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Forex Terms

Forex Terms FX DictionaryWe have put together an extensive list of forex terms to help you learn trading forex and orient in the world of financial terms.

Knowledge of forex terms is vital, as most of the trading tips, deposit bonus tips and other articles include the trading jargon. Without knowing these fx terms it will be difficult for you to understand the reviews and tips on Forex Bonus Lab.

Learning to trade begins with the definitions and hence we strongly recommend you to browse through the terms.

Check the forex terms displayed in the alphabetical order below and if you are unable to find what you are looking for here – get in touch and we will give you a hand.

A-Z forex terms

Account:
A place where the client’s equity is reflected and the overview of transactions is displayed.

Aggregate Demand:
Includes all the demand in the economy, such as private spending, government spending and investments. It shows all the products and services that will be purchased and at what price. It can be expressed in real or nominal terms.

Anonymous Trading:
Even if on the market the bids and offers are visible, the identity of the starter of the transaction is hidden. This is in order to protect the anonymity of the customers, especially if they are large firms or transact large volumes.

Appreciation:
The increase in the value of an asset. In case of currencies, the increase is relative compared to the others.

Arbitrage:
Opportunity to generate profit at no risk by using the differences in bid and ask prices at two different exchange places. For example, if the bid of an asset is higher than the ask price of the same asset on another market, arbitrage opportunities take place. Such opportunities are extremely hard to spot and by making trades in order to profit from the price difference between the rates, the gap of the quotes is quickly depleted until the market is in equilibrium again.

Ask price:
Ask price also called offer price or simply ask is what a seller demands for a good. It can be firm or negotiable. In the former case it will not be changed. In the latter case the seller may be convinced to lower it if he agrees with a bid.

Asset Allocation:
The percentages of the total portfolio invested in different assets, such as: bonds, stocks, currency, real estate, futures or others, in order to minimize the risk and to increase the total profitability.

Attorney in Fact:
Is a person that has the authority to represent another person in order to initiate transactions or to sign documents on his behalf.

Authorized Dealer:
A broker that is backed up by regulating financial authorities with regard to his activity in dealing with foreign exchange and customer accounts.

Back Office:
Is the administrative part of financial institutions that makes financial transactions and confirms them. Responsibilities include accounting, record keeping, documenting, and complaining with the regulation and clearance.

Balance of Payments:
It shows all the transactions of a country in a certain time interval. Economic transactions between countries are compared in order to find net export of different products, among other things. In this document all investments regarding the exterior are included as well as the trade balance.

Bank for International Settlements:
It is an international organization that promoted cooperation between financial institutions and central banks. This organization is located in Basel and acts as a guide to central banks. Data regarding international loans and transactions is collected and monitored and measures regarding international bank activities are implemented.

Base currency:
It is the first currency quoted in a currency pair on Forex. It is also called accounting currency or domestic currency. A firm may use the base currency to represent all profits and losses, for the purpose of accounting.

Basis Point:
It is a unit of measure equal to 1/100th part of a 1% change. It represents 0.01% of the modification of an asset’s price. It is generally used for bonds, interest rates and equity indexes.

Bid price:
It is the highest price that a buyer is willing to pay for an asset. It can also be referred to simply as the bid.

Big Figure:
It is the first number after the decimal point in a quote about the exchange rate. Because it changes often it is omitted in quotes.

Bonds:
There are instruments used to obtain capital and reach maturity in more than one year. To buy a bond is to loan money to companies and institutions. The coupon is similar to the interest rate in this case; however interest rates have a negative correlation with bond prices: when one rises, the other falls. There are a lot of types of bonds: bills, with maturity between one and five years, notes, with maturity between six and twelve years and bonds with maturity greater than twelve years.

Broker:
Is an intermediary that sends the orders to market for his clients in exchange for a commission or fee.

Buy a bounce:
It is a recommendation to take a long position if the price falls from a certain level, or bounces.

Buy break:
It is a recommendation to take a long position if the price passes over or breaks a previously specified level; this can be a support level.

Candlestick Chart:
It is similar to a bar chart, because it shows the opening, closing, high and low prices. When the closing price is lower than the opening price, the candlestick is filled and if the closing price is higher than the opening price, the candlestick is empty.

Carry Trade:
It consists on buying a currency that has a higher rate of interest and selling one with a lower rate of interest in order to profit from the difference between interest rates.

Central Bank:
It is an institution independent from the government that has the responsibility to implement the monetary policy of a country and to print money.

Closing a Position:
It involves not maintaining a position any longer and this can be realized by selling a long position or either buying back a short position.

Commission:
Is a sum of funds (a fee) that the trading intermediate (a broker) charges for being an intermediate at trading.

Confirmation:
It is a document which specifies details about a transaction, including: price, date, fees, commissions and settlement terms.

Contagion:
This term specifies the spread of economic problem from one country to another one that is located nearby. It can be seen during different crisis both in Latin America and the latest one in Europe.

Cost of Carry:
When an investor borrows money in order to maintain a position, this is called cost of carry.

Counter currency:
It is the second currency used as reference in a currency pair. Major currencies are more likely to be the base currency, rather than the counter currency, in a currency pair. When viewing a currency code the counter currency is listed after the base currency and also it is separated with a slash.

Counterparty:
It can be a person or an institution that is one part of a financial transaction. There is a risk associated with it, the counterparty risk that presents itself if the counterparty doesn’t act in accordance with the terms.

Country Risk:
It is the risk that the country will not fulfill its obligations regarding its financial contracts. This can cause problems for that country, as well as for the other country.

Credit Checking:
It is the process of verifying whether the counterparty has enough credit in order to act in accordance to the terms of the contract. This check is realized after the price has been determined, but before the details have been plotted.

Cross Rate:
It is the rate of exchange between two currencies, neither of which is the major currency.

Currency Risk:
It is the risk associated with large fluctuations in the exchange rate that can cause problems for traders and institutions that hold significant amounts of those currencies.

Day trading:
It means that the positions associated with trades are opened and closed in the same day.

Deficit:
It is an unfavorable condition it the financial statements. It can refer to liabilities that are greater than the assets, to losses that are greater than profits or to expenditures that are greater than income.

Delivery:
It refers to the precise time when both parties realize the exchange.

Depreciation:
It means a decrease in the value of an asset or currency pair.

Devaluation:
It happens when the value of a currency falls relative to another. It is different from depreciation, because depreciation happens because of all the factors in the market and especially because of the supply and demand. Devaluation happens because the government decides the currency should around a lower value in order to produce benefits for exporters and to discourage importers.

Economic Exposure:
It happens when the holdings in a currency of a country are exposed to modifications of the exchange rate.

Efficient Markets:
In these markets the price shows the accurate value of products and there are no undervalued assets.

Electronic Communication Network (ECN):
This is a general trading term and one of the most popular forex terms. An Electronic Communication Network (ECN) makes possible the trading of financial products by a computer system. All market participants are connected in that electronic network and all the orders, executions and publishing is made almost instantly.
The process is such that when orders are registered, the ECN matches orders of the same price and volume and also unmatched orders are published under the name of the ECN to all subscribers so that they can enter orders of the same price and volume to execute these unmatched orders.
Revenue is generated by charging subscribers a commission or transaction fee for every trade. A trader can be sure that he is anonymous in trades because the ECN is listed as counterparty in trade execution reports.

End of the Day:
It is an accounting procedure in which the value of an asset is recorded each day at its market value. This is different from the accrual system in which only cash flows are recorded.

FCA:
The Financial Conduct Authority (FCA) is separated from the United Kingdom government, is a financial regulatory body in the UK and it procures its financing by charging fees to brokers and participants in the financial services industry. The FCA provides services to consumers and helps maintain the integrity of the financial markets in the Kingdom of England. Its authority applies to the retail and wholesale financial services firms. Its predecessor is the FSA and like the FSA it is structured as a company limited by guarantee. If the FCA senses misconduct, it is able to ban financial products for up to a year or even consider an indefinite ban.

Federal Reserve:
It is the central bank in the United States. Such forex terms are easy to encounter in various news releases.

Forward Contract:
It is transaction in which the price of an asset is computed before the delivery. The forward price is dependent of the interest rates.

Future Rate Agreements:
There are transactions that make sure borrowing and lending is realized at an interest rate that is constant for a specified period of time.

Front Office:
In brokerage forex terms, it is composed of the employees that directly interact with the customers in order to make sales and transactions in a financial company.

Futures:
There are contracts that specify a fixed price that has to be met by both parties at a future date in a transaction of equity, currencies or commodities. There are different from forward contracts, because there are standardized.

Inflation:
It is the decrease in purchasing power caused by the increase in prices. It is computed by examining changes in the price index that can be a GDP deflator or a consumer price index.

Initial Margin:
The part of the price of an asset that needs to be in the trading account in order to initiate a transaction.

Leading Indicators:
Those are indicators such as consumer price index, unemployment rates, personal income, retail sales and discount rate and can be useful for predictions.

LIBO:
It is the London Interbank Offer Rate used by banks when they lend to others. It is a reference for interest rates for the short term.

Long Position:
It means buying and holding assets such as stocks, bonds and currencies with no immediate intent to sell because of the anticipation that the price will rise.

Lot:
This is generally one of the forex terms and mainly MetaTrader 4 term. A standard trading lot consists of 100,000 units of a stock or currency. In addition, there are also mini lots that contain 10,000 units and micro lots containing 1,000 units. This means to buy or to sell 100,000 of the base currency and in the same time to sell or to buy the equivalent number of units of the counter currency.

Margin:
It is a part of the total value of a transaction that needs to be in an account to serve a similar purpose to collateral. During the investment with borrowed funds, the margin requirement will ensure that the losses can be registered by the trader and not by the broker.

Margin Call:
It is a notification given by the broker to the trader that informs the latter that he must supplement his deposits in order to realize the margin requirement. This is usually given after an asset has decreased in value, making the trader register losses.

Market maker:
A market maker makes market. Another way of saying that is that it provides liquidity to the market or clients by trading against its clients as the counterparty thus taking positions and risks on its own trading book. An inventory of the currencies the market maker offers is kept. The market maker has a dealing desk to trade against clients using this inventory. It also has access to a lot of liquidity providers for market execution when it chooses to.
Revenue is generated from spread in market execution mode and from trading against clients in market maker dealing desk execution mode. The broker makes a profit when the client closes a position with a loss. For this reason, traders are sometimes not willing to work with a broker that makes money when they lose, because that type of broker can sometimes use unfair practices such as delaying the market orders for profit.
A trader’s identity is known and can be used by the broker to the advantage of the latter or to the disadvantage of the former. For instance, less successful clients may be transferred to dealing desk execution for the broker’s advantage and successful clients may be put to market execution so that the broker doesn’t have to pay them or be put to dealing desk execution but be also given cumbersome execution, slippage and re-quotes.

Market Order:
It is an order to buy or sell an asset at the available price.

No Dealing Desk (NDD):
A way of Forex trading that provides immediate access to the interbank market, where the trading of fx pairs is executed. It is different than trading through the dealing desks that are found in many banks and financial institutions. In the case of the use of this no dealing desk system, positions are automatically offset and then transmitted directly to the interbank.

Off-Balance Sheet:
Transactions the not appear on the organization’s balance sheet, such as Forward Rate Agreement.

Offsetting Transaction:
It is entering an opposite position to an existing one, thereby closing a position. An offsetting transaction to a buy is a sale.

One Cancels Other Order (OCO) aka One Cancels Another Order:
This type of order is mostly used during the news trading. When setting this order, a trader may choose one bid and one ask rate at which a position should be executed, a once an order has been executed, the other one is getting cancelled.

Open Position:
An order that waits to ne executed and is still viable. In this period of time the trader is exposed to changes in the price.

Open Order:
An order that is viable until is executed or cancelled. It is executed when the price reaches a specified level.

Overnight:
In trading, stocks and forex terms, a position that is maintained until the next day.

Pegging:
In order to obtain price stability, a country can use pegging to fix their exchange rate relative to another’s currency.

Pip:
In forex terms, a pip is the smallest price change that can be registered by an exchange rate. The price of most currency pairs is expressed to four decimal places and the smallest change is that of the last decimal point. It is the equivalent of one basis point, or 1/100 of one percent.

Political Business Cycle:
It is a theory in which changes in the economy are influenced by political factors present especially near the elections. The economy is expanded before the elections in order to gain the trust of the voters and reforms are implemented after the elections, so that the political party doesn’t suffer the consequences.

Political Risk:
It is the risk that investors will be driven away by changes in government policies and is common especially in third world countries.

Premium:
In order to obtain the forward or future price, the premium is added to the spot price. In general, “premium” forex term stands for an expected risk associated with the currency fluctuations and difference between the interest rates.

Price Transparency:
It is the availability of information regarding prices, bids and offers. It is preferable the all investors have access to information.

Realized and Unrealized Profit:
Gains derived from favorable evolution of the price of the asset that has not yet been sold are called unrealized profit. When this asset is sold, we can talk about realized profit.

REPO:
In the repurchase agreement a security is sold and then bought back after a short amount of time has passed, usually one day. They are a way to raise capital on short term.

Resistance:
In forex terms, resistance is a level over which the price is not expected to pass by rising. At that level it is expected to be enough supply that the sellers will determine the price to have a downward trajectory. In the case of the Forex Market, it is a level that the currency cannot rise over.

Revaluation Rates:
The rates that the traders use for determining their profits and losses every day.

Risks:
There are uncertainties regarding future outcomes and they can be associated with the price or the counterparty. Higher rates of return will determine higher levels of risk.

Spread:
It shows what difference there is between the bid and the ask price of a security or asset.

Straight-Through Processing (STP):
A STP broker manages the client’s orders by passing them directly directly to its capital providers, which can consist of large banks, ECNs or other brokers. When relieving a market type of an order, the dealer sends an order of exactly same volume and instrument under the name of the STP broker to the liquidity provider that has the best price for that volume. When the liquidity provider fills the order, the client order is executed with a spread added or subtracted from the market execution rate. The buy and sell prices of a currency pair a STP broker displays to its clients are the best bid or ask prices that can be found on the market. The more liquidity providers a STP broker has the deeper is the liquidity pool and the lower the final spreads for the clients.
Revenue is generated by STP brokers from the spread added to the price obtained from liquidity providers. This spread can be fixed or variable. Variable spread can change as market condition changes. The identity of the trader remains anonymous in trades executed by a STP broker because the STP broker is listed as the counterparty in trade execution report.

 

ForexBonusLab has put together an easy and quick overview of the most commonly used forex terms. If you are looking to explore more terms or want to get a detailed information, visit investopedia section of forex terms.

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  • markblack29

    What a useful post, it obtains everything you need to know in short version, so nice job. I recommend everyone to read this whenever having any doubts about terms it’s pretty helpful