Forex jargon buster

A B C D E F G H I J K L M N

O P Q R S T U V W X Y Z

A

Aggregate Demand - The sum of governmentspending, personal consumption expenditures, and business expenditures.Appreciation - A currency is said to 'appreciate ' when it strengthens in pricein response to market demand.

Arbitrage - The purchase or sale of an instrumentand simultaneous taking of an equal and opposite position in a related market,in order to take advantage of small price differentials between markets.

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

Ask Rate - The rate at which a financial instrument ifoffered for sale (as in bid/ask spread). Asset Allocation - Investment practicethat divides funds among different markets to achieve diversification for riskmanagement purposes and/or expected returns consistent with an investor'sobjectives.

B

Back Office - The departments and processesrelated to the settlement of financial transactions. Balance of Trade - Thevalue of a country's exports minus its imports.

Bar Charts - Standard bar charts arecommonly used to convey price activity into an easily readable chart. Usuallyfour elements make up a bar chart, the Open, High, Low, and Close for thetrading session/time period. A price bar can represent any time frame the userwishes, from 1 minute to 1 month. The total vertical length/height of the barrepresents the entire trading range for the period. The top of the barrepresents the highest price of the period, and the bottom of the barrepresents the lowest price of the period. The Open is represented by a smalldash to the left of the bar, and the Close for the session is a small dash tothe right of the bar.

Base Currency - In general terms, the base currency isthe currency in which an investor or issuer maintains its book of accounts. Inthe FX markets, the US Dollar is normally considered the 'base' currency forquotes, meaning that quotes are expressed as a unit of $1 USD per the othercurrency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Bear Market - A marketdistinguished by declining prices. Bid Rate - The rate at which a trader iswilling to buy a currency. Page 1 of 11

Bid/Ask Spread - The difference between thebid and offer price, and the most widely used measure of market liquidity.

BigFigure - Dealer expression referring to the first few digits of an exchangerate. These digits rarely change in normal market fluctuations, and thereforeare omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verballywithout the first three digits i.e. "30/35".

Book - In a professional tradingenvironment, a 'book' is the summary of a trader's or desk's total positions.Broker - An individual or firm that acts as an intermediary, putting togetherbuyers and sellers for a fee or commission. In contrast, a 'dealer' commitscapital and takes one side of a position, hoping to earn a spread (profit) byclosing out the position in a subsequent trade with another party. BrettonWoods Agreement of 1944 - An agreement that established fixed foreign exchangerates for major currencies, provided for central bank intervention in thecurrency markets, and pegged the price of gold at US $35 per ounce. Theagreement lasted until 1971, when President Nixon overturned the Bretton Woodsagreement and established a floating exchange rate for the major currencies.Bull Market - A market distinguished by rising prices.

Bundesbank - Germany'sCentral Bank.

Buying/Selling - In the forex marketcurrencies are always priced in pairs; therefore all trades result in thesimultaneous buying of one currency and the selling of another. The objectiveof currency trading is to buy the currency that increases in value relative tothe one you sold. If you have bought a currency and the price appreciates invalue, then you must sell the currency back in order to lock in the profit.

C

Cable - Trader jargon referring to theSterling/US Dollar exchange rate. So called because the rate was originallytransmitted via a transatlantic cable beginning in the mid 1800's.

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

Central Bank- A government or quasi-governmental organization that manages a country'smonetary policy. For example, the US central bank is the Federal Reserve, andthe German central bank is the Bundesbank. others include the ECB, BOE, BOJ.Chartist - An individual who uses charts and graphs and interprets historicaldata to find trends and predict future movements. Also referred to as TechnicalTrader.

Choice Market- A market with no spread. All trades buys and sells occurat that one price Page 2 of 11

Clearing - The process of settling a trade.Contagion - The tendency of an economic crisis to spread from one market toanother. In 1997, political instability in Indonesia caused high volatility intheir domestic currency, the Rupiah. From there, the contagion spread to otherAsian emerging currencies, and then to Latin America, and is now referred to asthe 'Asian Contagion'. Collateral - Something given to secure a loan or as aguarantee of performance.

Commission - A transaction fee charged by a broker.

Contagion - The tendency of an economiccrisis to spread from one market to another. In 1997, financial instability inThailand caused high volatility in its domestic currency, the Baht, which triggered a contagion into other East Asian emerging currencies, and then toLatin America. It is now referred to as the Asian Contagion Confirmation - Adocument exchanged by counterparts to a transaction that states the terms ofsaid transaction.

Contract - The standard unit of trading.

Contract (Unit or Lot) - The standard unitof trading on certain exchanges. Counterparty - One of the participants in afinancial transaction. Country Risk - Risk associated with a cross-bordertransaction, including but not limited to legal and political conditions suchas war etc.

Cross Rates - The exchange rate between two currencies expressed asthe ratio of two foreign exchange rates that are both expressed in terms of athird currency. Foreign exchange rate between two currencies other than theU.S. dollar, the currency in which most exchanges are usually quoted.

Currency - Any form of money issued by agovernment or central bank and used as legal tender and a basis for trade.Currency Risk - the probability of an adverse change in exchange rates.

D

Day Trading - Refers to positions whichare opened and closed on the same trading day. Dealer - An individual who actsas a principal or counterpart to a transaction. Principals take one side of aposition, hoping to earn a spread (profit) by closing out the position in asubsequent trade with another party. In contrast, a broker is an individual orfirm that acts as an intermediary, putting together buyers and sellers for afee or commission. Deficit - A negative balance of trade or payments. Delivery- An FX trade where both sides make and take actual delivery of the currenciestraded. Page 3 of 11

Depreciation - A fall in the value of acurrency due to market forces. Derivative - A contract that changes in value inrelation to the price movements of a related or underlying security, future orother physical instrument. An Option is the most common derivative instrument.Devaluation - The deliberate downward adjustment of a currency's price,normally by official announcement.

E

Economic Indicator - Economic indicatorssuch as GDP, foreign investment, and the trade balance reflect the generalhealth of an economy, and are therefore responsible for the underlying shiftsin supply and demand for that currency.

End Of Day Order (EOD) - An order to buy orsell at a specified price. This order remains open until the end of the tradingday which is typically 5PM ET. EURO - since 2002 the Euro has been the currencyof the European Monetary Union (EMU). A replacement for the European CurrencyUnit (ECU). Members of the EMU are Germany, France, Belgium, Luxembourg,Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal. EuropeanCentral Bank (ECB) - the Central Bank for the new European Monetary Union.

F

Federal Deposit Insurance Corporation(FDIC) - The regulatory agency responsible for administering bank depositoryinsurance in the US. Federal Reserve System - The central bank of the UnitedStates, with responsibility for implementing the country's monetary policy andregulating member banks of the System. The Fed was created in 1913 and iscomposed of 12 regional Federal Reserve Banks and a national Board of Governors

Fixed Exchange Rate- Official rate set bymonetary authorities for one or more currencies

Floating Exchange Rates - Floating exchangerates refer to the value of a currency as decided by supply and demand

Flat/square - Dealer jargon used todescribe a position that has been completely reversed, e.g. you bought $500,000then sold $500,000, thereby creating a neutral (flat) position. ForeignExchange - (Forex, FX) is the simultaneous buying of one currency while sellingfor another. This market of exchange has more buyers and sellers and dailyvolume than any other in the world. Taking place in the major financialinstitutions across the globe, the forex market is open 24-hours a day. Forward- The pre-specified exchange rate for a foreign exchange contract settling atsome agreed future date, based upon the interestrate differential between the two currencies involved.

Forward Contract - A forward contract fixesthe exchange rate for future delivery at a date to be agreed by bothparticipants. A deposit (or a minimum margin) is usually required in forwardtransactions. For example, if I want to lock in today's rate to buy $10,000 USDat 1.5820 Canadian for the next 4 months, I will have the ability to purchaseup to $10,000 USD at this rate.

Forward Rates (Swaps) - A Forward Raterefers to a cash price of 2 currencies interest difference for a fixed term.Forward rates can be calculated easily given the fixed term interest rates ofeach currency and the current spot rate

Forward Trading - Forward trading is makingthe opposite trade of a spot trade in a given period of time. Often investorswill swap their trades forward for anywhere from a week or two up to severalmonths depending on the time frame of the investment. Even though a forwardtrade is on a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future valuedate

Forward points - The pips added to or subtracted from the current exchangerate to calculate a forward price. Fundamental Analysis - focuses on theeconomic forces of supply and demand that causes price movement. TheFundamentalist studies the causes of market movement, whereas the Technicianstudies the effects.

Futures Contract- An obligation to exchange a good orinstrument at a set price on a future date. The primary difference between aFuture and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts - ETC), versus forwards, which are considered OverThe Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

G

Gearing - Also known as margin trading. Aterm used to in the relationship of actual equity versus controlling equity.

Group of Five (G5) - are five leadingindustrial nations (France, Japan, Germany, the UK and US), which meet fromtime-to-time to discuss common economic problems.

Group of Seven (7) are 7 leadingnon-communist industrial nations composed of G5 plus Canada and Italy. Group ofTen (G10) is also known as The Paris Club which includes Belgium, Canada,France, Germany, Italy, Japan, the Netherlands, Sweden, UK and US. Thesenations signed an accord in 1962 to increase the fund available to the IMF andaid member countries with balance-of-payments difficulties.

Goldilocks Economy - a term coined backin the mid-1902 to describe an economy that was not too hot and not too cold.This typically describes an economy that enjoyed steady growth with nominalrate of inflation. Page 5 of 11

Good 'til Cancelled (GTC) - An order to buyor sell at a specified price. This order remains open until filled or until theclient cancels.

H

Hedging - A hedging transaction is apurchase or sale of a financial product, having as its purpose the eliminationof loss arising from price fluctuations. With regards to currency transactionsit would protect one against fluctuations in the foreign exchange rate. (seeForward Contract)

I

Inflation - An economic condition wherebyprices for consumer goods rise, eroding purchasing power. Initial margin - Theinitial deposit of collateral required to enter into a position as a guaranteeon future performance. Interbank Rates - The Foreign Exchange rates at whichlarge international banks quote other large international banks.

L

Leading Indicators - Statistics that areconsidered to predict future economic activity. LIBOR - The London Inter-BankOffered Rate. Banks use LIBOR when borrowing from another bank. Limit order -An order with restrictions on the maximum price to be paid or the minimum priceto be received. As an example, if the current price of USD/YEN is 102.00/05,then a limit order to buy USD would be at a price below 102. (ie 101.50)

Line Charts - The Line Chart connectssingle prices for a selected time period.

Liquidity - The ability of a market toaccept large transaction with minimal to no impact on price stability.Liquidation - The closing of an existing position through the execution of anoffsetting transaction. Long position - A position that appreciates in value ifmarket prices increase. When one buys a currency, their position is long.

M

Margin - The required equity that aninvestor must deposit to collateralize a position.

Margin Deposit - The margin deposit is nota down payment on a purchase of equity, as many perceive margins to be in thestock markets. Rather, the margin is a performance bond, or good faith deposit,to ensure against trading losses. The margin requirement allows traders to holda position much larger than the account value, which allow for this highleverage. In the event that funds in the account fall below marginrequirements, brokerage firms will automatically close all open positions.

Margin call - A request from a broker or dealer for additional funds or othercollateral to guarantee performance on a position that has moved against theclient. If the equity balance in your account falls below the marginrequirement, a margin call will be generated. In the event that an accountexceeds its maximum allowable leverage, ALL open positions are liquidatedimmediately, regardless of the size or the nature of positions held within theaccount. Market Maker - A dealer who regularly quotes both bid and ask pricesand is ready to make a two-sided market for any financial instrument. MarketRisk - Exposure to changes in market prices. Mark-to-Market - Process ofre-evaluating all open positions with the current market prices. These newvalues then determine margin requirements. Maturity - The date for settlementor expiry of a financial instrument.

N

Narrow Market - occurs when there is lighttrading and greater fluctuations in prices relative to volume. This is ofteninterchanged for THIN MARKET.

O

Offer - The rate at which a dealer iswilling to sell a currency. Offsetting transaction - A trade with which servesto cancel or offset some or all of the market risk of an open position.

One Cancels the Other Order (OCO) - A designation for two orders whereby one part ofthe two orders is executed the other is automatically cancelled.

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

Open position - A deal notyet reversed or settled with a physical payment.

Over the Counter (OTC) - Usedto describe any transaction that is not conducted over an exchange. Overnight -A trade that remains open until the next business day.

P

Pips - Digits added to or subtracted fromthe fourth decimal place, i.e. 0.0001. Also called Points. Political Risk -Exposure to changes in governmental policy which will have an adverse effect onan investor's position.

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

Position -The netted total holdings of a given currency.

Premium - In the currencymarkets, describes the amount by which the forward or futures price exceed thespot price.

Price Transparency - Describes quotes to which every marketparticipant has equal access.

Q

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

R

Rate - The price of one currency in termsof another, typically used for dealing purposes.

Resistance - A term used intechnical analysis indicating a specific price level at which analysisconcludes people will sell.

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

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

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

Risk Capital - The amount of moneythat an individual can afford to invest, which, if lost would not affect theirlifestyle.

Risk Management - To hedge one's risk they will employ financialanalysis and trading techniques.

Roll-Over - Process whereby the settlement of adeal is rolled forward to another value date. The cost of this process is basedon the interest rate differential of the two currencies.

Rollover Rate -The daily rollover interestrate is the amount a trader either pays or earns, depending on the establishedmargin and position in the market. To avoid rollovers simply make surepositions are closed at the established end of the market day.

S

Settlement - The process by which a tradeis entered into the books and records of the counterparts to a transaction. Thesettlement of currency trades may or may not involve theactual physical exchange of one currencyfor another. Short Position - An investment position that benefits from a decline in market price. When one sells a currency their position is short.

Spot/Next - A currency deposit transactionor the simultaneous purchase and sale of currency, or vice versa by means ofswap for spot value day against the next working day.

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

Spot (Rate) - In FX Markets, Spot refers tothe cash price without interest factored in.

Spot Trade - When you trade foreignexchange you are always quoted a spot price 2 business days in advance. This isunder normal conditions where there are no bank holidays in the tradedcurrencies countries or is not over a weekend.

Spread - The difference between the bid(buy) and offer (ask, sell) prices; in other words the spread is the commissionthat the brokerage house makes on each trade. This can vary widely betweencurrencies and between brokerage firms. For example, USD/JPY may bid at 131.40and ask at 131.45, this five-pip spread defines the trader's cost, which can berecovered with a favorable currency move in the market. Sterling - slang forBritish Pound.

Stop Loss Order - Order type whereby anopen position is automatically liquidated at a specific price. Often used tominimize exposure to losses if the market moves against an investor's position.As an example, if an investor is long USD at 156.27, they might wish to put ina stop loss order for 155.49, which would limit losses should the dollardepreciate, possibly below 155.49.

Stochastics Oscillator - This technicalanalysis indicator is based on the premise that during an upward tradingmarket, prices tend to close near their high, and during a downward tradingmarket, prices tend to close near their low. Support Levels - A term used intechnical analysis indicating a specific price level at which a currency willhave the inability to cross below. Recurring failure for the price to movebelow that point produces a pattern that can usually be shaped by a straightline. It is the opposite of Resistance levels. Swap - A currency swap is thesimultaneous sale and purchase of the same amount of a given currency at aforward exchange rate.

Swift - Society of Worldwide InterbankFinancial Telecommunications. It is a dedicated computer network that is set upto support fund transfer messages between member banks worldwide.

T

Technical Analysis - An effort to forecastprices by analyzing market action through chart study, volume, trends, movingaverages, patterns, formations and many other technical indicators.

Tick - Minimum price move. Ticker - Showscurrent and/or recent history of a currency either in the format of a graph ortable. Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currencyfor delivery the following day.

Trading - Buying or selling of goods andservices among countries called commerce. Forex Trading is the trading ofForeign Currencies.

Transaction Cost - the cost of buying or selling afinancial instrument. Transaction Date - The date on which a trade occurs.

Trend - simply the direction of the market,usually broken down to three categories....major, intermediate and short-termtrends. Three directions are also associated

Trend Line - This is a Technical Analysisindicator also called or linear regression, which is a statistical tool used touncover trends. It is calculated by using the "Least Squares" method.There are two ways to use the linear regression line: a. Trade in the directionof the Trend line. b. Construct a parallel trend channel above and below theTrend line to be used as support and resistance levels. Turnover - The totalmoney value of all executed transactions in a given time period; volume.Two-Way Price - When both a bid and offer rate is quoted for a FX transaction.

U

Uptick - a new price quote at a pricehigher than the preceding quote. Uptick Rule - In the U.S., a regulationwhereby a security may not be sold short unless the last trade prior to theshort sale was at a price lower than the price at which the short sale isexecuted. US Prime Rate - The interest rate at which US banks will lend totheir prime corporate customers

V

Value Date - The date on whichcounterparts to a financial transaction agree to settle their respectiveobligations, i.e., exchanging payments. For spot currency transactions, thevalue date is normally two business days forward. Also known as maturity date.Variation Margin - Funds a broker must request from the client to have therequired margin deposited. The term usually refers to additional funds thatmust be deposited as a result of unfavorable price movements.

Volatility (Vol) - A measure of pricefluctuations. The standard deviation of a price series is commonly used tomeasure price volatility.

Volume - represents the total amount oftrading activity in a particular stock, commodity or index for that day. It isthe total number of contracts traded during the day.

w

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

Whipsaw - slang for a condition of a highlyvolatile market where a sharp price movement is quickly followed by a sharpreversal.

Y

Yard - Slang for a billion.

YIELD - Return on capital investment.