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Glossary of Forex termsby Liviu

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Below is a comprehensive list of some common terms used in Forex Trading and technical / fundamental analysis, as well on this site. The terms collection has been compiled from the following sources: investopedia.com, wikipedia.org, dictionary.com but also innerfx.com (own definition on some terms, adjustments etc). More terms will be included “on the fly”. If you have any suggestions on terms that should be included into this list, please post a comment on the bottom page.    

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.

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.

ascending channel- Upward Channel – an ascending /upward channel is the price action contained between upward sloping parallel lines. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change.

ask rate – The rate at which a financial instrument if offered for sale (as in bid/ask spread).

average true range – ATR – The Average True Range is a moving average (generally 14-days) of the True Ranges. The True Range indicator is the greatest of the following:

-current high less the current low. 
-the absolute value of the current high less the previous close. 
-the absolute value of the current low less the previous close.

back office – The departments and processes related to the settlement of financial transactions.

bar chart – a style of chart used by some technical analysts, on which the top of the vertical line indicates the highest price a security traded at during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. A single bar like the one below represents one day of trading. These are the most popular type of chart used in technical analysis. The visual representation of price activity over a given period of time is used to spot trends and patterns.

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.

bearish - declining or tending toward a decline in 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”.

breakeven – the price at which a security position can be closed out with no profit or loss.

breakout - a price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support. In practice, a breakout is most commonly used to refer to a situation where the price breaks above a level of resistance and heads higher, rather than breaking below a level of support and heading lower. Once a resistance level is broken, it is regarded as the next level of support when the asset experiences a pullback  Most traders use chart patterns and other technical tools such as trendlines to identify possible candidates that are likely to break through a support/resistance level.

A breakout is the bullish counterpart to a breakdown. A breakout / breakdown is valid only if the bar/candle closes above the resistance or below the support.

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.

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.

bull market – a market distinguished by rising prices.

bullish - characterized by favorable economic prospects, rising in prices.

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 or Technical Analyst.

clearing - The process of settling a trade.

commission - a transaction fee charged by a broker.

confirmation - The occurrence of two or more indicators corresponding with one another and thereby corroborating the predicted trend. A confirmation strengthens the implication of technical indicators. When a confirmation occurs, traders become more confident that the predicted trend will occur. If there is no confirmation, there is divergence.

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 GBPJPY 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. Also known as intra-day trading.

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.

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.

descending channel- A descending channel or downtrend is the price action contained between two downward sloping parallel lines. Lower pivot highs and lower pivot lows are a bearish signal. In a downtrend, a trade might be entered at the trendline and exited at the channel line. A lower low below a descending channel can signal continuation. A higher high above the low of an ascending channel can signal trend change.

devaluation - The deliberate downward adjustment of a currency’s price, normally by official announcement.

double bottom – a charting pattern used in technical analysis that describes the drop of a security / currency , a rebound, another drop to the same (or similar) level as the original drop, and finally another rebound.

double top – a term used in technical analysis to describe the rise of a security / currency, a drop, another rise to the same level as the original rise, and finally another drop – the opposite of double bottm

downtrend - describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.

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.

Elliott Wave Theory – Theory named after Ralph Nelson Elliott (1871–1948), an accountant who developed the concept in the 1930s: he proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves. Elliott published his views of market behavior in the book The Wave Principle (1938), in a series of articles in Financial World magazine in 1939, and most fully in his final major work, Nature’s Laws – The Secret of the Universe (1946). The key difference between the Elliott Wave Principle and other cyclical theories is that this theory suggests no absolute time requirements for a cycle to complete.

European Monetary Union (EMU) – The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. On January 1st, 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 an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, 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.

fibonacci clusters - a tool used in technical analysis that combines various numbers of Fibonacci retracements, all of which are drawn from different highs and lows. Fibonacci clusters are indicators which are usually found on the side of a price chart and look like a series of horizontal bars with various degrees of shading. Each retracement level that overlaps with another makes the horizontal bar on the side darker at that price level. The most significant levels of support and resistance are found where the Fibonacci cluster is the darkest.

fibonacci extensions- Levels used in Fibonacci retracement to forecast areas of support or resistance. Extensions consist of all levels drawn beyond the standard 100% level and are used by many traders to determine areas where they will wish to take profits. The most popular extension levels are 161.8%, 261.8% and 423.6%.

fibonacci retracements- a term used in technical analysis that refers to the likelihood that a financial asset’s price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 61.8% and 100%.

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.

fundamental analysis – analysis of economic and political information with the objective of determining future movements in a financial market.

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.

momentum- The rate of acceleration of a security’s / currency pair price or volume. Momentum can be Positve / Bullish, Negative / Bearish or Neutral.

momentum investor / trader – a market participant who increase market exposure when the market is rising and decreases exposure or goes short when the market is declining. Once a momentum trader sees an acceleration in a security’s / currency’s price, the trader will often take a long or short position in the security / currency with the hope that its momentum will continue in either an upwards or downwards direction.

moving average – MA – an indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.

offer – The rate at which a dealer is willing to sell a currency.

open order – an order that will be executed when a market moves to its designated price. Normally associated with Good ‘til Cancelled Orders.

open position – a deal not yet reversed or settled with a physical payment.

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.

position – The netted total holdings of a given currency.

price action- The movement of a security’s price. Price action is encompassed in technical and chart pattern analysis, which attempt to find order in the sometimes seemingly random movement of price. Swings (high and low), tests of resistance and consolidation are some examples of price action. The candlestick and price bar are important tools for analyzing price action, since they help traders visualize of price movement. Candlestick patterns such as the Harami, engulfing pattern and cross are all examples of visually interpreted price action. No two people will analyze every bit of price action the same way, and that is why a lot of traders find the concept of price action so elusive. Quite literally, price action is everything that a security’s price does, and just like every other facet of analysis, it is purely subjective.

pullback – a falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum. Often pullbacks are seen as buying opportunities after a security has had a large upward price movement. It is important, however, to analyze closely any pullback as it may be a sign of a definite trend reversal or a slight pause in the upward trend, each having very different trading implications.

quote – an indicative market price, normally used for information purposes only.

rally – to begin to trade with increased activity after a slow period; to rise sharply in price after a drop.

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.

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.

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.

whipsaw – slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.