Irrespective of whether you are new to forex trading or fairly proficient, you will come across different words and terms which are specific to forex trading. Here is an exhaustive compilation of forex terminology, and what it means.
Appreciation: When a currency’s value increases or strengthens it is called appreciation.
Ask Price (Rate): It is also known as “offer” and “ask rate” and is the price at which you could buy a currency that is available for sale. It appears on the right side of a quote, as for example EUR/USD 1.2525/30 means Euro could be bought for 1.2530 US Dollars.
Bid Price (Rate): It’s also called bid rate and it’s the price at which a trader can sell a currency pair. It appears on the left side of a quote as for example in EUR/USD 1.2525/30 means that one Euro could be sold for 1.2525 US Dollars.
BOC: It refers to Bank of Canada which is the Central Bank of Canada.
BOE: It refers to Bank of England which is the Central Bank of the United Kingdom.
BOJ: Refers to Bank of Japan which is the Japanese Central Bank.
Bid Ask Spread: The difference between the bid price and the ask price in any currency quote is called the spread, and it essentially represents the brokers fee. Some brokers have fixed spreads while others have variable spreads.
Broker: An entity that handles the job of buying and selling currencies on your behalf through a forex trading platform. A broker’s profit constitutes the spread between the bid and ask currency prices.
Base Currency: Currencies are always quoted in terms of currency pairs, and the first currency in a currency pair is called the base currency. For example in the quote EUR/USD the EUR is the base currency. However the base currency in most currency pairs is the US Dollar.
Bar Chart: It is a typical chart used in technical analysis wherein each time division in the chart is displayed as a vertical bar. The top of the bar is the high price, the bottom is the low price and on the left of the bar is the opening price and on the right of the bar is the closing price.
Bear: A trader who believes currency prices will decline.
Bull: A trader who believes that the currency prices will trend upwards.
Bear Market: A forex market situation in which currency prices keep declining. This is the opposite of bull market.
Bollinger Bands: It is a popular technical indicator to determine overbought and oversold currency price levels. So you sell when price touches the upper Bollinger band, and buy when it hits the lower Bollinger band. In range-bound markets, this technique works well.
Bretton Woods: It is the place where a conference was held in the late 1940s which led to the formation of the IMF. The meeting resolved to have a fixed exchange rate system linked to gold and dollar that remained intact till early 1970s.
Bull Market: A forex market situation that shows a steady upward trend. The currency prices keep rising in a bull market.
Currency Pair: Any foreign exchange transaction involves two currencies as for example you can see in the quote EUR/USD. There are two currencies involved in the quote and this is what is called as currency pairs.
Currency Crosses: A currency pair that does not include US Dollars is called a currency cross or cross currencies. Example EUR/GBP
Candle Chart: It is a type of technical analysis chart wherein, the candlestick displays each time division on the chart as a red or green vertical bar, with extensions above and below the candlestick body. The highest price for the chart is shown at the top of the extension and the bottom of the extension shows the lowest price. Often red candlesticks indicate lower closing prices than opening price and green candlesticks indicate the price rising.
Call Rate: It refers to the overnight interbank interest rate.
Convertible Currency: A currency that can be exchanged for other currencies without obtaining any special approvals from the Central Bank of the country to which the currency belongs.
Cross Rate: It refers to exchange rate between two currencies where neither currency is US Dollar
Currency Risk: The perceived risk of incurring losses due to unexpected changes in currency exchange rates.
Currency Swap: When two parties enter into a contract which specifies payment of interest in different currencies for a certain period of time, and which also specifies payment of the principal amount at maturity in different currencies at pre-determined exchange rates, then that contract is referred to as a currency swap.
Currency Option: It is an options contract that enables the trader to buy or sell a currency with another currency at an agreed upon exchange rate within a specific time frame.
Commodity Channel Index: CCI as it is referred to detect beginning and ending currency market trends and provides an indication of overbought or oversold markets.
For example, CCI indicates increase in currency prices compared to average prices as it moves towards +100, and as CCI drops towards -100, it indicates that the price is getting increasingly low compared to average prices.
Central Bank: General term used to refer to a financial institution that manages a particular country’s monetary policy
Dealer: is an individual or a firm that buys a currency pair with the intention of making a profit by closing the position with another forex trade.
Day Trading: A forex trader who buys or sells depending on short term price movements during the course of the day.
Depreciation: When the value of a currency falls its called depreciation.
Dollar Rate: When variable amounts of any foreign currency are quoted against 1 US Dollar it is called dollar rate.
Economic Indicator: These are reports issued by governments, trade bodies indicating economic conditions within a country. Example beige book, unemployment figures, farm payroll, housing stats etc.
ECB: Refers to European Central Bank
FIFO: This is an acronym for First in First Out. It refers to the sequence in which open orders are liquidated. The first order to be opened is the first orders to be liquidated in this case.
Fundamental Analysis: It is an analysis of the political and economic conditions, in the context of how it could affect currency prices.
Forex/Fx/Foreign Exchange: Simultaneously buying one currency and selling another in an over-the-counter market is called foreign exchange.
Federal Reserve: Refers to the Central Bank of the United States of America.
GDP: It stands for Gross Domestic Product. It measures the national income and output of a particular country’s economy.
High/Low: The highest traded price and the lowest traded price of a particular currency pair for the current day’s trading activity.
Hedging: It is a transaction that reduces the risk of an existing currency position. For example in some trading platforms you can open a “buy” order for a particular currency pair and simultaneously make a “sell” order that is of course in the opposite direction. But in some platforms one cancels the other and so hedging is not possible.
Initial Margin: The initial deposit required to open a forex trading position is called the initial margin which is also a sort of guarantee on future performance.
Interbank Rates: It denotes foreign exchange rates applicable between large international banks amongst themselves.
Jobber: It is slang for a forex trader who relies on intra-day trading and never leaves any open position for the next day.
Kiwi: It is a forex slang name for the New Zealand Dollar
Limit Order: It indicates an order to buy or sell when the price reaches a specified level
Lot: It is indicative of the size of a normal forex transaction.
Leverage: Leverage means the extent to which you can use your capital to take up forex trading positions that are several times bigger. Leverage is best explained with an example. Supposing you have $5000 in your account with a broker offering you a leverage of say 400:1. That means you will be able to take up currency positions of $2 million. In other words just multiply your capital with the leverage offered to determine the total currency position you could hold.
Liquidity: The ability of forex markets to transact large forex deals without impacting overall market prices is called liquidity.
Leading Indicators: They are a set of statistical data considered essential for predicting future economic activity.
MACD: MACD stands for Moving Average Convergence Divergence. MACD uses moving averages to find trading signals from price charts. For example, MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average with a 9-day moving average being used as a trigger line, meaning when the MACD crosses below this trigger, it is time to sell and when it crosses above it, it’s time to buy.
Margin Call: When you don’t have enough money in your forex trading account your broker will ask you to deposit additional funds and this is called margin call. It may happen because additional currencies have been purchased or sold short and also to counter adverse movement in currency prices.
Margin: It denotes the amount of money needed to maintain a forex position.
Market Order: The moment a forex order reaches the marketplace for immediate execution at the best price possible it’s called a market order.
Moving Average: A moving average is an average of a shifting body of currency price data. For example, a 10-day moving average is obtained by adding closing prices for the last 10 periods and dividing by 10. The term “moving” is used as only the last 10 days are used in the measurement and the average is shifted forward with every next trading day.
Momentum: The tendency of a currency pair to continue movement in a particular direction.
Margin Account: Most forex accounts allow you to do leverage buying on credit and borrowing on currencies already in the account, subject to the terms and conditions stipulated by your broker. These kinds of forex trading accounts are referred to as Margin Accounts.
Market Price: Denotes the current quote of a currency pair.
Major Currency: The Japanese Yen, British Pound, Swiss Franc, and the Euro are generally referred to as major currencies.
Minor Currency: The Canadian dollar, the Australian dollar and the New Zealand dollar are referred to as minor currencies.
OCO: This is an acronym for one cancels the other. It generally refers to two orders placed simultaneously with instructions to cancel the 2nd order on execution of the first or vice versa.
Open Position: This indicates an active trade that has not been closed
Offer: It is price at which the forex dealer is prepared to sell you the base currency. In other words it is simply the price of the offer or the price you buy for. Same as “ask”.
Parabolic SAR: The SAR in Parabolic SAR means “Stop and Reverse”. It is a system of defining the point of a trend’s turns, and is based on the link between a Forex market’s price and time. Parabolic SAR is used to make reverse orientation of trading positions when an ongoing trend turns. The indicator gets its name because of the fact that when charted, the pattern resembles a parabola or French curve.
Pips/Points: It is the smallest unit that a currency could be traded in. Pip is an acronym for “percentage in point”.
Position: It denotes the total holdings you have of a particular currency.
Political Risk: Uncertainty arising from government action that could be detrimental to the forex investment climate.
Pivot Point: It refers to support and resistance points calculated based on the previous trend’s high, low and closing prices.
Profit: Amount of money gained by closing a forex position.
Price: Indicates the rate at which a currency can be bought or sold.
Principal Value: Refers to initial amount of money invested.
Quote: It denotes indicative market prices of currencies for information purpose only.
Quote Currency: Consider the currency pair USD/EUR. The second currency in this pair is the EUR and it is called the quote currency.
RSI: RSI is an acronym for Relative Strength Index. It measures the markets activity as to whether it is over bought or over sold, and tells a trader as to which way the market is moving. RSI is a leading indicator and the higher the RSI number, the more over bought it are and conversely the lower the RSI number, the more over sold it is.
Rollover: If you have an open forex position with a settlement date set for today, and if you want to extend the settlement date to tomorrow then you are said to “rollover” your position.
Rate: The price at which you can purchase a currency or sell it against another currency.
Revaluation: It denotes the daily calculation of the potential profits and losses on open positions depending on the settlement price of the previous trading day and the current trading day.
Resistance: This is the price level at which you could expect selling to take place.
Swap: In forex trading you don’t physically receive the currency you buy nor are you holding to a currency when you offer to sell it. So for holding your position overnight the broker would have to pay you interest rate difference between the two currencies and this could be either positive or negative.
Stochastic: A technical momentum indicator that compares a currency’s closing price to its price range over a given time period.
Support Levels: It is a price at which intensive buying of a currency at that point can lead to a downtrend with further decrease in prices.
Settlement: When you complete a forex trade it is called a settlement. Also denotes actual physical delivery of one currency for another.
Selling Short: Means to sell a currency position hoping that the price will decline further and so in future it can be bought back at a profit.
Sell Limit Order: It denotes an order to complete a currency trade only at a pre-set price (limit) or higher.
Slippage: If you order to buy or sell a currency at a particular price, and because of low liquidity, or your broker’s inability to execute orders quickly, the price at the time of execution is seen to be different from what you had ordered. It means that slippage has occurred.
Spread: The difference between bid and ask price indicated in pips is called the spread. The smaller the spread the better it is for the trader.
Stop Loss Order: This is a defensive mechanism to escape from losses when the market moves in an opposite direction from the initiated trade. So it signifies an order to buy or sell a currency lot when the market reaches a certain price level.
Standard Lot: For any currency pair you are buying or selling 100,000 units of the base currency constitutes a standard lot.
Turnover: The total volume of executed forex transactions in a given time frame.
Tick: It denotes the smallest possible change in currency price either up or down.
Technical Analysis: This indicates the analysis of historical market price data to predict future currency price movements by analyzing charts, price trends and volume.
Trend: The direction of the forex market as influenced by different factors at any point in time is called a trend.
Transaction cost: Indicates the cost of forex transactions which is the spread between the bid and ask prices.
Usable Margin: The amount of money in your forex trading account that can be used to open new trades.
Used Margin: It is the amount in your forex trading account, used to open trades, and to hold in to those trades.
US Treasury: Refers to United States Department of Treasury responsible for issuing notes, bonds, and bills.
US Prime Rate: Refers to the interest rate at which US banks lend to corporate clients.
Volatility: It is a statistical measure which indicates the tendency of sharp price movements over a period of time.