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Forex trading retail lounge

A

Arbitrage

Profiting from differences in the price of a single asset (such as a currency pair) that is traded on more than one market.

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For arbitrage opportunities to exist, the currency pair must be traded simultaneously on two different markets, and at different prices. One very common form of arbitrage is hedging, which is a practice of buying a security on one market (e.g. the spot Forex market) and selling the options on that currency pair in another market (e.g.

currency options market).

Arbitrage is also used in sports, in trading exchange traded funds and also in trading credit default swaps.

At-Or-Better

This term is used in reference to order placement, indicating that the broker should fill the trader’s order at the trader’s ordered price, or at a price that will be cheaper for the trader in terms of spread costs. Usually pending orders are used for such requests by traders to brokers.

At Limit

An order by a trader to a broker to fill a long trade at a price that is below the current market price, or to fill a short trade at a price that is above market price.

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The expectation is that prices will move against the trader’s expectation for the asset before turning in the direction of the trader’s expectation, and so an ‘at limit’ order reduces the level of draw down the account would have experienced if the order is filled at market price. An ‘at limit’ order is a pending order.

At Best

An order by a trader or broker to fill a trade using the best prices possible in the shortest time possible. An ‘at best’ order is invariably an instant order that will be filled at market price, and may be subject to slippage.

Asset

An item having commercial or exchange value.

The commercial value of a resource is not fixed, but changes from time to time as a result of several factors influencing the supply and demand of the resource. It is this change in the perceived value of the resource that confers on it economic and commercial importance. Financial markets provide a standardized template on which assets can be exchanged for a value bestowed on it by the concurrence of traders and the intermediaries (brokers) in such transactions.

Ask

The price at which a currency pair or security is offered for sale.

The Ask is the quoted price at which an investor or trader can buy a currency pair, or the price at which a dealer will sell a currency pair to a trader. This is also known as the “offer”, “ask price”, and “ask rate”. In a price quote, there are two prices that are listed, and it is the price listed on the right hand side of a price quote that constitutes the Ask. The Ask Price is always higher than the bid price.

E.g. in a quote that is listed as 1.2346/1.2349, 1.2349 is the Ask Price.

Aggregate Risk

This is a measure of an investor’s total market exposure to spot and futures market contracts. Such investors would include banks, major corporations, hedge funds and other financial institutions. The definition for the Forex market is the exposure of a trading entity to fluctuations in the exchange rates of two currencies.

Aggregate risk is a key indicator that a trading entity must employ in order to gauge the maximum allowable exposure to a trade before engaging in that trade.

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Once this has been derived, limits on the position can be set. Larger corporations such as the ‘too big to fail’ banks have larger aggregate risk limits than smaller firms with lower credit ratings.

Aggressor

The aggressor is usually the party that initiates the deal in a transaction.

In the financial markets, the aggressors are usually the ones responsible for order flows in a particular direction. This role is taken on by the institutional investors in the Forex market, and that is why in times of increased volatility (especially during news trades), it is not unusual to see large spikes following the release of a news item.

In this instance, the institutional investors aggressive push prices by their large demand and hope to gain on this price change by offloading the positions on the non-aggressive section of the market.

Absolute Rate

Absolute rate is a combination of a percentage of an interest rate swap that is fixed, as well as the percentage that is flexible or floating.

Interest rate swaps are used by companies to hedge against sudden and undesirable fluctuations in interest rates. So if the swap deal is given at a premium of 5% and a flexible rate of 2% from a flexible rate such as LIBOR or EURIBOR is added to the mix, this gives an absolute rate of 7%.

B Base Currency

In terms of foreign exchange trading, currencies are quoted in pairs.

This is because you cannot trade one currency on its own. A currency is always traded in exchange for another. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a currency pair. In expressing the exchange rate, the rate is quoted as the value of the other currency in relation to 1 unit of the basic currency. For instance, when a quote of EUR/USD is said to be 1.3109, it means that 1.3109 US Dollars can be used to purchase 1 unit of the base currency.

Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.

Buy

An opening of a long and a closure of a short positions. Traders generally buy when there is the expectation that the price of the asset or that the exchange rate of the currency pair will increase. A Buy order in Forex is an instant market order to purchase the asset at the market (current) price.

Bull

A market participant counting on an increase in the value of the market in general or an asset specifically.

A bull is also a market operator, a trader or an investor who speculates for a rise in prices of tradable instruments. The bulls will therefore buy an asset based on their sentiment or on their market expectations. When there are more bulls in the market place than there are sellers (bears), then the market price of the asset will appreciate.

Broker – 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.

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In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.

Breakout – A breakout is a situation when the momentum of the price action is so strong that it moves beyond key levels of support (downside breakout) and resistance (upside breakout). Breakouts usually occur as a result of high impact news releases or some other factors that cause traders in the market to generally place orders in one direction.

Bid

The price at which a dealer is prepared to purchase a currency from an investor or trader, or the price at which an investor or trader can sell a currency pair to a dealer.

This is also known as the “bid price” and “bid rate”. In a price quote, there are two prices that are listed, and it is the price listed on the left hand side of a price quote that constitutes the Bid.

The Bid Price is always lower than the ask price. E.g. in a quote that is listed as 1.2346/1.2349, 1.2346 is the Bid Price.

Bear

A market participant counting on the market price decrease; a market operator, a trader or an investor who speculates on the fall in value of an asset. The bears will therefore sell an asset based on their sentiment of market expectations.

When there are more bears in the market place than there are buyers (bulls), then the market price of the asset will depreciate.

Basis Point

A basis point is one-hundredth of a percentage point, or 1/100 (0.01%).

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This term has its origins in the practice of trading the ‘basis’, or the percentage difference between spreads. It is commonly used in describing the rate of change of interest rates. So if a central bank increases interest rate from 4.5% to 5%, this is an increase in 0.5% or 50 basis points.

Bank Rate

The rate at which a central bank is prepared to lend money to its domestic banking system. It is also known as the discount rate, or interest rate on the economic news calendar. Central banks function as a lender of last resort.

Commercial banks invest funds deposited with them by customers either in the form of loans given out to individuals and businesses, or in other investment vehicles, but are required to keep reserve funds to handle settlement of transactions. Occasionally, commercial banks may run out of such reserve funds.

They can therefore obtain stop-gap loans from the central bank, repayable at a certain interest rate. This is what is known as the bank rate. Balance – The financial result of all completed transactions of a trading account.

In the Forex market, there is an unused balance and the used balance (which is the margin put up as the trader’s equity in the leveraged trade).

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The true balance of the trading account can only be known when all unrealized profits or losses, as well as the initial margin (used balance) are included into the unused balance after all positions have been closed.

C

Cent Lot

A cent lot is equivalent to 1/1000 micro lots, where the value of one tick movement of price is equivalent to 1 cent.

Currency Pair – A conversion operation object based on the change of one currency rate against another. The example of the currency pair is USD/JPY. Currency pairings are done because it is the rate of exchange of one currency to another currency that is measured in the Forex market. A currency cannot be traded against itself, and that is why currencies are paired so that they reflect the rate of exchange of one currency against another.

In a currency pair, the first listed currency is the base currency while the currency listed on the right is known as the counter currency.

Currency – Money issued by a government. Currency has evolved over centuries from grains to other times that were considered stores of value, to gold and silver, and then graduated to the use of minted coins and paper money. It is a form of money used as a unit of exchange within a country. Money is known as currency because once the issuing agency (the central bank) has decided on the amount of money that is in circulation at any given time, the existing amount of money in a system flows from one person to another based on the exchange of goods or services for it, and this is likened to a river current that flows from one point to the other.

Cross Rate

Currency exchange rate quotes which do not involve the US Dollar.

In other words, the cross rate is the exchange rate between two cross currencies. Another definition has it as the quoted exchange rate of two currencies in a country in which neither currency is the official currency.

Counterpart

A participant in a financial transaction.

A counterparty is a market participant that takes the opposing side of a transaction to that of a trader in the market.

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In the Forex market, market makers usually function as a counterparty in a Forex transaction. Consolidation – This refers to a period of time in the market when prices are restricted to a tight trading range. Consolidation occurs when the majority of traders sit on the sidelines, leading to very low trading volumes.

Commodities – These are trad-able financial instruments whose contracts are based on materials of value that are either extracted from the ground (hard commodities such as gold, natural gas, oil), or are based on agricultural products (corn, coffee, cocoa, wheat). Commission – Broker’s bonus for facilitating transactions. A commission is different from the spread, which is usually the difference between the price that a broker is ready to pay for an asset and the price that the broker is ready to buy back the asset from a trader.

A commission is a fee charged for enabling a transaction to occur. In the Forex market, commissions are only charged in an ECN environment to cover the cost of maintaining the FIX protocol on which the electronic communication network works. Centralized Market – A centralized exchange where all orders in the market are routed to, with no other competing exchanges receiving any orders/quotes.

As such, all price quotes obtained from that exchange are the same that are given to all participants in that market.

Central Bank

A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.

A central bank is responsible for issuing a nation’s currency, controlling its supply and in some cases, acting as a lender of last resort to provide emergency financing to the nation’s banking system.

D

Devaluation

The depreciation of the national currency, or in other words, the rate decline in relation to foreign currencies and gold.

For example, in Britain in September 1992 raising interest rates in the situation of stagnation in the economy were the reason for the devaluation of the pound. On September 16 the pound lost 2.7% against the Mark and by the evening was traded in New York at 2.703.

Direct Quote

This is a quote that expresses the exchange rate in terms of how much of the domestic currency or the currency under reference can purchase one unit of another currency. So instead of the conventional quote for Euro vs US Dollar being expressed in terms of the base currency (EURUSD = 0.9860), the direct quote is expressed in terms of the counter currency to the base currency.

Depth of Market – This is a measure of the size and number of the open positions on the buy and sell side for an asset at various prices. This information is a measure of market liquidity and is also the basis of the data shown in the order book, accessible to traders using Level II trading platforms. Another definition describes depth of market as the number of units of the asset that can be purchased without significantly affecting the price of the asset.

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In other words, a very large order has to be made before the price of the asset shifts significantly.

Dealing Desk

This is the department in a market maker brokerage firm that is responsible for the execution of trade orders in the Forex market. Dealing desks act as intermediaries between the trader and the liquidity providers, matching buyers with sellers and fulfilling sell orders with buy orders.

Dealing desks can also be found in banks and finance houses.

Day Trading

Refers to a style or type of trading where trade positions are opened and closed during the same day. Day trading requires that the trader analyze the market using short term charts (e.g. the 1 minute, 5 minute, 15 minute and 1 hour charts), identify currency pairs that have the potential for moving between 10 and 100 pips, and then executing the trade using this pip range as the target and stop prices.

A popular day trading technique is trading the price spike that follows high market impact news releases, in which the trader aims to capture market movement resulting from the price spike following the news release.

Diversification

The acquisition of a wide range of securities in order to reduce risks: the drop of rate of certain securities is covered by the growth of price of others.

The history of the Kimberly Clark company is one of successful diversification. The company worked in a pulp and paper industry sector. At one point, company managers realized that it became difficult for the company to develop in this sector on the world scale. The major incentive was to find a new market, a new industry, and a new strategy. And Kimberly Clark developed Procter & Gamble company in the sector of paper consumer goods. They began to produce “Haggies” diapers, cosmetics and by now they have successfully realized their goal.

E

EA (Expert Advisor)

An expert advisor or Forex robot is a software whose algorithm is based on a trading strategy, and which is programmed to open and close trades in the market automatically based on the trading strategy it has been programmed to work on.

ECN Broker

An ECN broker is a broker that provides straight through processing for pricing and order executions to its clients without the intervention of a dealing desk.

ECN brokers obtain pricing straight from the liquidity providers and offer the pricing to traders without interference or mark-up. ECN brokers therefore offer the most transparent pricing model in the market.

Economic Exposure – The risk that a company’s finances is exposed to as a result of fluctuations in interest rates and exchange rates, especially when a component of the company’s operations has to deal with foreign exchange transactions or cross-border transactions. Usually, such a company that has economic exposure is one that has to regularly exchange the local currency for a foreign one, or borrow money from external financing institutions.

In each case, there is a risk of economic exposure because of the floating nature of interest rates and exchange rates, so the entity stands to lose money by simple exchanges of money if the local currency weakens against the foreign one.

Equity

The balance of funds on the trade account. It is calculated using the following formula: balance + floating profit – floating loss.In other words, the equity in an account is calculated by adding the unused balance in the account to the difference between any floating profits made and floating losses in active trades.

European Monetary System (EMS)

EU countries relation in currency sphere, which has a goal to provide a stable national currencies rates ratio.

Another goal is the facilitation of stabilization of foreign economic relations in general.

Exotic Currency

An exotic currency is one that is thinly traded and as such, has little liquidity and very wide spreads. Examples are the Swedish Krona (SEK), Norwegian Krone (NOK), Turkish Lira.

On the forex platforms, the pairings of these currencies usually have very wide spreads. E.g. the EURSEK has spreads of up to 50 pips on some platforms.

As a consequence, they also have wide intraday ranges.

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Examples of exotic currency pairings include EURSEK, EURNOK, USDZAR etc.

F

Fakeout

A fakeout is a situation where a trader takes a position in the market on the basis of analysis done with technical indicators, but the outcome of the trade is different because the asset so analyzed takes a different course from the technical analysis done on it. Fakeouts occur commonly when a trader uses a single indicator for conducting technical analysis.

Fill

The process of completing a customer’s order to buy or sell a currency pair.

In an ECN environment, the trader’s fill is usually at the price that he has ordered at from a liquidity provider. In a dealing desk environment, the trader’s fill may not necessarily be at the price at which he ordered, especially in a situation of market volatility.

Five Digit Pricing

A system where currency pairs are priced with 5 decimal places instead of the conventional four. E.g. quote for EURUSD with five digit pricing would be expressed as 1.31092. This is a more exact pricing model for the forex market and is commonly used by ECN brokers.

Fixed Spread

This is a situation where the difference between the bid and ask prices is always the same, irrespective of market demand or volatility.

Fixed spreads are a feature of dealing desk trading in the forex market.

Flat

The Flat is a term that has three meanings. In Forex, it indicates a state of being neither in a long position or short position, or in other words, describing a trading book with no market exposure. It can also mean a bond that has no interest accruing to it, or a state where the price is neither rising nor falling (flat market).

Floating Profit and Loss

Unrecorded gains/losses on the open positions of a certain tool at current rates values.

Another name for floating profit or loss is unrealized profit or loss. When a position is open, whatever profit or loss is shown on the active trade is known as the floating profit or loss. In so far as the positions are open, whatever profit or loss shown on the platform represents the floating profit/loss.

Foreign Exchange

The purchase or sale of a currency against sale or purchase of another.

This is also used to describe the market in which currencies re bought and sold against each other with the aim of profiting from the change in the exchange rates between one currency and another. In everyday street parlance, it’s used to connote foreign currency.

Four Digit Pricing – A system of setting prices of currency pairs with 4 decimal places. E.g. quote for EURUSD with four digit pricing would be expressed as 1.3109. This pricing system is mostly used by market makers.

G

Gap

A price range where quotes haven’t occurred. A gap usually occurs as a result of after-hours trading, which pushes the price of an asset to some distance away from the original market close, thereby creating an area where no price quotes occur.

Gaps occur when there is plenty of volatility, and when some market moving news such as an earnings report has been released to the market after trading hours.

Good Till Cancelled Order (GTC)

A buy or sell order which remains open until it is filled or cancelled. A good till cancelled order is used by a trader when he/she feels that the conditions under which the asset is trading is one where an order which is filled will bring favorable returns for the trader, irrespective of how long it takes.

H

Hard Currency

A currency that is used and has wide acceptance internationally as a result of the stability of the country of its origin and the respect and standing that the country has in matters of international trade.

As a result, these currencies are widely traded because of the global demand and this translates into great liquidity for that currency. An example is the US Dollar which is used for settlement of most international transactions. The value of hard currencies does not experience wild swings in fluctuation.

Hedge

A transaction that reduces the risk on an existing investment position.

A hedge is a transaction which is used to cover for any losses that may be incurred on another investment. An example of a hedge is using a Short option on the currency futures market to cover for a long position on the spot Forex market. The way the hedge is constructed is such that if the investment that is being hedged is successful, the losses from the hedging position will be far less than the profits from the hedged trade, and if the hedged trade ends in a loss, the hedge trade’s profits will outstrip the losses from the hedged trade.

Hedging

An insurance operation against adverse market changes through a counter-purchases or sales of assets.

This is the active use of an opposing position in another market to cover for any losses that may be incurred from an investment in a certain market.

Hedged Margin

A hedged margin means holding an equal volume of trade on the buy and sell side of an active position simultaneously.

NAVIGATION

This means that if a trader holds 0.5 lots on a long order on EURUSD and also holds 0.5 lots on a short order on EURUSD, the net gain/loss is neutralized until the trader closes one of the positions. This works well as a hedging strategy on well funded accounts. It is used when the trader is suddenly unsure of the outcome of a trade and has no time to utilize a proper hedge on another market. I Indirect Quote – This is a system of currency price quotation where the quote is expressed in terms of how many units of a foreign currency will be used to purchase a unit of the local currency.

In other words, the indirect quote will depend on the country is used as the reference point. If the trader is in Canada and wants to express the USD/CAD currency quote in an indirect manner, that quote will be expressed as units of USD required to buy 1 CAD e.g. 1.0078 USD = 1 CAD Initial Margin – The deposit a customer needs to make before being allocated a trading limit. It can also be described as the initial capital that a broker mandates a trader to have in his account to be used as collateral for every leveraged trade opened in the market.

The requirements for initial margin differ from broker to broker and from country to country. In the US, FINRA requires traders to have an initial margin of 25% of the amount obtained from the broker as a leverage for the trade. Instant Execution – The provision of quotes to the trade system without a request. An instant execution is an instruction to the broker to fill a client’s order at market price. It is used when the trader wants to get into a position immediately so as to profit from that position.

Interbank Market

This is a financial market that features strictly bank to bank trading of currencies, money market and other financial instruments.

In other words, this is the banks’ market.

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No other class of investor can trade here. An example of an interbank market is the interbank currency auction where central banks sell foreign exchange to commercial banks, who now provide same for customers who need them.

Interest Rate Carry

The income or cost associated with keeping a foreign exchange position overnight.

This is derived when the currency pairs in the position have different interest rates for the same period of time. The interest rate carry is the basis of the carry trade, where traders look for currency pairs that feature a high interest rate yielding currency and another with a lower interest rate.

L

Leverage

Ratio between the amount of money on the account (deposit) and offered funds.

Trades in the Forex market are performed in the range of tens of thousands (mini-lot accounts) or hundreds of thousands (standard lot accounts).

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Many traders cannot afford these amounts, so brokers offer to match the trader’s funds with a corresponding ratio of trading capital so that the trader can meet the obligation for the trade. These borrowed funds provided by the broker is what is called leverage. The amount of leverage used depends on the ratio of the trader’s funds to the broker’s funds.

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For instance, the leverage minimum in the US is 1:50, meaning that for every $1,000 the broker can match the trader’s funds with $50,000. Limit and Stop Levels – These are the price levels at which a trader has set a take profit target and stop loss for his forex trades respectively.

Some trading platforms require the trader to set the profit and stop loss targets using a Limit and Stop order, and the price levels that are chosen for these targets are known as limit and stop levels. Limit Order – An order to execute a transaction at a specified price (the limit) or better.

A limit order to buy would be at the limit or lower, and a limit order to sell would be at the limit or higher. This order type is used when the trader expects the market to retreat before advancing (for Buy Limit) or to advance before retreating (for Sell Limit). Another way of using the limit order in an open trade is to set a profit target so that once the trade reaches the Limit target, the trade is automatically closed in profit. Liquid Market – This is a market in which there is a large number of buyers and sellers, such that trade volumes are high and it is not difficult to get matching order quotes filled because there is always a ready buyer or seller to match any order type.

Orders in a liquid market are fulfilled instantly because there are always buyers to buy sell orders and sellers to match buy orders. Liquidity – Refers to the relationship between transaction size and price movements. For example, a market is “liquid” if large transactions can occur with only minimal price changes.

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The Forex market is described as being very liquid because transactions that are carried out in this market are in the region of hundreds of thousands to millions and billions of dollars. Where traders can only afford hundreds to thousands of dollars, market makers step in to acquire positions from the liquidity providers so as to bridge the liquidity gap, and these positions are resold to such traders in smaller chunks.

Lock In Profits

This is a system of using a trailing stop order (i.e.

a stop loss set to a few pips below {for long orders} or above {for short orders} for an active forex trade with unrealized profits such that the trailing stop follows the market price by the set number of pips if the trade moves in the trader’s favor, and locks the profit by staying stationary when the trade moves against the trader. Locked Positions – Buy and sell positions on the same asset with the same trading volume. Locking of positions is an emergency hedging action taken to prevent further increase of a floating loss in a trade that has moved adversely to a trader’s position.

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If a trade in one direction is going bad ans there is a likelihood it may continue for some time, the trader may decide to place another trade in the opposite direction to curtail further losses and buy time to evaluate the positions.

Long Position

Open position to buy an asset, with the expectation of profiting from advancing prices. In Forex, a long position involves buying the base currency and simultaneously selling equivalent units of a counter currency.

Loss

A loss is a situation where the price of a currency pair moves against the direction of the trader’s position such that when the trade is closed, the trader ends up with less account equity than when he started the trade.

For instance, if a trader goes long on the EURUSD at 1.2908 and sets a profit target of 1.2958 and stop loss of 1.2868, and the currency retreats to hit the stop loss at 1.2868, then the trader has experienced a loss on the trade.

Lot

Exchange transactions unit.

A lot is the measure of the trade volume or trade amount invested in a Forex trade, and is equivalent to 100,000 units of the base currency in a Forex transaction. A Standard lot can be subdivided into mini-lots (one-thousandth of a lot or 1/1000 lots) and micro-lots (one-millionth of a lot or 1/1,000,000 lots).