Forex Glossary

MTNFX has made sure that you are never caught unprepared with some of the terminology and language used in Forex Trading, whether you are a novice trader that is still getting to know the in’s and out’s of the business or an experienced trader that is interested in refreshing their forex vocabulary, there are always new additions to the way around the business and we are here learning alongside each and every one of our traders and providing you with everything that we’ve come to know to arm you aptly on your way to success.

Below you will find a comprehensive and in depth Forex Glossary with everything that you need to master your FX trading.

Adjustable Peg

Exchange rate regimen where a currency’s exchange rate is pegged (fixed) in relation to a stronger currency, such as the US dollar or the Euro. The pegged rate is adjusted occasionally in an attempt to improve the country’s competitive position. For example, China’s yuan is sometimes pegged to the US dollar.

Aggregate Risk

A bank’s exposure to Forex contracts from a single customer.

API Trading

Trading that is conducted through an Application Programming Interface. APIs, such as the one available for FXTrade, enable users to build custom trading functionality into their own software systems.

Ask” open

The price at which sellers are willing to sell a currency pair, also known as the ‘offer’, ‘ask price’, and ‘ask rate’.

Automated Trader

A trader who uses an automated system to input trades without any human input.

Base Currency

In terms of foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.

Bid

The price at which an investor can place an order to buy a currency pair; the quoted price where an investor can sell a currency pair. This is also known as the ‘bid price’ and ‘bid rate’.

Broker

An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties.

Buy Limit Order

An order to execute a transaction at a specified price (the limit) or lower.

Buy On Margin

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.

Candlestick Chart

Chart depicting the daily high, low, opening and closing price, similar to that of a bar chart. If the close is lower than the open than the body of the candlestick is filled in, and if the open is lower than the close the body is left empty.

Carry Trade

The carry is the cost of keeping a position open overnight. Each currency has a different interest rate associated with it. You are paid interest on the currency you are long on, and you must pay interest on the currency on which you are short. The difference is the carry, sometimes referred to as the cost of carry.

Closed Position

A transaction that offsets the number of units in a previous open position. In the case of a long position, selling the exact number of units so that your exposure in the market is zero.

Closing Market Rate

The rate at which a position can be closed based on the market price at end of the day.

Currency Pair

The two currencies in a foreign exchange transaction. The “EUR/USD” is an example of a currency pair.

Day Trade

A trade opened and closed on the same trading day.

Deflation

A deep and long-lasting decrease in the price of goods and services within an economy. It is the opposite of inflation which is an escalation in prices. An extended period of deflation can lead to a deflationary spiral – this is a decrease in prices resulting from reduced demand for goods and services which leads to lower employment. With fewer people earning wages, demand falls even more and further perpetuates the cycle.

Depth of Market

The volume of buy and sell orders waiting to be transacted for a particular currency pair at a particular point in time.

Domestic Rates

The interest rates that apply to deposits or borrowing of a particular foreign currency. These rates are similar to those offered within the foreign country to citizens who keep money in deposit accounts.

ECN Broker (Electronic Communication Network)

An ECN broker provides its clients a direct access to live-stream prices provided by other participants in the market place (global banks, liquidity providers). Because an ECN broker consolidates price quotations from these market participants, it generally offers its clients tighter bid/ask spreads than would be otherwise available to them.

Entity Trading Account

A trading account that does not belong to an individual, but rather to a company that has designated a person to be responsible for its trading decisions.

Exchange rate

In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other.

Expert Advisor (EA)

A software program commonly known as ‘Robots’ which are configured to do the trading for you. This can be referred to as ‘automated trading’.

Fast Market

Strong buying and/or selling pressure in the market, in which prices often gap and move too quickly to be disseminated.

Fill or Kill

An order that must be executed immediately based on certain criteria such as price and quantity. If it cannot be executed, the order is immediately canceled.

Fixed Exchange Rate

Foreign exchange policy where a central bank maintains an official rate for their currency, often intervening to keep the rate fixed within a limited range.

Foreign Exchange

Buying or selling one currency against another currency.

Fundamental Analysis

The study of economic factors (GDP, Trade Balance, Employment, and so on) that can influence prices in financial markets.

Futures

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).

Going Long

The purchase of a currency pair.

Going Short

Selling a currency pair by first borrowing it, then returning it at a later time by buying it back (hopefully once prices are lower).

Good-Till-Сancelled order (GTC)

A type of limit order that remains in effect until it is either executed (filled) or cancelled, as opposed to a day order, which expires if not executed by the end of the trading day. A GTC option order is an order which if not executed will be automatically cancelled at the option’s expiration.

Grid Trading

A series of positions and open orders that are built with a predetermined spread defined by the trader.

Hard Currency

A currency that investors have confidence in. Examples could be the US Dollar or the Euro.

Hedge

A term used to describe reducing risk associated with adverse market movements by using two counterbalancing investments, thereby minimizing any losses caused by price fluctuations. For example, if you sell a house in Holland to relocate to the UK (your new base currency), you are in a long Euro (EUR) position and short Pounds Sterling (GBP). To offset this position you would need to sell the equal amount of EUR to make up for the short GBP position.

Inflation

A rise in prices or a drop in the purchasing power of money.

Initial Margin

The first deposit by a customer which determines a corresponding maximum trade size.

Interbank Market

A market in which financial institutions can trade. The term refers to short term money or foreign exchange markets that are only accessible to banks or financial institutions. There is no physical market place; the transactions take place over communication networks such as Bloomberg or Reuters.

Interday Trading

Positions that are opened and closed within the same trading day.

Introducing Broker

A person or firm that introduces customers to a market maker often in return for commission or a portion of the spread.

Leading Indicators

Economic indicators used to predict future economic activity.

Leverage

The ratio of margin to the maximum position size. With a deposit of $5000 and a leverage of 50, a trader could enter a position with a face value of $250,000. Leveraging allows you to profit quickly, but lose money just as fast.

Limit Order

An order to transact at a specified price or better. See Buy Limit Order and Sell Limit Order.

Liquidity

Term used to describe a market where there are lots of buyers and sellers generating a great deal of volume.

Long Position

When a currency pair is long, the first currency is bought while the second currency is sold short. To go long on a currency means that you buy it. A long position is expressed in terms of the base currency.

Lots

Standardized method of trading in forex which requires a trade of 100,000 units of a particular currency.

Margin

The minimum deposit required to maintain an open position. For example, with an open position of $250,000 and a leverage of 50, the required margin would be $5000.

Margin Call

A notification that more funds must be deposited into an account because the value of the account has fallen below the minimum margin needed to cover the size of existing positions.

Mark-To-Market

For an open position, what its value would be if it were closed out at the current market rates.

Market Maker

A dealer who provides a two-way quote a bid and ask price in which they stand ready to buy or sell. In this way, dealers are also known as market makers.

Market Order

An order for immediate execution at the best available price

Maximum Leverage

The biggest position that a margin deposit would cover. At a leverage of 50, one could enter a maximum leveraged position of $100,000 by depositing $2,000 worth of margin.

Money Manager

A person who is responsible for the entire financial portfolio of an individual or other entity. A money manager receives payment in exchange for choosing and monitoring appropriate investments for the client.

Narrow Market

Also known as a thin market, where there is light trading.

News Trader

An investor who bases his/her decisions on the outcome of a news announcement and its impact on the market.

Non-Client Order

An order on an exchange that is made by a participant firm or on behalf of a partner, officer, director, or employee of the participant firm. Where a participant firm is a firm that is entitled to trade on the exchange, also known as a member firm. While these orders are allowed, priority must be given to client orders for the same securities.

One Cancels the Other Order

Two orders that are submitted simultaneously. If either one is executed, the other one is automatically canceled.

Open Position

A position whether long or short that is subject to market fluctuations and thus profits or losses.

Options

The right, but not the obligation, to buy (long call) or sell (long put) an underlying asset.

Over the Counter

Refers to trading that is not done over a formal exchange. Traditional forex is traded over the counter, meaning traders entered into forex transactions with one another over telephones or electronic devices. Counter refers to counterparty, in that with forex one trades with a counterparty instead of through an exchange. In online forex trading, the counterparty is the market maker.

Overnight Position

A dealer’s net position that is carried into the next trading day.

Pip

The smallest upward or downward price movements quoted in forex. In EUR/USD, a movement of 0.0001 is one pip (for example, from 140.005 to 140.004 euro). In USD/JPY, a movement of 0.01 is one pip (for example, from 116.32 to 116.31 yen).

Position

A trade that is still in effect.

Profit Taking

Closing a position in order to realize a gain.

Quantitative Easing

Quantitative easing is a monetary tool used by central banks to encourage spending within an economy. One of the most well-known instances of quantitative easing remains the Bank of Japan’s attempts to fight domestic deflation in the early 2000s. Interest rates during this time were already close to zero and further cuts could not be implemented so the Bank flooded commercial banks with excess funds to promote lending and by extension, encourage spending.

Quote Currency

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.

Rate

Price at which a currency can be purchased or sold against another currency

Regulated Market

A market in which a government agency monitors and regulates industry activity to protect investors. An example is forex trading in the United States.

Resistance Level

Price level at which technical analysts note persistent selling of a currency.

Risk Management

The use of strategies to control or reduce financial risk. An example is a stop-loss order that minimizes maximum loss.

Roll-Over

Extending the settlement value date on an open position to the next trade date.

Round Trip

The buying and selling of a currency pair and having the profit or loss applied to one’s account currency.

Scalping (Forex trading)

1. A legitimate method of arbitrage of small price gaps created by the bid-ask spread.
2. A legitimate method of currency trading based on quick momentum trades triggered by order flow reading setups.
3. A fraudulent form of Forex market manipulation.

A Forex trader who trades currency in this fashion has been nicknamed a “Scalper” because these traders attempt to take small spread differences between the Bid and Ask price. “Forex Scalpers” do not enter positions and carry them overnight. Scalping is a fast-paced trading where a Forex trader seeks 1-5 pips profit from each trades.

Short Position

In foreign exchange, when a currency pair is sold, the position is said to be short. It is understood that the primary currency in the pair is ‘short’, and the secondary currency is ‘long’.

Slippage

It’s the experience of not getting filled at (or even very close to) your expected price when you place a market order or stop loss. This can happen because either: market price is simply moving too fast, the market is not liquid or you’re talking to an unmotivated broker.

Speculative

The condition where there is no guarantee that money will be made and tremendous risk that you will lose all your capital. The attraction to speculative trading is that you can make a great deal of money very quickly. However, you can also lose it just as fast.

Spread

The value difference between the bid and ask price of a currency pair.

Stop Loss Order

Order to buy or sell when a given price is reached or passed to liquidate part or all of an existing position.

Swap

A transaction that moves the maturity date of an open position to a future date.

Take Profit Order

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.

Technical Analysis

An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc.

Turnover

The total volume of all executed transactions in a given time period.

Unconvertible Currency

A currency that cannot be exchanged for another because of foreign exchange regulations.

Uptick

A trade that must be executed at a price higher than the previous trade. Certain rules on the New York Stock Exchange require this during sessions of extreme volatility.

Variation Margin

Funds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis.

Volatility

Measure of how much the price of a currency changes over time.

Wire Transfer

Electronic transfer of funds from one bank to another.

Yield

The return on an investment. The yield is usually calculated in percentage terms.