FXLORDS Forex Glossary Terms is a list of definitions used in the Forex Trading Industry and vocabulary used in Forex related subjects and news, written in a simple direct manner to make them easier to remember. They are exactly where you need to start if you are new to Forex.
Often found linked with its opposite – ‘Bid’, ask is the price that a seller will accept for a stock, commodity or currency. It is often referred to as the offer price.
Automated Trading/ Dealing
The rise of powerful software systems able to store and analyze prices of stocks, commodities and currencies led to the development of automated trading systems where, when the trader enters his criteria, the software will make the trade when that criteria is met. It can incorporate stop loss and take profit levels as well as trailing stops. It’s particularly useful for the trader who doesn’t have the time to watch all his trades. It also helps remove some of the emotion from trading if left to run its course. Found in various guises, the more powerful can let traders trade directly from charts.
Average True Range
This is the average over a period of usually 14 days, of the true range indicator. This is calculated as being the biggest of either the current high less the current low, the value of the current high less the previous close or the value of the current low less the previous close.
If a trader is running a portfolio of trades in different currencies, the base currency is the currency in which he will measure his gains or losses.
A bear market is a period in time where prices are displaying a downward trend. The bear market can end when prices reach a support level.
This term describes a trader or analyst who believes prices are due to fall
Often found linked with its opposite – ‘ask’, this is the price that buyers are willing to pay for a commodity, stock or currency.
This is the difference between the bid price and the ask price. The bid/ask spread is usually tighter for more popular or liquid stocks, commodities and currencies and in such situations can reduce the necessary gain or fall before a trader makes a profit.
Bollinger Bands are an important technical indicator. They are bands that are drawn two standard deviations away from a simple moving average. They can be move closer to the SMA in periods of low volatility or further away in times of high volatility. Such movement is an indication of a change in volatility, indicating to the trader an opportunity to enter the market.
A breakout is where the price rises through a resistance level or falls through a support level, indicated by trend lines. It usually signifies further travel in that direction.
A bull market represents a period of sustained price increases in a market, following an upward trend. It can end when it hits a resistance level.
This term describes traders or analysts who believe prices are going to rise or have further to rise.
This is the main bank of a country, charged with defining and implementing monetary policy, issuing currency and operating in the market to maintain a healthy economic system . Examples include the Federal Reserve in the US, the Bank of England in the UK and the European Central Bank.
The channel is the band between support and resistance levels that a currency has traded in over a period of time. A breakout through the top of the channel is seen as bullish, through the bottom as bearish.
Commodity Channel Index
This is a technical analysis tool where high values show potential for a downward correction whilst low values indicate a rally in the market. The index works on calculating the deviation from the statistical mean. It’s become a very popular tool for identifying cyclical trends.
These are currency pairs for countries which possess large quantities of natural resources. The pairs are considered to be USD/CAD, USD/AUD and USD/NZD. Their popularity is gained in that their exchange rates are influenced by the prices of the commodities they produce and sell.
This is the numerical exchange rate at which a currency can be converted to another.
Conviction is an emotion or state of mind in which the trader expresses his view firmly in support of a particular trend.
Cross pairs are currencies that are paired and which don’t include the USD, either in the pairing or in the conversion rate between them.
Cross Currency Swap
Cross currency swaps are a useful way for companies to obtain loans in a currency at favorable rates by finding a partner who wishes to swap interest payments and capital in the opposite direction. The deal usually ensures a better interest rate and exchange rate for each. It’s often seen where a company in one country can obtain more favorable terms for a loan that the partner company can for that currency in their own country.
This can be a private company or a bank which makes their profits by exchanging currencies, charging a commission or benefiting through the spread.
These are contracts for the delivery of a certain amount of currency at an agreed rate at some time in the future. Investors seek to gain by being able to buy or sell the currency at a more favorable rate once the futures contract expires.
These are pairs of currencies that are traded. The trader is looking for changes in the exchange rate between the components of the pair in order to make a profit. They include what are known as ‘major pairs’, the most important traded currency pairs on the forex market; USD/JPY, GBP/USD, EUR/USD and USD/CHF.
Daily Cut Off
Once a day, trading is suspended in currencies and commodities to define the change over from one trading day to the next. Whilst technically unnecessary as currencies trade around the clock, it allows administrators to set dates for settlement.
Divergence is a term used in technical analysis and is the moving away of a price in the opposite direction to its momentum as described by a trend line. The divergence can often signal a change in price direction as almost always, a price will generally follow its momentum indicator.
A doji is a signal on a Japanese Candlestick Chart and is represented by what looks like a cross. The horizontal bar is thin, indicating that the opening and closing prices were similar. They are considered as neutral indicators.
A technical indicator based on natural rhythms which suggests that markets move up in sets of five waves and down in sets of three. It is effectively a cyclical indicator but one with no time frame.
This is the time at which a trader enters a trade. They should be determined by careful technical analysis to find the optimum entry point to maximize profit.
This is the price at which a trader enters a deal and, judged correctly using technical indicators, can affect the chances of a profitable outcome.
This is the point at which a trader closes a trade and once more should be determined by a combination of technical analysis and use of the risk/reward principle.
Extensions are mainly seen when using Fibonacci to inform trading. An extension is when the price exceeds the 100% level. In Fibonacci, common extension levels where traders may close out are 161.8%, 261.8% and 423.6%.
An execution is the completion of a buy or sell order for Forex or other traded security or commodity. The order is executed when it it fulfilled, not when it’s placed.
A fakey is a false break pattern on a Japanese Candlestick chart combined with a pin bar reversal.
Fibonacci was an Italian mathematician who developed a number sequence where each member was the sum of the two previous members. When the ratio of the numbers later in the series is considered they give a ratio that equates to around 61% of the following number or 162% of the previous number.
Chart analysts notice that patterns form in price charts that follow the rules of Fibonacci and so can be used to predict the direction and extent of any price moves.
Forex accounts are trading accounts set up with a Forex broker. It’s usually recommended that a new trader sets up a demo account to practice trades and to get an understanding of how the broker’s systems work. They can then move onto what is called a ‘mini account’ which allows for smaller trades. Full accounts can be managed by the broker or the trader depending on the experience or requirements of the trader.
Forex Charting Software
A very useful piece of software which enables the user to chart the prices of a variety of currency pairs whilst giving various indicators at the same time. If you’re looking for similar software, compare its capabilities to its price and importantly ask whether it allows direct from the chart trading.
Fundamental is linked with fundamental analysis, a partner indicator with technical analysis for Forex price moves. Whereas technical analysis looks at charts and involves maths, statistics and often geometry, fundamental analysis is concerned with the underlying factors that may affect currency price swings and are usually economic indicators such as inflation rates, economic growth, industrial output etc.
A hammer is an indicator on a Japanese Candlestick Chart with a small body at, or near, the top of a long wick and is considered a bullish reversal indicator. They usually form at the bottom of a trend when the price moves lower at the opening before rebounding to close above the opening price.
A hanging man is similar to a hammer in shape but not in meaning. It is usually seen at the top of an advance and can be a bearish reversal. Again they are formed when the price drops on opening before recovering to close higher.
Derived from the Japanese word Hara-Kiri meaning a slow ritual suicide, the swap involves currencies where the originator of the swap does not gain financially from doing so. Often the swap is completed to put the originator in a better position on a linked deal.
The Harami is a pattern on a Japanese Candlestick Chart and is typified by a large bearish or bullish candlestick followed by a small bullish or bearish candlestick. It’s considered a reversal pattern.
It’s the currency of a typically industrialized country whose currency is widely used in global trade. Best examples of this are the USD and the GBP. The currency’s value is not expected to fluctuate wildly so making it a stable currency where the contract may be longer term.
Indicators are pieces of information that signal a move in prices or can be used to predict price changes. There are many different types of indicator including waves, stochastic oscillators and Fibonacci sequences.
Around half of all currency trades are interbank allowing them to square positions. Some of the trades are speculative but less so following the banking crisis. It’s a closed market, only available to the commercial banks.
Leads and Lags
These are the names given to the attempt to manipulate the timing of trades to maximize profits. If exchange rates are expected to rise, payment on a trade is likely to be speed up, known as ‘leads’, whilst if the exchange rate is due to fall, payment will be slowed down, known as ‘lags’, to take advantage of more favorable exchange rates.
A liquid market has a high number of buyers and sellers and the spread between the ask and the bid price is small. Because of the large volumes involves, price movements are not volatile. The Forex market is considered to be the largest liquid market with the USD the most liquid currency on it.
Liquidity is a measure of how quickly and easily an asset can be converted into cash. This usually depends on how widely traded the asset is.
Long simply means buying an asset in the expectation that it will rise in value.
These are the four biggest traded currency pairs and include the USD/CHF, EUR/USD, GBP/USD and USD/JPY. These make up the majority of currency pair trades and are said to drive the market.
A Marubozu is a Japanese Candlestick formation which is only body and no tail. As a white Marubozu it indicates the price opened at the day’s low and closed at the day’s high and is bullish, a black Marubozu is the opposite where the price opened at the day’s high and closed at the day’s low.
Meta Trader is a commonly used trading platform software, now at version 5
Minor currency pairs are all the currency pairs in Forex that are not major pairs. They are less commonly traded and are less liquid than the majors.
Managed Forex Accounts
If you don’t feel confident yet in managing your own trades, you can apply for a managed Forex account where the account manager will do the trading for you. It’s akin to hiring an investment manager to run your stock and share portfolio. They’ll make the decisions for you but will charge you a fee. Whilst you may have better success in making a profit using a managed Forex account, never forget that nothing is guaranteed!
This is the attitude of traders regarding how they think the market will move and their reading of the factors behind the move. It can be linked with the psychology of the market.
A form of automated trading, mirror trading allows a trader to see the trading history of an experienced trader via their trading platform. From this they can choose to mirror certain types of trade based on risk, currency, profit and more and the automated trading system will do a twin trade for them when the trader makes a trade of the kind selected.
The moving average is a technical indicator that enables traders to filter out ‘noise’ from trend lines. It is most commonly used to verify trend directions.
An option is a contract that gives the buyer the right, but doesn’t compel them, to buy or sell stocks, commodities or securities at a fixed price within a per-determined period. There are two types; call and put. Call options give the right to buy, put options give the right to sell.
A pip is the smallest unit of change that the price of a currency can undertake. It’s usually the last decimal place for the quoted price of the currency. For example, the pip for the US Dollar is $0.0001 or a hundredth of a cent.
A pivot point is an average of the high, low and closing prices of the previous day’s trade. It’s a technical indicator which, when followed by a rise above the pivot point shows bullish sentiment and when the price falls below the pivot point, it shows bearish.
A ‘position’ is effectively a live trade.
Quantitative easing is the release of money into a banking system by a central bank to ensure liquidity. It has been practiced in recent years, most notably by the US Federal Reserve and the Bank of England in order to stimulate lending by commercial banks and hence revive flagging economies.
Relative Strength Index
This is a technical indicator that measures momentum in a price. It is used to determine overbought and oversold conditions by comparing recent gains and losses.
The resistance level is the point at which the price of a currency, share or commodity struggles to go higher. A breakout through a resistance level often indicates the start of a new trend.
Retracement is a brief change in the price of a currency pair, commodity or stock, away from the general trend. In theory it should simply be a pause before the trend continues but can sometimes become a reversal where the trend changes direction.
Risk/Reward is a basic principle applied to all forms of trading whereby the trader decides on how much capital he is prepared to risk and calculates his reward as a multiple of the risk he is taking.
This is the net effect of interest rates on a Forex trade. Both currencies earn or incur interest during a trade and as part of the profit calculation a net figure has to be taken into account deducting the short currency interest rate from the long one.
A run is a prolonged rise or fall in price of a currency, commodity or security.
This describes a type of trade where the trader place many trades in a trading period looking to make small gains on each trade which cumulatively add up to a good profit. Such traders have to be disciplined to avoid losses and rely heavily on automated trading.
This is a Japanese Candlestick formation which occurs in a bullish trend when the price rises higher than the opening price but then falls back to end lower than the opening price.
Short means selling in the hope that the price will fall and give the trader the option of fulfilling the contract by being able to buy back at a lower price.
Soft currencies are usually avoided by Forex traders on account of their volatility and often unrealistic valuations when pegged against hard currencies such as the USD. They are usually the currencies of developing countries and their volatility is caused by uncertain political or economic conditions.
Spot Exchange Rate
A spot exchange rate is the exchange rate that is payable for a deal concluded for immediate delivery. It’s often called the benchmark rate. Settlement terms actually mean that the currency is settled two days later.
The spread indicator is a tool found on analytical charts and shows the difference between the bid and ask price. It’s usually represented as a curve and is smaller for liquid currencies, stocks and commodities.
A spot trade is a deal that is concluded for immediate delivery. They can also include futures contracts that are due to expire in the current month. They are concluded at the current or ‘spot’ rate and with automated trading are usually settled immediately.
This is a measure of the dispersion of the members of a set of price data concerning a currency pair, away from its mean. Standard deviation is calculated using the square root of the variance of the data. One would expect low deviation from a hard currency and high deviation from a soft currency.
This is a technical indicator that works by comparing the closing price with the currency’s price over a given period. To fine tune the measure, differing time periods can be used or a moving average.
This is a mechanism, usually introduced by a central bank as a result of government economic policy to stimulate the economy by increasing liquidity. It can include quantitative easing or manipulation of interest rates as well as in extreme circumstances, manipulation of the exchange rate through devaluation of the country’s currency.
This is the level at which prices can stop falling in a bear market and represents the price that bulls are prepared to re-enter the market. A fall through a support level can indicate a continued bear run and lead to the formation of a new trend line.
This is a price level set by a trader to minimize his losses. It should normally be calculated based on the amount of capital he is prepared to lose. If a trade becomes profitable, traders often apply trailing stop loss levels to follow the profit, allowing them to capitalize their gains.
This is the point at which a trader decides that he will take any profits earned from a trade by closing out the trade. Risk averse traders often take profits at the first level, usually set as a single multiple of the risk whilst less risk averse traders will set second, third and higher take profit points trailing the stop loss up with the gains.
Tapering is the term given to the gradual reduction in quantitative easing by a central bank. The term was coined to represent the efforts of the US Federal Reserve to reduce the flow of money into the US economy through Quantitative Easing.
This is an important technical indicator and is chosen by traders to represent the point at which they feel a trade will break through a support or resistance level. If it fails to break the test level, the trade will continue to follow the trend, breaking the test level can mean the start of a new trend.
Three White Soldiers
This often follows a downtrend and is typified by three consecutive days when the price closes higher than on the previous day. It’s considered a strong indicator of a bull market.
Three Black Crows
This is a pattern formed in a Japanese candlestick chart and is a bearish indicator in a bullish trend. It’s signified by three consecutive large bearish candlesticks and is a top reversal in an uptrend.
The important foundation to technical analysis and represents the period over which a trader is going to analyse the market for his intended trade. Recommendations are to choose a longer time frame initially to identify longer term trends before focusing on shorter time frames for greater accuracy.
This is the difference in value between the goods and services imported into a country and those exported. A deficit must be financed and can impact on a country’s credit rating if financing a cumulative deficit is seen to be beyond the ability of the country’s earnings to finance it.
This is a trader’s plan to enable him to make profits by going short or long in financial markets. It should be informed by fundamental and technical indicators.
A trendline is a technical indicator that is formed by joining peaks or troughs in the price of a currency, stock or commodity. The trend is considered strong when it is touched by several peaks or troughs along its length and is the important second step in technical analysis of time frames.