Glossary of Forex (Foreign Exchange) Terminology A – C
Aggregate Demand – The total amount of government spending, personal consumption expenditures, and business expenditures.
Appreciation – Appreciation is an increase in value of currency in response to market demand.
Arbitrage – The simultaneous purchase or sale of an instrument 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 of the present spot.
Ask Rate – The rate at which traders accepts to buy in market (as in bid/ask spread).
Asset Allocation – Investment practice that implements investment strategy that attempts to balance risk by dividing funds among different.
Back Office – The departments and processes related to trade confirmation, settlement and record keeping of financial transactions.
Balance of Trade – The difference of value of a country’s imports and exports.
Bar Charts – Standard bar charts are commonly used to show price activity into an easily readable chart. Four elements are shown in a bar chart; the Open, High, Low, and Close for the trading time. The bar represents any time frame the user wishes, from 1 minute to 1 month. The vertical length of the bar represents the entire trading range for the representing period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar.
Base Currency – The base currency is the currency in which an investor manages its book of accounts. Usually the US Dollar is normally considered the ‘base’ currency in FX markets. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair.
Bear Market – A market when the price of financial instruments is declining.
Bid Rate – The rate at which a trader is willing to set a buy order.
Big Figure – Simplified expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are simplified, especially in times of high market activity. For example, a USD/CNY rate might be 6.80/6.85, but would be quoted 80/85 without the first three digits.
Book – In a professional trading environment, a ‘book’ is the summary of a trader’s total profit.
Broker – An individual or firm that acts as an intermediary between buyers and sellers, charging commission.
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, which can happen as a result of an economic recovery, or economic boom.
Bundesbank – Germany’s Central Bank.
Buying/Selling – In the forex market currencies are always priced in pairs, therefore, all trades result in buying of one currency and the selling of the another. The objective of Forex trading is to buy/sell the currency that increases/decrease in value relative to the order you made.
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 type of chart that indicates the trading range for the day including the opening and closing price. If the opening price is higher than the closing price, the rectangle between the opening and closing price is shaded. If the closing price is higher than the opening price, the rectangle of the chart is not shaded.
Central Bank – A government organization that manages a country’s monetary policy. As an example, there are US central bank, The Federal Reserve, and the German central bank, the Bundesbank.
Chartist – An individual who uses charts to interprets historical data to predict future movements. Also referred to as Technical Trader.
Clearing – The process of coordinating the buy and sell of various financial products.
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’.
Collateral – Property or other assets given by borrowers to lenders to secure a loan.
Commission – A transaction fee charged by a broker.
Confirmation – A document that are exchanged for transaction that specifies the terms of transaction.
Contract – The standard unit of trading.
Contract (Unit or Lot) – The standard unit of trading on certain exchanges.
Counterparty – One of the participants in a transaction.
Country Risk – Risk associated with an over-the-sea transaction, including legal and political conditions.
Cross Rates – The rates between two currencies expressed as two foreign exchange rates that are both expressed in terms of a third currency.
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.