s price chart to discern the Fibonacci relationships that are thought to also exist in asset price fluctuations. Instead of them simply being plotted at high and low points like traditional support and resistance lines, they are drawn according to the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%.
To apply them, select Fibonacci retracements from your terminal and draw a line from a recent lowest low to a recent highest high (or vice versa depending on whether the market is trending bullishly or bearishly), your platform will automatically plot the ratios for you between these two points. Fibonacci retracements work best when plotted on strongly trending markets. When drawn from low to high the levels indicate retracement support levels that price action may pull back to, thus generating buy signals for traders. When drawn from high to low the levels indicate retracement resistance levels that price action may momentarily spike back up to, thus generating sell signals for traders. It is thought that one of the reasons Fibonacci retracements seem to work as well as a predictive tool has more to do with the levels being self-fulfilling due to so many investors observing them, rather than there being some essential mathematical ratio that defines price movement.
Floating profit and loss refers to the unrealized profits or losses resulting from any open positions currently held by a trader.
Members of the Federal Reserve’s Open Market Committee are responsible for voting on where U.S interest rates should be set. Consequently, whenever one of their numbers is scheduled to speak publically, or their internal meeting minutes are released, it is regarded as a high-impact economic indicator. If their sentiment is more hawkish than expected this can have a positive effect on the value of the US dollar, and vice versa if it is more dovish than expected.
A market where foreign currencies are traded internationally. As measured by the Bank for International Settlements the daily turnover of the foreign exchange market is around 4 trillion dollars making it the largest market in the world.
A transaction with a settlement date that is more than 2 business days after the actual trade date.
The expression of the value of one currency in terms of another where the settlement date is more than 2 business days after the trade date. A forward exchange rate is the spot exchange rate of the currencies on the trade date adjusted for the forward points.
Free Margin refers to the funds in a trading account that is not currently being used to guarantee any open positions. It is calculated as follows: Free Margin = Equity – Margin.
The basic economic determinants of exchange rates, such as inflation, interest rates, commodity prices, and economic activity.
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 while forwards are traded over the counter (OTC).
The seven leading industrial countries: The United States, Germany, Japan, France, United Kingdom, Canada, and Italy.
Gross Domestic Product is an economic indicator that tracks the changes in the total value of goods and services produced by a country or economic region (adjusted for inflation). GDP provides a comprehensive account of economic activity and is regarded as the most important barometer of economic health. Except for Canada, which releases its GDP figures monthly, GDP is usually reported quarterly. Most countries release three versions of their GDP figures: a Preliminary report, a revised Second Estimate, and a Final version. Even though the Preliminary report is not the most accurate, it tends to have the greatest market impact due to it being released first. When GDP comes in higher than expected, it will tend to have a beneficial effect on the value of the currency in question.
In technical analysis, when two moving averages intersect, usually a short one like a 20 day and a long one such as 40 days. This is considered a favorable sign that the underlying currency will move in the same direction.
Good for the day orders, as the name suggests, are valid only until the end of the trading day, at which point they are automatically closed.
An order instruction provided to a broker that does not expire at the end of the trading day, although normally terminates at the end of the trading month.
A series of positions and open orders that are built with a predetermined spread defined by the trader.
The Guppy is the market nickname for the GBP/JPY currency pair.
A currency that investors have confidence in. Examples could be the US Dollar or the Euro.
A central banker, or economic advisor, whose policies are defined by being primarily concerned with interest rates. Hawks tend to be in favor of keeping interest rates relatively high to keep inflation down. Another way to describe a hawk’s policies is to say that they are not as concerned with economic growth as they are with keeping inflationary pressures in check. Policies or statements made to this effect are described as being ‘hawkish’.
A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the price to drop to around the same level as the shoulder. A further modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to sell.
A strategy used to offset market risk, whereby one position protects another.
Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn an active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets to generate high returns (either in an absolute sense or over a specified market benchmark). It is important to note that hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds. One aspect that has set the hedge fund industry apart is the fact that hedge funds face less regulation than mutual funds and other investment vehicles.
Hot money describes an influx of speculative investments from one economy into another to take advantage of higher interest rates.
Ichimoku Kinkō Hyō, often abbreviated to just Ichimoku, is a technical indicator developed by Japanese journalist Goichi Hosoda in the late 1930s. It is used to provide information on trend and momentum as well as support and resistance. Ichimoku is widely used by Japanese traders but is gaining in popularity among western traders owing to the density of information it can provide without the use of additional indicators.
Ichimoku is comprised of five lines:
1.Tenkan-sen (usually a red line), which is a 9 period moving average determining trend as well as support and resistance.
2. Kijun-sen (usually a blue line), which is a 26-period moving average used to indicate potential future price action. If price action is taking place above this line it may continue to trend upwards, if below this line it could continue to trend downwards.
3. Senkou Span A, which averages out the 9 and 26-period moving averages of Tenken-sen and Kijun-sen and plots the result 26 periods ahead.
4. Senkou Span B, a 52-period moving average that is plotted 26 periods ahead.
The area between span A and span B is called the Kumo (cloud) and is shaded. Thick clouds represent higher volatility and more robust support/resistance levels. Thinner clouds represent decreased volatility and weak support/resistance. When Span A is above Span B the underlying market is considered bullish, when Span B is above Span A the underlying market is considered bearish. When Spans A and B cross it is regarded as a signal of an imminent trend reversal.
5. Chinkou Span (usually a green line), which plots current closing prices 26 periods behind and is used to generate signals as well as support/resistance levels. When Chinkou crosses current price action from bottom-up it is considered a signal to go long. When it crosses current price actions from a top-down it is considered a signal to go short.
The focus of 26-period data in Ichimoku Kinkō Hyō is derived from the typical working month of a Japanese employee in the 1930s being 26 days long.
Indices are imaginary portfolios of securities that represent the relative health of a given market or sector of the economy. For example, the S&P 500, which is one of the most popular benchmarks of the U.S stock market, tracks the value of 500 of the largest American companies and represents around 75% of the American equity market. Its value represents the aggregated performance of all the stocks that comprise it. Though each index has its calculation methodology, what investors look for is the percentage that an index rises or falls above or below its base value. Indices are not technically investment vehicles; however index mutual funds and exchange-traded funds allow investors to take positions on the changing fortunes of the economic sectors represented by indices.
A market maker's price is an indication of price, it cannot be dealt with.
Industrial Production is an economic indicator that reports the total value of a country or economic region’s industrial output (adjusted for inflation). The figures take manufacturing, mining, and utilities into account. Industrial output is a valuable indicator because it is closely correlated with other areas such as employment, earnings, and consumer confidence. It is considered a coincident indicator due to production being so sensitive to changes in demand. When the figures come in higher than expected they tend to have a positive effect on a country’s currency value
A continued rise in the general price level in conjunction with a related drop in purchasing power. This is sometimes referred to as an excessive movement at such price levels.
The margin is a returnable deposit required to be lodged by buyers and sellers when opening a new position.
When entering a position, the minimum amount that must be paid in cash.
A person or firm that introduces customers to a market maker often in return for a commission or a portion of the spread.
The Yen is the Japanese currency unit. It is the third most-traded currency in the foreign exchange market after the United States dollar and the Euro.
Jawboning, also known as ‘Moral Suasion’, is the use of rhetoric to influence political and economic events rather than having to resort to direct intervention through legislation. Speeches by central bankers tend to fall into this category as they seek to influence market sentiment and exchange rates without overtly changing policy.
A trader who trades for small, short-term profits during a trading session, rarely carrying a position overnight.
For smaller countries, the act of orienting their currency to that of a major trading partner.
Traders term for the New Zealand Dollar.
Lagging indicators are technical indicators that register change after the economy does as a whole. A good example of a lagging indicator is employment as it will tend to increase or decrease after upturns or downturns in the wider economy.
Economic indicators used to predict future economic activity, such as the levels of the S&P 500 index.
Leverage allows investors to command a much larger investment than their capital will allow, thus allowing them to potentially increase their returns while only investing a percentage of the overall value of the asset in question. One of the most commonly employed types of leverage is the use of mortgages that allow home-buyers to purchase properties that are worth more than the amount initially invested.
In terms of foreign exchange, the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.
Excess of purchases over sales or of foreign currency assets over liabilities.
The Loonie is the market nickname of the Canadian dollar. It is derived from the Common Loon, the provincial bird of Ontario which appears on one side of the Canadian one-dollar coin.
A standardized method of trading in Forex, which requires a trade of 100,000 units (a lot) of a particular currency.
MACD is a popular technical indicator that was developed by Gerald Appel in the 1970s. It is used to indicate changes in the momentum, direction, and duration of an underlying asset’s price action. MACD focuses on the relationship between two moving averages. The first is called the MACD line; it is calculated by subtracting the 26 period EMA (exponential moving average), from the 12 period EMA. The second line is known as the signal line, this is a 9 period EMA of the MACD line. Both the MACD line and the signal line are plotted over current price action, and the difference between them is presented in a histogram beneath the chart being monitored.
MACD works best in trending markets as its main strength is alerting traders to subtle changes in the strength and direction of an asset’s trend. There are three main things MACD traders look out for when using this technical indicator.
1. MACD/signal line crossovers: When the MACD line crosses up through the signal line it is a bullish signal indicating the emergence of an uptrend. When the MACD line crosses down through the signal line it is a bearish signal indicating that a downtrend is in effect. These crossovers are also clearly visible in the histogram, which shows the difference between the two. The point at which they cross over the histogram is to be found at zero because there is no difference between them.
2. MACD/Zero line crossovers: When the MACD line plotted on the histogram crosses the x-axis, or zero line there is no difference between the fast (short period) and slow (long period) EMAs that compose it. An upward move through the zero-line means that the short-term EMA is above the long-term EMA, which is considered an indication of a possible bullish reversal, a downward move through the zero-line means that the long-term EMA is above the short-term EMA, which is considered an indication of a possible bearish reversal. It is important to keep in mind that while a zero crossover indicates a trend reversal, it says less about the momentum of this change than a signal-line crossover.
3. When the underlying asset’s price begins to diverge from the MACD line or histogram, i.e. price action moves either above or below the MACD line or histogram, this can be an indication that a current trend is beginning to break down.
The difference between the buying and selling rates also used to indicate the discount or premium between spot or forward.
The minimum margin that must be available in an account to support all open trades.
A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.
Market depth refers to a security’s ability to fill large numbers of both buy and sell orders without them significantly affecting its market price
A market maker is a person or firm authorized to create and maintain a market in a foreign currency or CFD.
An order to buy or sell a financial instrument at the best possible price at the time the order is placed.
A Micro lot is a hundredth of a lot, in Forex trading a micro lot represents 1,000 units of the base currency in a pair.
A mini lot is a tenth of a lot, in Forex trading a mini lot represents 10,000 units of the base currency in a pair.
Momentum is the rate at which an underlying asset’s price and volume accelerate, either positively or negatively. Once an asset begins to gather momentum it is considered increasingly likely that it will continue to move in the same direction. In technical analysis indicators of momentum are called oscillators and are used to indicate emerging trends.
A central bank’s management of a country’s money supply. Economic theory underlying monetary policy suggests that controlling the growth of the amount of money in the economy is the key to controlling prices and therefore inflation. However, central banks’ monetary capability is severely limited by global money movements. This forces them to use the indirect tool of exchange rate manipulation.
A way of smoothing a set of data, widely used in price time series.
Currency positions that have not been offset with opposite positions.
An investor who bases his/her decisions on the outcome of a news announcement and its impact on the market.
NFP is one of the most impactful economic indicators relating to the U.S economy. It tracks the changes in the number of employed people excluding farm workers, the government, a non-profit organization, and private household employees. The previous month’s data is released on the first Friday of every month, making NFP the earliest and most important employment indicator from the United States. Numbers can vary from +/- 10,000 – 250,000, if it comes in better than expected bullish USD activity normally follows.
Brokers who operate a No Dealing Desk model pass the trades they receive from their clients straight through to liquidity providers. They do not intervene in any way between the trader and the market.
The North American session is the last session of each trading day, opening between 12 pm and 8 am GMT. These hours change whenever daylight savings is observed.
The price at which a seller is willing to sell. The best offer is the lowest such price available.
A contingent order where the execution of one part of the order automatically cancels the other part.
The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency.
An option is a financial instrument that secures the right, though not the obligation, to buy or sell a given asset at a certain price on a specified date. The seller of an option is referred to as an option writer and the buyer of an option is referred to as option holder. In options trading to purchase an option on a given asset is to ‘Call’ and to sell is to ‘Put’.
Quantitative methods designed to provide signals regarding the overbought and oversold conditions.
Also known as parabolic stop and reverse, Parabolic SAR is a technical indicator developed by J. Welles Wilder Jr. It is used in trending markets to determine entry and exit points and is also employed to set effective trailing stop-loss parameters. Parabolic SAR is presented as a series of dots which are plotted either over or under the current market price. The simplest way to read this indicator is to sell when price action is below Parabolic SAR and to buy when price action is above it.
It works by calculating the next period’s value using the current period, added to an acceleration factor (normally valued at 0.02 and increased by a further 0.02 each time a new extreme high or low point is registered), this is multiplied by the value of that last registered Extreme Point (EP) minus the current value. The way the acceleration factor is set causes SAR to converge on the current price as a trend continues. This indicator takes as a given that trends tend to be short-lived and can only continue unabated for a limited period.
A pending order is an instruction to buy or sell an instrument when certain preconditions specified by the trader are met. Pending orders fall into two categories, limit orders and stop orders. Essentially, when placing a pending order a trader is informing their broker that they do not want the current market price, but rather that they only want their order executed if the market price reaches a certain level.
Limit orders limit the price at which a trader is prepared to buy or sell. There are two types of limit order; a buy limit order instructs that an instrument is bought at a specified price or lower, a sell limit order instructs that an instrument is sold at a specified limit price or higher. Limit orders are especially useful in preventing slippage as they guarantee that an order will be filled within the specified limits or not at all. The downside of limit orders is that even though they prevent slippage, they are at risk of not being filled at times of high volatility.
Stop orders are pending orders which also instruct that positions are opened or closed when specified prices are reached. Though frequently confused with limit orders they differ from them in key respect; when the market price reaches the level specified by a trader in their stop order, a market order is then automatically placed. As such limit orders are affected by the same issues as Market Orders at times of high volatility. Because they effectively become market orders when triggered they are also affected by slippage and poor fills in certain market conditions. Buy stop orders are entered above the current market price and sell stop orders are entered below the current market price. Stop orders are used to lock in profits, restrict losses, or to go long when an asset’s price is rising and short when it is falling.
A pip (or percentage in point) is the smallest unit when describing the value of a currency pair. This is usually the fourth decimal place or 1/10,000th of the quote currency in a pair. In the case of the Japanese yen, it is the second decimal place or 1/100th of the quote currency in a JPY pair. Nowadays many currency pairs are calculated to five decimal places, this fifth decimal place is often referred to as a ‘pipette’.
Pivot points are technical indicators used to predict short-term movements in price action. Usually, they are calculated by taking the average of an asset’s highest, lowest, and closing prices, or an average of an asset’s highest, lowest, opening and closing prices. When current price action takes place above a pivot point it is regarded as being bullish, when it takes place below a pivot point it is regarded as being bearish
Pivot points are technical indicators used to predict short-term movements in price action. Usually, they are calculated by taking the average of an asset’s highest, lowest, and closing prices, or an average of an asset’s highest, lowest, opening and closing prices. When current price action takes place above a pivot point it is regarded as being bullish, when it takes place below a pivot point it is regarded as being bearish
The netted total commitments in a given currency. A position can be either flat or square ( no exposure), long, (more currency bought than sold), or short ( more currency sold than bought).
An amount by which a currency is more expensive to buy for future delivery than for spot delivery.
Profit and loss is a method of monitoring a trading system’s ability to consistently create more profits than losses over a given period. Profit and loss are calculated by taking the average profit from winning trades and dividing it by the average loss from losing trades. The result is two numbers which form a profit and loss ratio. A common benchmark for a successful strategy is that it should generate a profit and loss ratio of at least 2:1, in other words, two wins for every one loss.
An indicative price. The price quoted for information purposes but not to deal.
The second currency of two in a currency pair. For the EUR/USD, USD is the quote currency. The exchange rate quoted is how many units of the second currency you will receive for one unit of the base currency.
A rally refers to a large upward movement in price action. Rallies occur in market conditions where buyers are abundant and not many sellers. This demand causes price increases that can only be dampened by a large number of sellers coming to the market.
The difference between the highest and lowest price of a future recorded during a given trading session.
Price at which a currency can be purchased or sold against another currency.
The real body is a term used to refer to the main bar that composes each candlestick on a candlestick chart. It excludes the shadows, or wicks, to be found above and below the real body.
The profit and loss that is generated by closing a position.
When charting an asset’s price action resistance is a price level which the market seems reluctant or incapable of going beyond. In other words, it is a level at which selling is likely to occur. Traders often use recent highs to plot resistance lines on the charts they are monitoring because they can be good indicators of an imminent trend reversal. The more times an asset’s price fails to break through a resistance level the more that resistance level is reinforced.
A high-impact economic indicator that tracks the monthly change in the value of sales at the retail level. Retail sales reports are important to traders because consumer spending accounts for the majority of a country’s economic activity. When retail sales figures come in better than expected traders can expect bullish price action on the country’s currency. In the United States, retail sales are divided into a standard retail sales report and a core retail sales report, which excludes automobile sales as these big-ticket items are regarded as being highly volatile and can conceal the underlying trend.
When price action moves in the opposite direction of the prevailing trend it is regarded as a retracement.
A reversal is a complete change in the direction of a trend. If security is trending upwards, then a reversal marks the beginning of a downward trend. If it is trending downwards then a reversal marks the beginning of a new upward trend. Reversals tend to be more sustained than pullbacks or retracements.
An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).
Buying and selling of a futures or options contract.
Developed by J. Welles Wilder in the 1970s, Relative Strength Index (RSI) is a very popular momentum oscillator used in technical analysis to determine whether an asset is overbought or oversold. Typically it is calculated using 14 periods of historical data. Current price action is assigned a value between 0 and 100 depending on how it relates to the respective average gains and losses for the last 14 periods. If this figure reaches or exceeds 70 then the underlying asset is regarded as being overbought, if it reaches or dips below 30 then it is regarded as being overbought, in both instances a reversal is thought to be imminent and so overbought conditions prompt selling activity, and oversold conditions prompt buying activity.
Scalping is a trading strategy in which traders look to profit from small changes in price by rapidly opening and closing a large number of positions in every trading session. In this way risk is limited and profits accumulate due to the sheer volume of trades placed. Scalpers can either trade manually or with the use of automated strategies. Increasingly scalpers at the retail level are turning towards Expert Advisors to automate their scalping strategies. This is because speed is the primary factor in identifying scalping opportunities and trading bots have a natural advantage over human traders in this respect. Also, manual scalping can be extremely demanding both in terms of the kind of prolonged attention required to consistently profit, and the emotions that arise from deficits incorrect trading psychology. A well-programmed EA can eliminate these human errors and lead to a much more efficient scalping strategy.
The sentiment is a general feeling surrounding a given financial instrument, market, or economy. In many ways, it is the aggregated attitude of all the investors taking part in that specific market. The terms ‘bullish’ and ‘bearish’ refer to the sentiment surrounding a market as much as they describe its price action. Investors also talk of ‘hawkish’ or ‘dovish’ sentiment to refer to central bankers’ attitudes to interest rates and growth; hawkish sentiment is rhetoric that supports and encourages the maintenance of high-interest rates, and dovish sentiment involves promoting economic growth through low-interest rates with little or no concern for inflationary pressures. Sentiment alone, even in the absence of the relevant fundamentals, can dramatically change the fortunes of a market, albeit temporarily. A perfect example of this occurred in 2012 when in the midst of Europe’s sovereign debt crisis, and much speculation regarding the future of the single currency, ECB president Mario Draghi, speaking at a conference in London, pledged to do ‘whatever it takes’ to save the Euro. The words alone were enough to cause the Euro to rally and for borrowing costs in Spain and Italy to drop.
Excess of sales over purchases or of foreign currency liabilities over assets.
Slippage is the pip-difference between the price a trader expects an order to be filled at and the price it is actually filled it. Slippage tends to occur when liquidity is low, or in volatile markets, particularly in the run-up to, or in the wake of, important economic data releases. Slippage also affects stop orders as these are executed as market orders which are automatically filled at the next best price rather than re-quoting another price to the trader.
Spikes are relatively large, though short-lived, positive or negative movements in price action.
Foreign exchange bought and sold for delivery two business days after the deal is firmed.
The value difference between the bid and ask price of a currency pair.
Also known as a share or equity, a stock is a tradable security that grants the purchaser ownership of a fraction of a corporation, as well as a claim on a percentage of its assets and earnings (dividends). The two main types of stock are common and preferred. Common stock entitles owners to dividends as well as a say at stockholder meetings. Preferred stock owners are entitled to higher dividends but do not have the right to vote at shareholder meetings.
An arrangement whereby a position is automatically closed out when it reaches a certain loss or when exchange rates reach specified values.
When charting an asset’s price action, support is a price level which the market seems reluctant or unwilling to fall below. In other words, it is a level at which buying is likely to occur. Traders often use recent lows to plot support lines on the charts they are monitoring because they can be good indicators of an imminent trend reversal. The more times an asset’s price fails to drop below a support level the more that support level is reinforced.
Swap is the interest that accrues when holding a position in a currency pair overnight. All currency trades involve borrowing one currency (the quote) to purchase another currency (the base) when holding these positions overnight interest is charged on each currency in the pair. Traders are charged interest on the currency they have borrowed and are paid interest on the currency they have bought. So, depending on whether the quote currency’s interest rate is higher than that of the base currency, a trader may owe interest, or be owed interest when a rollover occurs.
Swap is calculated as follows: Swap = (one pip / exchange rate) * trade size (lot size) * swap value in points. Click on "Trading Calculator" in the menu on the left to perform swap calculations.
Swing trading is a relatively short-term investment style that attempts to capitalize on short-term trends that may last for up to several days. Technical analysis is employed by swing traders to identify securities that are experiencing increased momentum; these securities are invested in and sold when the momentum begins to subside.
Trader’s nickname for the Swiss Franc.
A limit order that is placed above the market with a long position or below the market with a short position. When the market reaches the limit price, the position is closed thereby locking in a profit.
A customer’s instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.
Is concerned with past price and volume trends and often with the help of chart analysis in a market to be able to make forecasts about future price developments of the commodity being traded.
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
Technical indicators are a class of mathematical processes applied to certain features of historical price action to determine the momentum, volume, volatility, and strength of current price action. This is done to predict future movements in price. Technical indicators are primarily used in live trading conditions as their results are constantly being updated with the current market price.
The smallest possible change in a price, either up or down. Also known as a pip.
The trade balance is an economic indicator that tracks the monthly changes in the difference between the value of goods and services imported and exported by a country or region. A negative figure indicates a trade deficit; a positive figure indicates a trade surplus. When the data is better than expected, i.e. a deficit is reduced and/or a surplus is extended, this tends to have a positive effect on the currency in question.
Trailing stops are dynamic stop-loss orders that can be set to shadow the market price, staying within a certain predefined pip range to secure profits when price action moves in a trader’s favor. A trailing stop can be set to become active after the market moves by a predefined number of pips at which point it will begin to follow the market price, always remaining within a certain number of pips from the current price.
The current direction of the market, whether up or down or sideways (which is sometimes referred to as non-trending or trading market).
Trend lines are drawn beneath uptrends and above downtrends to mark their respective support and resistance levels. Unlike regular support and resistance lines, they are drawn diagonally across low points in an uptrend to indicate support levels and along high points in a downtrend to indicate resistance levels. When they are broken the prevailing trend is thought to be over.
A currency that cannot be exchanged for another because of foreign exchange regulations.
A widely used quantity of currency. In forex trading, one unit of USD is equal to one United States dollar, while one unit of EUR is one Euro. For JPY, one unit is equivalent to one Yen. One unit is the smallest trade size in Forex trading.
For exchange contracts, it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For a spot transaction, it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting center coinciding with a banking holiday in the country(-es) of the foreign currency(-es). The value date then moves forward a day. The enquirer is the party who must make sure that his spot day coincides with the one applied by the respondent. The forward month's maturity must fall on the corresponding date in the relevant calendar month If the one month date falls on a non-banking day in one of the centers then the operative date would be the next common business day. The adjustment of the maturity for a particular month does not affect the other maturities that will continue to fall on the original corresponding date if they meet the open day requirement. If the last spot date falls on the last business day of a month, the forward dates will match this date by also falling due on the last business day. Also referred to as maturity date.
A transaction with a settlement date that is on the same day as the trade date.
A transaction with a settlement date that is 1 business day after the trade date.
Velocity is a measure of the rate at which an asset’s price changes. It is useful for analysts looking for potential points of reversal.
A measure of the extent to which the exchange rate changes over a given period.
The number, or value, of securities traded during a specific period.
Price action in one of the three market directions: up, down, or sideways.
A continuation price pattern. It consists of two converging trendlines that intersect at a point called the apex. Wedges usually slant in the opposite direction from the prevailing trend. Hence, a falling wedge appears during an uptrend whereas a rising wedge appears during a downtrend.
Sudden price movements in the opposite direction, usually leading to false or bad signals. For example, while the price is rallying upwards suddenly it swings direction and follows a downward path until it bounces up again. It is a characteristic of volatile markets.
A technical indicator developed by Larry Williams. It is used to identify extreme price movements i.e. overbought and oversold levels. It uses an upside-down scale. Readings from 0 to -20 imply overbought levels whereas readings between 80 and 100 imply oversold levels. The %R indicator often anticipates reversals as it forms a top and turns down before the underlying financial instrument does and similarly, it forms a bottom and turns up before the price does. To calculate %R, take the difference between the Highest High of the last n periods and the current closing price - this is the dividend. Furthermore, take the difference between the Highest High of the last n periods and the Lowest Low of the last n periods - this is the divisor. Finally, multiply the quotient by -100.
WTI is considered one of the major benchmarks for crude oil pricing globally. It has a low Sulphur content (sweet) and it has a relatively low density (light). Hence, it is also known as Texas Light Sweet. It is listed in the New York Mercantile Exchange's oil futures.
Xenocurrency is a currency that circulates or trades in markets outside of its domestic borders. The name derives from the Greek prefix "Xeno," meaning foreign or strange.
A traders’ term for a billion as in a billion dollars.
The yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value. Yields may be considered known or anticipated depending on the security in question as certain securities may experience fluctuations in value.
The Yuppy is the market nickname for the EUR/JPY currency pair.
Rand. The currency of South Africa. It is subdivided into 100 cents.
A technical indicator that draws tops and bottoms - filtering out the noise.