Currency Trade Glossary

Appreciation - A 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.
Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs.
Balance of Trade - The value of a country's exports minus its imports.

Bar Chart - A type of chart 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 little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

Base Currency - The first currency in a Currency Pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215.

Bid Price - The bid is the price at which the market is prepared to buy a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs.

Bid/Ask Spread - The difference between the bid and offer price.

Big Figure Quote - Dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes. For example, a USD/JPY rate might be 117.30/117.35, but would be quoted verbally without the first three digits i.e. "30/35".

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.

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.

Closed Position - Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will 'square' the position.

Collateral - Something given to secure a loan or as a guarantee of performance.

Commission - A transaction fee charged by a broker.

Counter Currency - The second listed Currency in a Currency Pair.

Country Risk - Risk associated with a cross-border transaction, including but not limited to legal and political conditions.

Cross Currency Pairs or Cross Rate - A foreign exchange transaction in which one foreign currency is traded against a second foreign currency. For example; EUR/GBP.

AUD - Australian Dollar

CAD - Canadian Dollar

EUR - Euro

USD- US Dollar

JPY - Japanese Yen

GBP - British Pound

Currency Pair - The two currencies that make up a foreign exchange rate. For Example, EUR/USD

Currency Risk - the probability of an adverse change in exchange rates.

Dealer - An individual or firm that 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.

Depreciation - A fall in the value of a currency due to market forces.

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.

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.

Fundamental Analysis - Analysis of economic and political information with the objective of determining future movements in a financial market.

FX - Foreign Exchange.

G7 - The seven leading industrial countries, being the US, Germany, Japan, France, UK, Canada, Italy.

Going Long - Buying of a stock, commodity, or currency for investment or speculation.

Going Short - Selling of a currency or instrument not owned by the seller.

Gross Domestic Product - Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross National Product - Gross domestic product plus income earned from investment or work abroad.

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.

Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.

Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received.

Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability.

Long position - A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.

Lot - A unit to measure the amount of the deal. A standard size Lot is $100,000 (or $100K).

Margin - The required equity that an investor must deposit to collateralize a position. \

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 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.

Maximum Drawdown - Maximum drawdown means the most that a system has ever gone down from a previous high (peak to valley), usually measured in terms of percentage of the peak value.

Offer (ask) - The rate at which a dealer is willing to sell a currency. See Ask (offer) price.

Open position - An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

Overnight Position - A trade that remains open until the next business day.

Pips - The smallest unit of price for any foreign currency. It is 0.0001 in most cases, but 0.01 for JPY. Also called Points.

PAMM - Percent Allotment Management Module.

Position - The netted total holdings of a given currency.

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

Profit /Loss or "P/L" or Gain/Loss - The actual "realized" gain or loss resulting from trading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.

Range - The difference between the highest and lowest price of a currency recorded during a given trading session.

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.

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. This occurs every day at 5:00PM EST.

Round Turn (or Round Trip) - Buying and selling of a specified amount of currency, basically meaning one completed trade.

Short Position - An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Slippage - The difference in price between what the computer signal indicates and the actual price that gets executed on the trading platform. For example: if the computer signals a "buy" at a price of 1.3200 and the trading platform actually executes the "buy" at 1.3202, there would be 2 pips of "slippage" or difference between the signal price and actual execution price.

Spread - The difference between the bid and offer prices.

Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Stops are 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.

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.

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

Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates. Unrealized Gains/Losses become Profits/Losses when position is closed.

US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.

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.