Appreciation
Currency is said to appreciate when it strengthens in price in
response to market demand.
Arbitrage
The purchase or sale of an instrument and simultaneous taking
of an equal and opposite position in a related market, in order
to take advantage of small price differentials between markets.
Around
Our normal dealing spreads are 5-7 pips for the major currency
pairs.
Ask Rate
The rate at which a financial instrument if offered for sale (as
in bid/ask spread).
Asset Allocation
Investment practice that divides funds among different markets
to achieve diversification for risk management purposes and/or expected
returns consistent with an investor’s objectives.
Back Office
The departments and processes related to the settlement of financial
transactions.
Balance of Trade
The value of a country’s exports minus its imports.
Base Currency
In general terms, the base currency is the currency in which an
investor or issuer maintains its book of accounts. In the FX markets,
the US Dollar is normally considered the ‘base’ currency for quotes,
meaning that quotes are expressed as a unit of $1 USD per the other
currency quoted in the pair. The primary exceptions to this rule
are the British Pound, the Euro and the Australian Dollar.
Bear Market
A market distinguished by declining prices.
Bid/Ask Spread
The difference between the bid and offer price, and the most widely
used measure of market liquidity.
Big Figure
Dealer expression referring to the first few digits of an exchange
rate. These digits rarely change in normal market fluctuations,
and therefore are 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 verbally without the first three digits, i.e.
“30/35.”
Book
In a professional trading environment, 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 together
buyers and sellers for a fee or commission. In contrast, a ‘dealer’
commits capital and takes one side of a position, hoping to earn
a spread (profit) by closing out the position in a subsequent trade
with another party.
Bretton Woods
Agreement of 1944 - An agreement that established fixed foreign
exchange rates for major currencies, provided for central bank intervention
in the currency markets, and pegged the price of gold at US $35
per ounce. The agreement lasted until 1971, when President Nixon
overturned the Bretton Woods agreement and established a floating
exchange rate for the major currencies.
Bull Market
A market distinguished by rising prices.
Bundesbank
Germany’s Central Bank.
Cable
Trader jargon referring to the Sterling/US Dollar exchange rate.
So called because the rate was originally transmitted 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
the opening 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 is higher than the open price, that
area of the chart is not shaded.
Central Bank
A government or quasi-governmental organization that manages a
country’s monetary policy. For example, the US central bank is the
Federal Reserve, and the German central bank is the Bundesbank.
Chartist
An individual who uses charts and graphs and interprets historical
data to find trends and predict future movements. Also referred
to as Technical Trader.
Clearing
The process of settling a trade.
Contagion
The tendency of an economic crisis to spread from one market to
another. In 1997, political instability in Indonesia caused high
volatility in their domestic currency, the Rupiah. From there, the
contagion spread to other Asian emerging currencies, and then to
Latin America, and is now referred to as the "Asian Contagion."
Commission
A transaction fee charged by a broker.
Confirmation
A document exchanged by counterparts to a transaction that states
the terms of the transaction.
Contract
The standard unit of trading.
Counterparty
One of the participants in a financial transaction.
Country Risk
Risk associated with a cross-border transaction, including but
not limited to legal and political conditions.
Cross Rate
The exchange rate between any two currencies that are considered
non-standard in the country where the currency pair is quoted. For
example, in the US, a GBP/JPY quote would be considered a cross
rate, whereas in UK or Japan it would be one of the primary currency
pairs traded.
Currency
Any form of money issued by a government or central bank and used
as legal tender and a basis for trade.
Currency Risk
The probability of an adverse change in exchange rates.
Day Trading
Refers to positions which are opened and closed on the same trading
day.
Dealer
An individual who acts as a principal or counterpart to a transaction.
Principals take one side of a position, hoping to earn a spread
(profit) by closing out the position in a subsequent trade with
another party. In contrast, a broker is an individual or firm that
acts as an intermediary, putting together buyers and sellers for
a fee or commission.
Deficit
A negative balance of trade or payments.
Delivery
An FX trade where both sides make and take actual delivery of
the currencies traded.
Depreciation
A fall in the value of a currency due to market forces.
Derivative
A contract that changes in value in relation to the price movements
of a related or underlying security, future or other physical instrument.
An option is the most common derivative instrument.
Devaluation
The deliberate downward adjustment of a currency’s price, normally
by official announcement.
Economic Indicator
A government issued statistic that indicates current economic
growth and stability. Common indicators include employment rates,
Gross Domestic Product (GDP), inflation, retail sales, etc.
European Monetary Union (EMU)
The principal goal of the EMU is to establish a single European
currency called the Euro, which officially replaced the national
currencies of the member EU countries in 2002. On Janaury 1, 1999,
the transitional phase to introduce the Euro began. The Euro now
exists as a banking currency and paper financial transactions and
foreign exchange are made in Euros. This transition period will
last for three years, at which time Euro notes and coins will enter
circulation. As of July 1, 2002, only Euros are legal tender for
EMU participants, and the national currencies of the member countries
will cease to exist. The current members of the EMU are Germany,
France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands,
Italy, Spain and Portugal.
EURO
The currency of the European Monetary Union (EMU). A replacement
for the European Currency Unit (ECU).
European Central Bank (ECB)
The Central Bank for the new European Monetary Union.
Federal Reserve (Fed)
The Central Bank for the United States.
Flat/Square
Dealer jargon used to describe a position that has been completely
reversed, e.g. you bought $500,000 then sold $500,000, thereby creating
a neutral (flat) position.
Foreign Exchange - (Forex, FX)
The simultaneous buying of one currency and selling of another.
Forward
The pre-specified exchange rate for a foreign exchange contract
settling at some agreed future date, based upon the interest rate
differential between the two currencies involved.
Forward points
The pips added to or subtracted from the current exchange rate
to calculate a forward price.
Fundamental analysis
Analysis of economic and political information with the objective
of determining future movements in a financial market.
Futures Contract
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 (Exchange-
Traded Contacts – ETC), versus forwards, which are considered Over
The Counter (OTC) contracts. An OTC is any contract NOT traded on
an exchange.
Good ‘Til Cancelled Order (GTC)
An order to buy or sell at a specified price. This order remains
open until filled or until the client cancels.
Hedge
A position or combination of positions that reduces the risk of
your primary position.
Inflation
An economic condition whereby prices for consumer goods rise,
eroding purchasing power.
Initial margin
The initial deposit of collateral required to enter into a position
as a guarantee on future performance.
Interbank rates
The Foreign Exchange rates at which large international banks
quote other large international banks.
Leading Indicators
Statistics that are considered to predict future economic activity.
LIBOR
The London Inter-Bank Offered 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 price to 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 (i.e. 101.50).
Liquidity
The ability of a market to accept large transaction with minimal
to no impact on price stability.
Liquidation
The closing of an existing position through the execution of an
offsetting transaction.
Long position
A position that appreciates in value if market prices increase.
Margin call
A request from a broker or dealer for additional funds or other
collateral to guarantee performance on a position that has moved
against the customer.
Market Maker
A dealer who regularly quotes both bid and ask prices and is ready
to make a two-sided market for any financial instrument.
Market Risk
Exposure to changes in market prices.
Mark-to-Market
Process of re-evaluating all open positions with the current market
prices. These new values then determine margin requirements.
Maturity
The date for settlement or expiry of a financial instrument.
Momentum investor
A market participant who increase market exposure when the market
is rising and decreases exposure or goes short when the market is
declining.
Offer
The rate at which a dealer is willing to sell a currency.
Offsetting transaction
A trade which serves to 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 of the two orders
is executed and the other is automatically cancelled.
Open order
An order that will be executed when a market moves to its designated
price. It is normally associated with Good ‘til Cancelled Orders.
Open position
A deal not yet reversed or settled with a physical payment.
Over the Counter (OTC)
Used to describe any transaction that is not conducted over an
exchange.
Overnight
A trade that remains open until the next business day
Pips
Digits added to or subtracted from the fourth decimal place, i.e.
0.0001. Also called Points.
Political Risk
Exposure to changes in governmental policy which will have an
adverse effect on an investor’s position.
Position
The netted total holdings of a given currency.
Premium
In the currency markets, describes the amount by which the forward
or futures price exceeds the spot price.
Price Transparency
Describes quotes to which every market participant has equal access.
Quote
An indicative market price, normally used for informational purposes
only.
Rate
The price of one currency in terms of another, typically used
for dealing purposes.
Resistance
A term used in technical analysis indicating a specific price
level at which analysis concludes people will sell.
Revaluation
An increase in the exchange rate for a currency as a result of
central bank intervention. Opposite of Devaluation.
Risk
Exposure to uncertain change, most often used with a negative
connotation of adverse change.
Risk Management
The employment of financial analysis and trading techniques to
reduce and/or control exposure to various types of risk.
Roll-Over
Process whereby the settlement of a deal is rolled forward to
another value date. The cost of this process is based on the interest
rate differential of the two currencies.
Settlement
The process by which a trade is entered into the books and records
of the counterparts to a transaction. The settlement of currency
trades may or may not involve the actual physical exchange of one
currency for another.
Short Position
An investment position that benefits from a decline in market
price.
Spot Price
The current market price. Settlement of spot transactions usually
occurs within two business days.
Spread
The difference between the bid and offer prices.
Sterling
Slang for British Pound.
Stop Loss Order
Order type whereby an open position is automatically liquidated
at a specific price. Often used to minimize 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 in
a stop loss order for 155.49, which would limit losses should the
dollar depreciate, possibly below 155.49.
*Does not apply
during major fundamental announcements or outside Gain Capital's/FOREX.com's
normal trading hours. Placing contingent orders may or may not limit
the risk of loss.
Support Levels
A technique used in technical analysis that indicates a specific
price ceiling and floor at which a given exchange rate will automatically
correct itself. Opposite of resistance.
Swap
A currency swap is the simultaneous sale and purchase of the same
amount of a given currency at a forward exchange rate.
Swissy
Slang for Swiss Franc.
Technical Analysis
An effort to forecast prices by analyzing market data, i.e. historical
price trends and averages, volumes, open interest, etc.
Tomorrow Next (Tom/Next)
Simultaneous buying and selling of a currency for delivery the
following day.
Transaction Cost
The cost of buying or selling a financial instrument.
Transaction Date
The date on which a trade occurs.
Turnover
The total money 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.
Uptick
A new price quote at a price higher than the preceding quote.
Uptick Rule
In the US, a regulation whereby a security may not be sold short
unless the last trade prior to the short sale was at a price lower
than the price at which the short sale is executed.
US Prime Rate
The interest rate at which US banks will lend to their prime corporate
customers
Value Date
The date on which counterparts to a financial transaction agree
to settle their respective obligations, i.e. exchanging payments.
For spot currency transactions, the value date is normally two business
days forward. Also known as maturity date.
Variation Margin
Funds a broker must request from the client to have the required
margin deposited. The term usually refers to additional funds that
must be deposited as a result of unfavorable price movements.
Volatility (Vol)
A statistical measure of a market’s price movements over time.
Whipsaw
Slang for a condition of a highly volatile market where a sharp
price movement is quickly followed by a sharp reversal
Yard
Slang for a billion.
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