Forex Terminology FAQ

Explanation of the Different Terms in Forex Trading

forex currenciesIt is important for forex traders to get acquainted with the terminology that is commonly used in the forex market. So when you come across some of these terms in materials and resources about the market, you will not be lost in space.  Here are some of the terminologies that you will come across very commonly in the forex market.

Ask

This goes by many names such as the Ask Price or Offer price. This is the price at which a dealer/broker is prepared to sell a currency to the trader. It is listed as the second price in a forex quote. If the price quote for the GBP/USD is quoted at 1.6201/1.6203, the ask price in this quote is 1.6203.

AUD

This is the ISO standard abbreviation for the Australian Dollar.

Aussie

This is the colloquial name given to the Australian Dollar. The Australian Dollar is also known as Aussie Dollar.

Bid

This is also known as the Bid Price, and is the price at which a dealer/broker will buy off a currency from a trader. It is also the price at which the trader will sell a short position to the broker when closing the trade. The bid price is the located on the left hand side of the forex quote. If the GBP/USD is quoted at 1.6201/1.6203, the bid price is 1.6201.

Cable

This is the colloquial name of the British Pound. The term was derived from the method of delivery of information of the currency price of the British Pound to relevant parties, which was via the use of cable as the information service.

Canadian Dollar

This is the currency/legal tender in Canada, and is also known as the Loonie. The ISO abbreviation is the CAD. 

Candlesticks

Candlesticks are a format of price representation where price action is displayed in shapes that resemble candles with a body and a shadow (the wick). Developed by the Japanese more than 300 years ago, candlesticks give a form of price representation which give an indication of what buyers and sellers are doing in the market.

Carry Trade

This is a forex strategy in which the trader buys a higher interest yielding currency while simultaneously selling a lower interest yielding currency, in order to earn from the interest rate differential between the two currencies. The AUDJPY and NZDJPY are the favourite carry trade currency plays in the forex market. 

Channels

Also known as the Donchian channel, the channel is an indicator which uses trend lines to capture the highs and lows of the price action over a period of time, hence defining the range of support and resistance for that time frame.

Day Trading

This is a trading style in which the trade opens and closes forex positions within the same trading day.

Dealing Desk

A dealing desk is a department within a brokerage firm where buying and selling of securities is done by the brokers on behalf of the trader. It is also the department within a market maker brokerage operation where prices are fixed on the forex platforms.

Dealer

The dealer is a corporate entity that either trades securities for itself as a market maker, or buys and sells securities from clients as a broker.

Depreciation

This is a decrease or fall in the value of a currency against other currencies in the forex market as a result of a bearish sentiment by traders on that currency.

Devaluation

Devaluation is a term used to describe a deliberate reduction in the value of a currency, usually as a result of an intervention by the central bank of the affected country. This is usually done by central banks of countries which operate export-oriented economies. Examples are Japan and Switzerland.

Economic Indicators

Economic Indicators are a collection of data and reports that provide information about the state of several sectors of a country’s economy. These are usually known as the fundamentals. 

ECN

ECN stands for Electronic Communication Network, which is a network in which traders receive pricing of currencies from several liquidity providers and orders are executed via direct market access, without the intervention of a dealing desk.

Euro

This is the common currency of the European Monetary Union member states. It was introduced in 1999.

Fed

This is a colloquial term commonly used to refer to the Board of the Federal Reserve Bank, the central bank of the United States.

FOMC

The FOMC or Federal Open Market Committee is a 12-member committee of the US Federal Reserve that is responsible for the setting of interest rates as well as monetary policy for the Federal Reserve systems. The composition of the Federal Open Market Committee is made up of the 7 members of the Federal Reserve Board of Governors, and 5 of the 12 regional Federal Reserve Bank Presidents.

Fixed Exchange Rate

A fixed exchange rate system is a system where the value of a currency relative to other currencies is usually fixed by the local central bank. Example of a currency with a fixed exchange rate system is the Chinese Yuan Renminbi.

Floating Exchange Rate

This is a currency exchange system where the value of a currency is determined by market forces on the forex exchange market.

Forex

Forex stands for foreign exchange, and is used to commonly refer to the practice of buying and selling of currencies in the global currency market. 

Fundamental Analysis

This is a method of forex market analysis using socio-economic and political data to determine the direction of currency price movements. 

GBP

This is the ISO standard abbreviation for the British Pound, the currency of the United Kingdom. 

Hedge

Hedge or “hedging” refers to a capital protection strategy where a trader uses any of several methods to guard the forex portfolio against adverse price movements of a currency.

Kiwi

This is the colloquial name given to the currency of New Zealand, the New Zealand Dollar. It is named after the wingless bird called the Kiwi, which is native to New Zealand. 

Major Currencies

These are the most widely traded currencies in the forex market, accounting for most of the trade volume in the forex market. The major currencies are US Dollar, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, New Zealand Dollar and Swiss Franc. 

Market Hours

“Market hours” refers to the trading times in which traders can buy and sell currencies in the forex market. Despite the fact that forex is a 24 hour market, there are peak periods at which market volatility is at its maximum.

Non-Farm Payrolls

The Non-Farm Payroll report (NFP) is a statistic that measures the total number of jobs that have been added to the US private sector, excluding general government workers, private household employees, employees of non-profit organizations and employees in the agricultural sector.

NZD

This is the ISO standard abbreviation of the New Zealand Dollar.

Pending Order

A pending order refers to any of several types of orders which a trader can set for future execution in order to get the best possible entry price that will lead to maximum profit.

Pip

A PIP stands for Percentage Interest Point, and refers to the measurement of price movements in a currency pair. It is usually measured in decimal points, the minimum movement of which is equivalent to ten-thousandths of a point (0.0001).

Range Trading

Range trading is a style of trading where a trader buys a currency pair when its price is close to support levels and sells a currency pair at close to resistance levels. This is a trade strategy used commonly in sideways or consolidating markets.

Resistance

Resistance is defined as a price level that an asset has difficulty getting above. It is a point at which rising prices either stall before continuing upwards (if the support does not hold firm), or a point at which prices reverse completely downwards (strong support). 

Re-quotes

A re-quote is a market phenomenon where the original entry price of a trader’s order is rejected and a call made for the trader to buy the asset at a new price, based on the quick movement of prices making the former order untenable.

Rollover

A rollover is a trade strategy where a forex position is allowed to stay open to the following deliver date. It also means maintaining an open forex position overnight. In this instance, the rollover incurs a charge which is equivalent to the interest rate differential of both currencies in the pairing, in which case the trader who is long on the higher interest yielding currency is paid the charge while the trader who is short on the higher yielding currency will be debited the charge.

Short Trade

This is the trade position that aims to benefit from a downward move of a currency pair. It involves selling the base currency while simultaneously buying the counter currency.

Slippage

Slippage is a market phenomenon where increased market volatility cause traders’ orders to be filled at more expensive prices. These orders could be entry orders, in which case a long order is filled at a higher price, or a short order in which case the order is filled at a lower price. Slippage could also occur with stop loss orders, in which case the position is closed out at a price far beyond the stop loss.

SNB

This stands for the Swiss National Bank, the central bank of Switzerland. 

Speculation

Speculation is the practice of taking on high risk trades in order to profit from price fluctuations for the short term.

Swissy

This is the colloquial name for the currency of Switzerland, the Swiss Franc. This currency is also known as the Confederatio Helvetica Franc (CHF).

Support

Support is defined as a price level that an asset has difficulty falling below. It is a point at which falling prices either stall before continuing downwards (if the support does not hold firm), or a point at which prices reverse completely. 

Technical Analysis

This is a form of market analysis that does not use economic indicators but instead, utilizes technical indicators and chart information as parameters for determining future price direction.

Trailing Stop Loss

The trailing stop loss is also known as the trailing stop. It is an automatic tool that adjusts the stop loss to trail behind the market price of an asset by a pre-determined amount when the market moves in the trader’s favour.

USD

This is the ISO standard abbreviation for the US Dollar, the currency of the United States and US territories.

Volatility

This is a phenomenon commonly seen in the forex markets whereby increased market activity by traders leads to wide movement in prices.

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