Forex, or foreign exchange, is the concept of the global market for buying and selling foreign currencies. It’s essentially a decentralized marketplace. Investors and speculators can anticipate the strengthening or weakening of one currency against another. By assessing the relative value of a particular currency and determining the rate at which it’s changing, one can make trading decisions that enable them to obtain purchasing power and turn a profit.
Common currency exchanges include U.S. dollars and Euros. The Australian dollar comes into play with many exchanges as well. Relative values and exchange rates are constantly changing. The activity across the global foreign exchange system determines what the relative value of different currencies are.
The forex market, formed during the 1970s, has the highest volume trading of any system in the world. Transactions occur across continents and 24/7 during the week. To get involved, one must become familiar with the many forex terms. It doesn’t necessary require a whole lot of technical knowledge. You can gain an understanding by becoming familiar with the terms and understanding them. Here are a few of the most common ones.
Account: A transaction record, showing the goods and services owed to one party by another in the trading or brokerage process.
Agent: Aside from the principal individual in a financial transaction, the agent is an intermediary that conducts transactions on their behalf.
Ask Rate: The lowest price on the market for which a given financial product is being sold.
Ask Size: A total number of shares being sold at the most current ask rate.
Ask: An offer price at which a product can be purchased by a trader. This price is on the right side of a currency pair.
Aussie: An AUD/USD pair. Some traders and brokers refer to it as an Oz or Ozzie.
Bear Market: A market trend in which prices decline for a prolonged period of time. The attitude towards trading and the overall market is generally pessimistic.
Bid: The price offered, and which a buyer is prepared to purchase a currency for. Also the highest a broker will pay at the most current time.
Bull Market: A trend in which prices continue to rise for an extended period of time. The general outlook is overall more positive.
Call: The option for a holder to buy the financial instrument in question, at a specified price. A call is open for only a fixed time period.
Call Option: The investor can buy stock, shares, or futures at a specific price. It doesn’t give them the exclusive right to, but the trader earns on the interest rate difference between two countries.
Candlestick Chart: Shows the opening and closing prices of the day plus the trading range. Shaded rectangles mean the price was higher at opening; an unshaded shape means the close price was higher.
Cash Price: What a financial product would cost if the trader requests instant delivery, or what the price is at a given moment.
Chart: A visual map of price activity and exchange rates over time. Price charts, for example, represent value on the vertical axis and time across the bottom.
Cost of Carry: The price for holding an open position or borrowing funds to do so. This is usually quoted as dollars, or pips, per day, and affected by interest stability parity between two countries.
Cross Currency: Any currency pair that does not involve the U.S. dollar. Traders do not have to exchange a currency into American dollars before trading with another.
Cross-Currency Swap: An exchange of interest payments and loan principals on a loan in one currency for an equally valued loan in another.
Cross Rate: The exchange rate between two currencies that are not official to the country they’re quoted in.
Currency Futures: A contract allowing the price of a currency to be set for future purchase or sale, serving as a hedge against foreign exchange risk.
Currency Pair: A quotation and pricing scheme in which base and quote currencies are paired up, showing what’s needed to purchase one unit of a particular base currency.
Currency Symbol: A graphic that serves as a short hand for a country’s or region’s money. These have been created by the International Organization for Standardization.
Dealer: The party who places the order to buy or sell; they can be the principal trader or act as a counterpart.
Depreciation: A decline in a currency’s or asset’s value, tracked over time. This is most likely due to influences across a market.
Dividend: Typically indicated as a value per share, the amount of a company’s earnings that is distributed among shareholders in the organization.
Economic Indicator: One that reveals insight into economic growth, such as GDP, trade deficits, employment rates, production, etc.
Exchange Rate: One of the most important forex terms, a percentage of how much one currency changes in value compared to another over time, influenced by changes in supply and demand.
Fed Fund Rate: A short term interest rate on Fed funds that signals the Federal Reserve’s perspective on the state of the global financial market.
Fed: Can refer to either the U.S. Federal Reserve Bank or its policy-setting body, the Federal Open Market Committee.
FEDAI: The Foreign Exchange Dealers Association of India. Includes all dealers of forex and sets rules for fixation of commissions and regulations for forex transactions in India.
First In First Out: Positions in a currency pair get liquidated in a specific order. This reflects the same pattern in which they were opened.
FOMC: The U.S.-based Federal Open Market Committee that sets money supply targets. These are typically set through Fed Fund interest rates.
Hedge: An investment position, or combination thereof, intended to reduce the risk of one’s primary position in that particular investment.
Japanese Pairs: Here, the pip is the second digit to the right of the decimal point. These are different because the currency is in general devalued against most other pairs.
Leverage: A multiple by which an amount traded is larger than the margin needed to trade the monetary value. Also refers to the use of credit or margins in trading.
Limit: An order in which one buys at a specific price, when the market declines to it, or sells at a pre-determined price if it moves up to that.
Liquidity: In regards to market volume and activity, the cost effectiveness of trades and orders. The more liquid a market, the more frequent the ask price will be lower. Larger transactions will also not impact interest rates as much.
Liquid Market: When there are enough buyers and sellers so prices can move smoothly in a given direction.
Major Currencies: U.S. Dollar (USD), Euro (EUR), Japanese Yen (JPY), Great Britain Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD). These forex terms are the most common.
Major Pairs: The four most heavily traded pairs on the forex market. These include EUR/USD, USD/JPY, USD/CHF, and GBP/USD.
Managed Forex Account: One where, on the client’s behalf, a money manager does the trading. The manager acts as an advisor for a fee.
Margin: A minimum deposit needed to keep a position open or maintain it. The term used margin refers to an amount to keep the position open, while free margins are amounts used to maintain them.
Margin Call: A notification telling a trader their account has fallen below the money needed to keep a position open. It asks the trader to add money or close an open position.
Mini Forex Account: Traders can enter positions one-tenth as large as the standard forex account. In U.S. dollars, a pip in a mini lot is $1 compared to the standard $10.
Minor Currencies: Currencies outside of the most commonly traded ones. Sometimes traders and investors identify them as “Emerging” or “Exotic” currencies.
Market Order: Any order in which the trader buys at the currently listed Ask price.
Marked-to-Market: A re-evaluation of open positions, based on current prices. The value of open trades are shown on account balances, which is now done electronically. New values are used to re-set margins.
Nominal Quotation: Also called nominal quote or nominal price, the quote a futures exchange or broker generates for contracts not traded for a given time.
Open/Open Position: A valid order not yet executed, which is subject to changes in market prices and exchange rates.
Open Order: Remains valid until executed or cancelled, or is executed at a predetermined currency or share price.
Options: Tradable contracts in which one can buy or sell commodities, currencies, or securities at a pre-set price in the future, with potentially higher returns than shares.
Pip: Represents the smallest possible unit of price for a currency. It is 0.0001% for exchanges such as EUR/ USD, and .01% for the USD vs. JPY.
Political Risk: Changes imposed by the government of a particular country and their impact on a trader’s or investor’s position.
Position: The trading perspective expressed by the activities of a buyer or seller, or a cash value an investor owns or owes.
Profit: The difference between a higher sale price and what a given financial product was initially bought for (in forex terms, its cost price).
Quote Currency: Also called secondary or counter currency, this is the second currency quoted in a forex pair. It’s the foreign dollars in a direct quote, and the domestic ones in an indirect quote.
Risk: Potential returns on an investment or trading action, considering possible outcomes and the uncertainty associated with these. Higher risk often comes with better returns.
Risk Capital: Capital funds an investor can work with, and which does not contribute to their lifestyle or living expenses.
Risk Management: When analytics or appropriate trading strategies are used to avoid excessive risk to one’s financial portfolio.
Rollover: For a charge, a forex position is moved over to a delivery date following the day of expected delivery. The price includes the interest rate difference between both currencies.
Settlement: Not always involving physical exchanges, a settlement is when a trade is recorded along with other aspects of a particular transaction.
Short Position: The position an investor finds themselves in when they engage in short selling.
Short Selling: A financial instrument is sold when the trader doesn’t actually own it. If the price declines it can be bought back for profit.
Spread: A value representing the difference between a currency’s bid and ask prices. The narrower the spread, usually the higher the market liquidity. It’s usually expressed in pips.
Sterling: Often called the British Pound or Pound, it is also a Forex term used to refer to GBP/USD.
Stop Entry Order: An intention to buy higher than a current price or sell below it. Traders often do this if they anticipate market direction and are looking for a specific price to start an order.
Stop Loss Order: An order sold below a current price or bought above it, often used for risk management in case the market moves against the trader’s profit goals.
Stop Order: In forex terms, an order to buy or sell based on a preferred price. Once this is reached, the order is executed at the best available value.
Stops Building: The accumulation of stop loss orders made by traders looking to move above or below the market.
Technical Analysis: The use of charts to assess price trends and predict where prices will move. Common examples include moving averages, Bollinger Bands, and standard deviation.
Ticker: A moving or frequently updated graph or chart that shows current prices or the recent history or trends of a currency.
Uptick: An incoming price quote that’s higher than the quote before it. Both prices have to be from the same currency.
Uptick Rule: Per U.S. regulations, a security can only be sold short if the trade prior to the sale was priced lower than that during the short sale.
Volatility: A market or security’s statistical price movement over time. A volatile market often carries with it higher risk. Standard deviation is used to calculate volatility.
These forex terms should give you a good introduction to foreign exchange trading. There are many more, but as you delve into the subject the relation between each and how they factor into the big picture will become clearer.