Terms & Expressions of Forex Trading – the Language of Success
Below, please find a list of terminology and expressions along with their definitions commonly used in the world of financial trading.
Offer price -The minimal price a seller will accept for a security. The amount of securities sold at that price will usually be specified alongside.
An ‘Instrument’ ( Example EUR), Securities, currencies, commodities, derivatives, indices or any other trading/investment resource whose value may change.
An instruction to a broker to buy or sell at the best available rate.
At or Better
An instruction to a broker to fill a transaction at or above/below a specific price.
The maximum amount of asset units available.
The practice of buying shares in a company at a price that is lower than the price one paid in the past for the same share – decreasing the average entry price of held shares
The amount of funds in an account before opening any positions.
The first currency mentioned in a currency pair – one unit of which can be purchased for an amount of secondary currency units, as specified by the value of the pair. For ‘EUR/USD = 1.6122’, the euro is the base currency while the U.S. dollar is the secondary (quote) currency. In this case, 1.6122 U.S. dollars are required to purchase 1 euro.
A market of decreasing security value, reinforced by and reinforcing investor pessimism. As investors seek to sell securities, the prices of these securities decrease even more. These conditions are usually defined by a 20% move lower from highs over a specified period of time.
Market or Investor behavior, may be described as bearish when values begin to fall. A bearish belt hold refers to a candlestick pattern that characteristically forms towards the end of a ‘bullish’ market, signaling entry into a bearish market.
The price a buyer will pay for a security. The amount of securities purchased at that price (lot size) will usually be specified alongside.
The difference between the Bid and Ask prices.
Bitcoin is a virtual or digital currency – part of an online financial exchange system that is based on the transfer of encrypted information between users over the internet. Please note that Legacy FX enables Bitcoin trading using an ECN account.
The point at which an investment aimed at generating revenue sees returns, equaling the cost of entering the investment.
A person (or agency) that arranges and/or negotiates a transaction between the parties to that transaction (buyer – seller), to be distinguished from an agent, who acts on behalf of one of the parties.
A system of evaluating and assessing brokers, usually based on client input and performance.
A market of increasing security value, reinforced by and reinforcing investor optimism and confidence. As investors seek to purchase securities, the prices of those securities increase even more.
Market or investor behavior, may be described as bullish when values are rising over a defined period of time. A bullish belt hold refers to a candlestick pattern that characteristically forms towards the end of a bearish market, signaling entry into a bullish one.
A buy signal is an indication for investors to invest, usually based in events or conditions that suggest a potential future return on that investment.
A pending buy order with the value placed below market price. If the ask price reaches the specified level, a long position is opened.
A pending buy order with the value placed above the market price. If the ask price reaches the specified level, a long position is opened.
A slang reference to the GBP-USD currency pair dating from the 19th century, at which time the exchange rate between the two currencies was transmitted between the two countries using the first transatlantic communications cable.
A candlestick chart plots the price movement of a financial instrument. Each candlestick represents a specified time-frame. Each candlestick also indicates opening price, closing price, maximum price and minimum price for that time-frame.
Borrowing (usually money) at a comparatively low interest rate, then converting it into another currency that offers a higher interest rate, and depositing it for interest. Alternately, one may invest in financial instruments or real estate that also offer a higher yield than the currency borrowed.
A country’s regulator of monetary policy tasked with determining base interest rates and controlling inflation. The central bank is also usually the country’s lender of last resort, preventing the country’s banking system from collapse.
Contract for Difference; a derivative contract between a buyer and a seller, wherein the seller will pay the buyer the difference between an asset’s current value and its value at a defined closing time.
A visual representation of data that usually provides qualitative and quantitative information. The 4 most common types are histogram, bar, pie and line charts. In financial trading, the most frequently used charts are Bar Charts, which follow financial market prices,Candlestick Charts (or OHLC Charts), which display high, low, opening and closing prices throughout the day, and Renko Charts, which provide key support/resistance levels.
Also referred to as ‘closing’, or ‘squaring’ a position. An opposing transaction to an existing position with the intention of closing (liquidating) the initial position.
The price at which a security closes at the end of a trading session, remaining at that level until the commencement of trading on the following trading session.
Commodities Exchange, est. 1933 (through the merger of the National Metal Exchange, the New York Rubber Exchange, the National Raw Silk Exchange and the New York Hide Exchange). The world’s largest physical futures exchange (following its merger in 1994 with the New York Mercantile Exchange), COMEX trades both electronically and in open auction (trading floor – Pit).
Basic goods usually used as inputs in the manufacture of products or provision of services. The most common traded commodities are gold, silver and oil.
A standardized measure of financial instruments, which varies by asset class, traded on an exchange. In currency trading, contract size is measured in lots, each lot being the equivalent of 100,000 units of the base currency.
Core Retail Sales
A major indicator of U.S. economic health, Core Retail Sales figures are released in the middle of each month for the previous month. They reflect consumer spending, excluding automobile and petrol sales, and assist in calculating price indices, economic activity and GDP.
(Secondary Currency) The second currency quoted in a currency pair, it is the currency for which one unit of base currency can be traded, and equal to the pair’s value. Also referred to as the ‘quote currency’.
Closing out an existing position in a financial instrument with an opposing transaction.
The extension of financial resources to be repaid at a later date. In foreign exchange trading, the transfer of positive interest differential in the investor’s favour to his/her account following a successful transaction (closing a position).
(Petroleum) A natural energy-rich liquid found below the earth’s crust and produced by the subjugation of dead organisms to heat and pressure. WTI (West Texas Intermediate) is one variety of crude oil, of higher quality and easier to refine than others, which is quoted on the New York Mercantile Exchange. Another variety commonly quoted is Brent, which represents two-thirds of the world’s traded crude oil.
The New York Coffee, Sugar & Cocoa Exchange, est. 1979; created initially in 1882 as the Coffee Exchange, the CSCE traded electronically in soft commodities – those grown rather than mined – before being acquired by the New York Board of Trade in 1998.
The basic currency transaction is comprised of two currencies involved in a currency change – one being sold, the other being purchased. A currency pair’s value is measured by the base currency (the first one quoted) divided by the quote currency (the second), denoting how much of the latter is valued against a single unit of the former.
The Cyprus Securities & Exchange Commission, est. 2001. The agency responsible for regulating the Cyprus Stock Exchange, it also issues licenses to investment firms and brokers operating therein. A member of the European Union, Cyprus attracts numerous retail brokerages as a pan-European licensing agency.
Economic data (usually macroeconomic) that indicate the health of an economy and its financial market. The most pertinent are those released on a regular basis by government agencies regarding inflation, GDP, employment and prices of major commodities (such as crude oil).
Electronic Communications Network: an electronic network that connects investors directly, bypassing personal brokers and enabling individuals to trade directly with major institutions. The network automatically matches orders between buyers and sellers.
The amount of funds held by a financial entity (or its net value) after all liabilities have been paid. In trading, the value of securities minus the brokerage input. In margin trading, the total amount deposited by an investor from which collateral against a trade is set aside. In the last case it reflects net profit and loss in real-time.
With over 1,900 instruments traded, the European Exchange, run by the German Bourse, is the largest dealer of European derivatives in the world and one of the most technologically innovative.
European Central Bank (ECB)
Located in Frankfurt, the ECB was established in 1998 as part of the Maastricht Treaty as the European Union’s Central Bank. It is tasked with implementing monetary policy, and maintaining price stability and a 2% inflation rate throughout the Euro zone; but its objectives are not defined by statutory law. National central banks in the Euro zone are shareholders in the ECB, alongside other financial institutions
Federal Reserve (Fed)
The Central Bank of the United States of America, established in 1913, was originally tasked by the U.S. Congress with maximizing employment, stabilizing prices and maintaining long-term interest rates. It also conducts federal monetary research and policy, regulates banking institutions and provides monetary services to other financial institutions and U.S. government agencies.
The fill price is the execution price of a securities or commodities order, agreed upon by the buyer and the seller, once the transaction has been completed.
A technical method for setting support and resistance levels based on Fibonacci ratio divisions of the distance between upper and lower levels on an asset’s price chart. The ratio sequence – named after the 12th century Italian mathematician – is obtained by adding two subsequent numbers to derive the next sequential number.
Financial Instruments Exchange, est. 1985. The New York Board of Trade’s exchange for currency derivative’s – futures and options on futures. In 1998, after opening a second trading floor in Dublin, Ireland, FINEX became the first exchange agency to be active on two continents.
Financial Industry Regulatory Authority, est. 2007 (formerly, the Securities Industry Regulatory Authority – SIRA). A privately held, self-regulatory body established through the merger of the New York Stock Exchange’s regulation committee and the National Association of Securities Dealers that governs relations between brokers, dealers and investors.
The use of government income revenues (mostly taxation, but also printing money, taking out loans or consuming reserves) and spending to affect the economy. Fiscal policy may be neutral (when the economy is balanced, expansionary (during a recession) or contractionary (when the economy is expanding, mostly to pay off debts).
A type of investment based on regular and fixed payments by the borrower. A fixed-income security thus provides periodic payments (coupon) and (usually) the return of the principal upon the security’s maturity. Such securities generally offer a lower return on investment (ROI), since income is pledged.
Often referred to as a ‘pit broker’, not to be confused with ‘floor trader’ or ‘commission broker’. An exchange-licensed, independent agent who executes trade on the exchange floor for clients he/she represents and in their best interests. Clients are most often institutions, financial services companies, pensions or mutual funds and high-net-worth individuals/traders.
A member of the exchange licensed to trade from the floor, or to access the exchange’s electronic trading system on his/her own behalf.
Fill or Kill Order: an instruction to a broker to buy or sell a financial instrument that must be executed in its entirety within (usually) seconds. If not executed, the entire order is immediately cancelled. The FOK is quite rare and usually involves large quantities of stock.
Foreign Exchange (Forex/FX)
An exchange for currencies belonging to different states. The foreign exchange market is global, decentralized and not bound by time constraints.
Financial Times & London Stock Exchange, est. 2002. Co-owned by the London Stock Exchange and the Financial Times, the FTSE Group provides thousands of market indices – 600 of them in real time – and other data-related services.
An analysis form based on identifying the intrinsic value of an asset. This form of analysis relies on real-world indicators and events, such as economic indicators (GDP, employment, interest rates), policymaker and business leader statements, and other current affairs. Based on fundamental analysis, investors try and determine if an instrument’s market price is undervalued or overvalued relative to intrinsic value.
The contractual obligation of a buyer to acquire an asset, financial instrument or physical commodity at a specific time and price, as opposed to an option, which is the right to purchase the asset. The buyer is usually described as long and the seller – short. Futures are mostly traded on a futures exchange, which acts as a market-maker; forwards are usually traded over-the-counter and may apply to almost any type of commodity.
A change in price levels that usually occurs between one session’s close of trading and the subsequent session’s opening. They can be a result of either fundamental or technical adjustments and will either fill (prices return to previous levels) or not. Traders may speculate on the following session’s opening prices and buy or sell after hours. Gaps are defined as either full or partial, and either up or down. They can also be classified as breakaway, exhaustion, common or continuous.
Gross Domestic Product: the total fiscal value of all goods manufactured, and services provided in a country over a defined period of time. Changes in GDP are typically measured quarterly or annually, but occasionally monthly. It should not be confused with GDP per Capita, which is the total output per person, nor with GNP (Gross National Product), which measures the total of production and services by the country(regardless of location). Real GDP equals the value of all goods and services adjusted for inflation, whereas Nominal GDP is not adjusted for inflation.
Gross National Product: equals GDP plus income on foreign investments and labour with domestic earnings by foreigners subtracted.
Taken from the term meaning a fence made of shrubbery/trees, to hedge is to fence one’s self off against loss, or, more pertinently, to invest in order to offset potential loss (or gain) that results from another investment. Hedging may be undertaken through a variety of financial instruments (stocks, ETFs, forwards, swaps, options and other derivatives).
Historical Volatility (Statistical Volatility)
Financial volatility describes the price fluctuation of a financial instrument from its average price. Historical volatility computes this over a given time period, whereas implied volatility is the momentary measurement of the deviation.
Hong Kong Futures Exchange, est. 1976. Until 1987, the HKFE dealt in futures and options for underlying stocks, indices, currencies and interest rates. During the global crash of 1987, it underwent a government bailout, and – three years later – it merged with the Hong Kong Stock Exchange and the Hong Kong Securities Clearing Company to form Hong Kong Exchange & Clearing Ltd., Hong Kong’s primary stock and futures exchange.
The owner of a financial instrument
A market in which assets are difficult to buy and sell because of a small number of buyers and sellers. This may be a result of an asset that is highly valued but hard to sell in a swift manner due to the price (requiring a significant discount), a lack of potential buyers, or any other reason. Illiquid assets are those that are difficult to sell (sometimes at any price). Illiquid options are usually those whose expiration dates are distant.
Index (pl. Indices/Indexes)
The aggregate value of a group of selected stocks, the index is used to describe its market and compare returns on investment. Some of the most popular indices include the Dow Jones Industrial Average, NASDAQ Composite, S&P 500, and FTSE 100.
A transaction that is immediately executed based on the asset value currently quoted in the platform. Legacy FX traders may also execute in ‘Maximum Deviation’ mode, so that if the quoted price is not immediately available the position will only open if the deviation conforms to that which has been specified by the client.
An organization (not banks or financial services companies) that trades in large quantities, thus gaining access to preferential treatment, low commissions and other benefits. Institutions most often include insurance companies, pension funds and other entities that govern major savings or demonstrate large cash flows. They are regulated to a lesser degree but also protected to a lesser degree by regulatory safeguards.
Any asset that can be traded between two parties, including money, documented proof of ownership or interest, and a bonded agreement to receive or sell an interest. In law, contracts, wills and deeds are also considered instruments. The two main forms of financial instruments are cash-bound (securities, bonds, bills, stock, loans or deposits) whose value is determined by the market, and derivatives (futures, options, swaps and forwards), which derive their value from their underlying assets (either cash-bound instruments, indices or interest rates). Derivatives may be traded through an exchange or over-the-counter.
The amount one invests in a transaction. In Forex trading, an amount is withdrawn from one’s general account balance and multiplied by the broker’s leverage to provide the investment amount.
International Securities Exchange, est. 2000. The first fully computerized options exchange in the U.S., offering equity and index options, as well as market data tools, the ISE is a publicly traded company and a member of EUREX.
Last Dealing Time
The final hour of the last trading day for a bid to be placed for an instrument.
Last Trading Day
The last day upon which a futures contract must be closed out before cash settlement or the underlying asset is actually delivered. Either the commodity or its cash value is then transferred between trading parties. Usually, the futures contract is a means of hedging the asset’s value and the asset itself is not actually delivered.
Leverage is the ratio between an investor’s margin in a position and the broker’s contribution. It enables traders to place a position whose value is higher than the amount of money at their immediate disposal, by using a short-term credit allowance.
London International Financial Futures Exchange, est. 1982. Following the abolishment of foreign currency controls in Britain in 1979, LIFFE was established as a futures exchange, becoming the largest in Europe in 1996. It was acquired by the New York Stock Exchange in 2007, creating NYSE Euronext – the first global multi-national Euro-American financial services corporation that operates several equity exchanges throughout the world.
A limit order is a pending order that entails buying or selling an asset (a currency pair, CFD, stock index or commodity) when it reaches a pre-specified price: if a buy limit order, the price is placed below the present market price; if a sell limit order, the price is placed above the present market price. Once the price is hit, the order is triggered and the position is opened.
A line chart plots the value movement of an underlying asset over a selected time period.
The ability of an asset to be sold without a major discount. As a measurement, it is the ratio between speed of sale and going price. A market is considered to be liquid if it displays many bids and offers coupled with low spreads and volatility – thereby facilitating trade. Forex is considered the most liquid market of all, with deals related to U.S. dollars being most prominent – it being the most liquid currency.
London Metal Market and Exchange Company, est. 1877. A commodities exchange that offers options and futures contracts on metals and plastics, as well as hedging and delivery services. Still offering open outcry bidding, it also hosts a telephone and computerized system. Historically, before the establishment of its predecessor, the Royal Exchange, trading was conducted in coffee houses.
The investment in an underlying asset’s value increasing. A long position becomes profitable if market prices rise before the closing of the position.
Unit of measurement used to determine trade size. The quantity of an instrument denoted by a lot varies by asset class.
London Stock Exchange (LSE)
The LSE (est. 1801) is the largest stock exchange in Europe and the 4th largest in the world (after NYSE, NASDAQ and Tokyo). Before its establishment, traders operated in coffee houses, since they were not allowed to enter the Royal Exchange (est. 16th century), and established the first trading room in 1773. The United Kingdom’s regional exchanges merged with the LSE in 1973, which was then privatized in 1986 (the Big Bang), and today, the exchange lists 2500 companies from 68 countries.
Margin (Margin Requirement)
Margin can refer to either 1. the amount of money borrowed to buy a security, 2. the difference between price and production cost, 3. the difference between the given interest and the base interest on an adjustable-rate mortgage, or 4. a portion of one’s total invested equity –initial margin requirement required for the purchase of a security. In Forex trading, margin may refer to used margin – the amount of equity provided by a trader to cover possible losses incurred in a trade, thereby protecting the investor from losing the entire balance;usable margin – the remainder; required margin – the amount of balance required to open a new position.
In the event that usable margin falls below required margin, the broker’s system will begin to close positions. This protects the client from falling into negative balance.
Mark-to-Market (fair value accounting)
An accounting procedure, by which an institution or company’s financial value may be assessed, based on the fair value or current market price of an asset (or liability). In periods of heightened market volatility, the current market value may be substituted by the value of the asset under orderly market conditions.
The total value of a company’s traded shares (share price multiplied by total number of shares issued). The value reflects a company’s size, rather than total value or company capitalization, which also reflect sales, assets and debt.
A Transaction execution, in which the order is filled at the best available price. If not available, the order is executed at the closest available price.
A brokerage, bank or financial institution that quotes both