Forex Glossary
Arbitrage - Taking an equal and opposite position at the same time to benefit from small price differences between related markets.
Ask - The price at which the market sells a currency. The trader can buy the base currency at this price.
Base currency - The first currency in a currency pair. It compares the values between the first currency and the second currency in a currency pair.
Bear - An investor who believes that prices will decline.
Bear market - A market in which prices are noticeably declining.
Bid - The price at which the market buys a currency. This is the price that the trader may sell the base currency.
Broker - An intermediary body that makes money through commission fees. Handles buyers' and sellers' orders. 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.
Bull - An investor who believes that prices will rise.
Bull market - A market characterized by rising prices.
Cable - Slang for the GBP/USD currency pair. Due to the rate originally being transmitted by a transatlantic cable, the name stuck.
Central Bank - Central banks play a key role in the currency markets because of their power over monetary policy. They have a direct influence over money supply, which in turn affects demand and price of the currency. Through the use of different policies, central banks can try to manipulate the markets so that they can keep their currency at specific levels. Some countries and their central banks try to peg their currency to that of another currency or basket of currencies.
Currency - Any form of money a government endorses and is used for trade.
Day Trading - refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day. Traders that participate in day trading are called active traders or day traders.
Dealer - An individual or firm acting as a principal, rather than as an agent, in the purchase and/or sale of securities. Dealers trade for their own account and risk. This is in contrast to brokers who trade only on behalf of their clients.
ECU - European Currency Unit.
EMS - European Monetary System.
Exotic Currency - Refers to a currency that is not popularly traded.
Federal Fund Rate - interest rate set by FED for interbank market.
FED - The Federal Reserve of the United States, commonly known as the Fed, is the organization responsible for monitoring and maintaining the United States currency supply. Established by Congress in 1913, the Fed is composed of a Washington D.C.- based Board of Governors, twelve large regional banks, and a number of smaller affiliated institutions.
FOMC - The Federal Open Market Committee (FOMC) is the team behind the US Federal Reserve that controls the nation's cash supply through open market operations.
Foreigh Exchange - Foreign Exchange, or Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro and the US dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY).
Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
Forex - Also referred to as the "FOREX" or "Forex" or "Retail forex" or "FX" or "Spot FX" or just "Spot", the foreign exchange market is the largest financial market in the world, used for trading and exchanging the world's different currencies. The trading occurs by simultaneously buying currency of one currency and the selling the currency of another.
With a trading volume of about $4 trillion a day, compared to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It equates to more than 3X the total combined amount of the stocks and futures markets!
G7 - The Group of Seven leading industrial countries: United States, Germany, Japan, France, United Kingdom, Canada, Italy.
G10 - G7 plus Belgium, Netherland and Sweden.
IMF - The International Monetary Fund (IMF) is an organization of 186 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It oversees the global financial systems of its member countries by monitoring policies that have an impact on exchange rates and the balance of payments. It also offers highly leveraged loans to underdeveloped countries.
Initial Margin - The original deposit of collateral needed to enter in a trade.
Kiwi - Slang for the New Zealand Dollar. Currency code (NZD).
Limit Order - An order with specified boundaries. Can be used to control how much profit and how much loss a trader is willing to handle.
Leverage - Leverage allows traders the ability to control large dollar amount of a commodity with a comparatively small amount of capital. The leverage at IamFX allows a trader to hold positions 100 to 400 times larger than the amount he has actually deposited. For example, if you deposit $1000 USD you are able to trade $100,000 USD in currency.
Long Position - A position that becomes beneficial as market price rises. A pair in which the base currency is bought is said to be long.
Lot - A unit of measurement that measures the amount of the transaction. It is always an integer number.
Margin - Margin is the amount of money needed to open or maintain a position. Basically it is used as a security deposit to the trader's account that is intended to cover possible trading losses in the future. Margin enables traders to hold a much larger position than their account value.
Margin Call - The need for additional funds in order to attain necessary margin requirements.
Market Order - An order to make a transaction at the current market price.
OTC Market (Over the Counter Market) - A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Rollover - Rollover is the process of extending the settlement date on an open position by rolling it over to the next settlement date. IamFX pays or charges clients rollover interest at competitive rollover rates for all open mini and standard positions. At the end of the trading day, 5 pm EST, an account with any open positions is either credited or debited interest on the full size of the positions. This is known as rollover interest. Rollover interest is calculated based on the full value of the client position rather than the value of the margin or collateral necessary to take on that position. A client holding one standard lot of USD/JPY, with $5,000 USD in his or her account will be assessed interest on the $100,000 of the position rather than on his or her $5,000 account balance.
Whether an account is credited or debited depends on the direction of the client position and the interest rate differential between the two currencies involved. For instance, the primary interest rates in Great Britain are much higher than in Japan, so if a trader buys GBP, he or she will earn interest at 5 pm EST. On the other hand, if he or she sells GBP in this currency pair, he or she will pay interest at 5 pm EST.
Rollover refers to the process of closing open positions for today's value date and opening the same position for the next day's value date at a price reflecting the difference in interest rates between the two currencies.
In the spot Forex market, rollover is required because all trades must be settled in two business days. In accordance with international banking practices, IamFX automatically rolls over all open positions for settlement to the next day at 5 pm EST. Rollover involves exchanging the current position for a position expiring the following settlement date. For example, for traders who execute on Monday, the value date is Wednesday. An exception occurs when a position is opened and held overnight on Wednesday. The normal value date would be Saturday, but because banks are closed on Saturday, the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that fall on a holiday also incur or earn additional interest.
Pip - In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503. Among the major currencies, the only exception to that rule is the Japanese Yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1% of a yen, as opposed to 1/100th of 1% with other major currencies). In the USD/JPY, a 3 pip spread is quoted as 114.05/114.08.
Short Position - A position in which the base currency is sold. It is beneficial when a price declines.
Spot Rate - The current exchange rate at which a currency pair can be bought or sold. The spot forex rate differs from the forward rate in that it prices the value of currencies compared to foreign currencies today, rather than at some time in the future. The spot rate in forex currency trading, is the rate that most traders use when trading with an online forex broker.
Spread - The spread is the point difference between the price at which you can sell currency (Bid) and the price at which you can buy currency (Ask).
Sterling - Slang for the British Pound. Currency code (GBP).
Stop-Loss Order - A limit order in which a trade is closed when a specified price is reached causing a loss. Used to limit amount of losses in trades.
Swissy - Slang for the Swiss franc. Currency code (CHF).
Take Profit - An order used by currency traders to automatically close their position once a certain profit has been made. Although it halts any further advance in profit, it guarantees a specific profit after a level has been hit.
Trailing Stop - Stop-loss order set at a percentage level below the market price - for a long position. The trailing stop price is adjusted as the price fluctuates. The trailing stop order can be placed as a trailing stop limit order, or a trailing stop market order.
VPS - Virtual Private Server (VPS) is basically another computer running on a hosted server. You interact with it in the same way you would with a normal Windows®-based desktop on your PC or laptop. VPS runs separately from your local machine so you don't need to keep your computer running at home 24/7, and you don't need to rely on your internet or power connection in order for the VPS to keep running.