Forex Trading Terms

A

Ask The price at which a curency or instrument is offered.

At best An instruction given to a dealer to buy or to sell at the best rate that can be obtained in a given time period.

At or better An order to deal at a specific rate or better.

B

Base currency the currency to which each transaction will be converted at the close of each position.

Basis point (pip) For most currencies, denotes the fourth decimal place in the exchange rate and represents 1/100 of 1 percent (0.01%). For such currencies as the Japanese yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal
terms.

Basket A group of currencies normally used to manage the exchange rate of a currency.

Bearish A downtrending market or a period in which currency prices are devaluing.

Bear Market A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

Bullish Referring to an uptrending market or to a period in which currency prices appreciate in value.

Bid The price at which a buyer has offered to purchase a currency or an instrument.

Bid / Ask Spread The quote at which currency traders are willing to buy or sell a currency pair.

Buy Order A buy order is the instruction to buy a currency pair. For example, if a forex trader buys GBPUSD, they are using Dollars to buy Pounds, effectively selling US Dollars.

Book The summary of currency positions held by a dealer, a desk, or a room; a sum total of assets and liabilities.

C

Cable In the foreign exchange market, refers to the U.S. dollar/British pound rate.

Closed position A transaction that leaves the trade with a zero net commitment to the market with respect to a particular currency.

Cover To close out a short position by buying currency or securities that have
been sold short.

Currency cross rates Rates between two currencies, neither of which is the U.S. dollar.

D

Day Trading Refers to opening and closing the same position or positions within one day's trading.

F

Forex Broker An agent or firm who handles investors' orders to buy and sell currency at the forex market. Forex Brokers usually don't charge commissions but are compensated for their services through the spread between the bid/ask prices.

G

Good until canceled An instruction to a forex broker that, unlike normal practice, does not expire at the end of the trading day.

I

Initial margin The margin required by a foreign exchange firm to initiate the buying or the selling of a determined amount of currency.

Interbank rates The bid and offer rates at which international banks place deposits with each other; the basis of the interbank market.

L

Leverage The ability to control large dollar amounts of a currency with a comparatively
small amount of capital.

Limit order A request to deal as a buyer or a seller for a foreign currency transaction at a specified price or at a better price, if obtainable.

Liquidation Any transaction that offsets or closes out a previously established position.

M

Margin The amount of money or collateral that must be initially provided or thereafter maintained to ensure against losses on open contracts. Initial margin must be placed before a trade is entered. Maintenance or variation margin must be added to initial margin to maintain against losses on open positions. The amount that needs to be present to establish or thereafter maintain is sometimes referred to as “necessary margin.”

Margin call A claim by one’s broker or dealer for additional good faith performance monies, usually issued when an investor’s account suffers adverse price movements.

Market maker A person or firm authorized to create and maintain a market in an instrument.

Market order An order to buy or to sell a currency pair at the best possible price.

O

Offer The price at which a seller is willing to sell; the best offer is the lowest such price available.

One cancels other A contingency order instructing a broker to cancel one side of a two-sided entry order.

P

PIP (percentage in points) The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

Position The netted total commitments in a given currency; can be flat or square (no exposure), long (more currency bought than sold) or short (more currency sold than bought).

Profit taking The unwinding of a position to realize profits.

Rollover An overnight swap; specifically, the next business day against the following business day; also called “tomorrow next” (Tom-next).

S

Scalper A trader who trades for small, short-term profits.

Slippage Refers to the negative (or depreciating) price value between where a stop-loss order becomes a market order and where that market order may be filled.

Spot price The price at which a currency is currently trading in the spot market.

Spread The difference between the bid and the ask prices of a currency.

Stop-limit order A variation of a stop order in which a trade must be executed at the exact price or no worse than a specific price. The limit side of the order limits the slippage. It also does not ensure execution if the next best price is beyond the limit side of the stop order until the limit or stop price is reached again.

Stop order An order to buy or to sell when the market reaches a specified point. A stop order to buy becomes a market order when the currency pair trades at or above the stop price. A stop order to sell becomes a market order when the currency pair trades at or below the stop price.

T

Thin market A market in which trading volume is low and in which bid and ask quotes are wide and the liquidity of the instrument traded is low.

Tomorrow next (Tom-next) Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa.

Transaction The buying or selling of currencies resulting from the execution of an order.

Transaction date The date on which a trade occurs.

W

Whipsaw A condition in a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.