Basic Terms of Banking
Appreciation - A rise in the price or value of a currency (or other asset) over time.
Arbitrage - The purchase of securities on one market for simultaneous or immediate resale on another market with the goal of profiting from a price discrepancy. Currency traders often arbitrage against exchange risk by buying a currency for immediate delivery but also selling that currency on the forward market at the same time.
Ask Rate - The price at which sellers offer currencies to buyers.
Asset - Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
Asset Allocation - The division of funds between different assets (items of value such as property, financial instruments, commodities and cash) with the goal of diversifying ones personal holdings to manage specific risk / reward expectations.
B
Back Office - The departments and processes related to the settlement of financial transactions.
Bank Wire - A computer message system linking major banks. It is used as a mechanism to advise the receiving bank of some action that has occurred, i.e., the payment by a customer of funds into that bank's account.
Base Currency - In the following pair USD/EUR, the first currency (in this case USD) is referred to as the base currency. The primary base currency is the US dollar, meaning that quotes are most commonly expressed as a unit of $1 USD per the other currency quoted in the pair.
Basis Point - One hundredth of a percentage point - 0.01%.
Bear (bearish) - Someone who expects the price of a given financial instrument or the overall value of a given financial marketplace to decline in value and thereby is a seller of the instrument(s). This individual is said to be bearish on the instrument / marketplace. Opposite of bull (bullish).
Bear Market - A market distinguished by declining prices.
Big Figure - Dealer expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verbally without the first three digits i.e. "30/35".
Bid Rate - The price at which buyers offer to buy currencies from sellers.
Bid / Ask Spread - The difference between the buy (bid) and sell (ask) price. In the following example - 0.9853/58 the spread is 0.0005 or 5 PIPs.
Bretton Woods Agreement - An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (I.M.F.) and the post-World War II international monetary system of fixed exchange rates.
Broker - Any individual or firm in the business of buying and selling securities for itself and others. When acting as a broker, a broker/dealer executes orders on behalf of his/her client.
Bull (bullish) - Someone who expects the price of a given financial instrument or the overall value of a given financial marketplace to rise in value and thereby is a purchaser of the instrument(s). This individual is said to be bullish on the instrument / marketplace. Opposite of bear (bearish).
Bull Market - A market distinguished by rising prices.
Buying / Selling FX - An investor/speculator buys a currency pair (takes a long position), if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up. Selling the currency pair implies selling the first, base currency, and buying the second, quote currency. An investor / speculator sells a currency pair (takes a short position), if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.
C
Cable - Refers to the Sterling/US Dollar exchange rate. Derived from mid-1800s practice of New York sending sterlings dollar rate to London via a transatlantic cable.
Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.
Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.
Clearing - The process of settling a trade.
Commission - Fee charged by a broker for executing a trade.
Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction.
Contract - The standard unit of trading.
Counterparty - One of the participants in a financial transaction.
Cross Rate – Refers+ to an exchange rate between two non-US dollar currencies. Trading between two non-US dollar currencies usually occurs by first trading one currency against the US Dollar and then trading the US Dollar against the second non-US dollar currency.
Currency - Any form of money issued by a government or central bank and used as legal tender and a basis for trade.
Currency Risk - The probability of an adverse change in exchange rates.
D
Day Trader / Day Trading - Speculators trying to take advantage of market movements in very short time periods --- buying a currency and then selling it again may happen within hours or even minutes. Day traders are attracted to currency trading because of the size, liquidity, volatility, and accessibility of the market.
Dealer - An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.
Delivery - A trade where both sides make and take actual delivery of the currencies traded. Delivery is not the norm in FX trading. More commonly, an FX trade involves cash settlement of the difference between spot and delivery prices. Spot refers to any delivery within two business days. Forward refers to delivery beyond two days and usually quoted one year out in increments of 30 days (i.e. 1 month, 2 month, etc.).
Directional Forecast - A projection of bid/ask prices for a currency pair for a point in the future. The forecast displays the most likely future direction of prices. This direction reflects the latest price fluctuations as they are influenced by economic and political events. Directional Forecasts are designed for: Investors and traders who trade small to large volumes in the foreign exchange markets daily Professionals who do business internationally and who want to minimize foreign exchange risk due to currency price fluctuations. To find out more about directional forecasting, visit www.oanda.com.
Dollar Rate - The exchange rate of a foreign currency as quoted against the US dollar (USD). Some currencies are typically only quoted against the US dollar, such as the Algerian dinar (DZD) and the Andorran franc (ADF). The exchange rate of the Algerian dinar against the Andorran franc is thus computed from DZD-USD and ADF-USD.
E
Entry Order - An order to buy/sell a currency pair when the market reaches a specified price.
EURO - The currency of the European Union (EU) since January 1, 1999. The following countries have adopted the EURO in addition to maintaining their own unique currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.
Exchange Rate - The price of one country's currency expressed in another country's currency.
Exchange Rate Risk - The potential loss that could be incurred from a movement in bid/ask prices, or exchange rates.
Exposure - The risks that an investor accepts when holding an open position. When an investor buys EUR/USD, he exposes himself to risks associated with changes in the valuation of the EURO and/or USD markets.
F
Flat/square - Dealer slang used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.
Foreign Exchange Market - Market for trading currencies internationally. The foreign exchange market, also referred to as the Forex and FX market, is a decentralized market that has no physical exchange floor. Trading is done over the counter via phone, fax or electronic distribution networks. Turnover in this market is approximately $1.5 trillion USD daily, making it the largest, most liquid financial marketplace.
Forex - (see foreign exchange market).
Forward - The pre-set exchange rate for an FX contract that settles at a pre-determined future date. The forward rate is based upon the interest rate differential between the two currencies involved. Forward rates can be calculated easily given the fixed term interest rates of each currency and their current spot rates.
Forward Points - The PIPS added to or subtracted from the current exchange rate to calculate a forward price. If points are added, then the forward is priced at a premium. If points subtracted, then the forward is priced at a discount.
Fundamental Analysis - The study and analysis of economic, political and social data/events to predict the future movements of the market and guide ones FX trading decisions.
G
Gearing - (refer to margin trading or leverage)
Good 'Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.
H
Hedging - A strategy used to offset market risk, whereby one position protects another. Traders and investors in foreign exchange hedge to protect their investment or portfolio against currency price fluctuations.
I
Initial margin - The initial deposit of collateral required to enter into a position as a guarantee on future performance.
Interbank Prices - Currency prices/rates quoted between the large international banks, typically on transactions of US $1 million or more. These rates differ and are often more favorable than those quoted for smaller, retail transactions.
Interest Rate - Differential In FX trading, interest rate charges are determined by the difference between the interest rate on the base currency less the interest rate on quote currency. Interest rates are only paid on positions held over night.
L
Leverage - Refers to margin trading or gearing. The use of credit or borrowed funds to increase ones buying power.
Letter of credit - A document issued by a bank which guarantees the payment of a customer's drafts for a specified period and up to a specified amount.
Limit Order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 102.00/05, then a limit order to buy USD would be at a price below 102. (ie 101.50)
Liquidity - Refers to the ability to buy and sell with little or no impact on price stability. The number of players in a market/security has a direct impact on this ability. The FX market is the most liquid market in the world.
Long - To go long is to buy a currency / security. For example, if an investor believes that the Japanese economy is getting stronger and that, as a result, the Japanese Yen will appreciate in value, then he/she may want to buy Japanese Yen and take what is called a long position.
M
Margin - Collateral (could be cash, securities and/or unrealized profit) that an investor is required to keep on deposit to cover potential losses. If the margin requirement is 10% and a speculator wishes to buy $1 million EURO/USD, that speculator must have $100 thousand EUROS in value in his/her account.
Margin Call - A call for additional capital to bolster the equity in an investors margin account. Occurs when equity in the account is in danger of going below the required margin percentage threshold.
Market Maker - A pricing source that regularly quotes a two-sided market, meaning it supplies executable bid and ask prices.
Market Order - An order to buy/sell at the best price available when the order reaches the market.
Marking to Market - Common valuation method for calculating ones foreign exchange exposure at current market prices. Adjusting book value of holdings to reflect current market value.
O
Offer - The rate at which a dealer is willing to sell a currency.
One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.
Open position - A deal not yet reversed or settled with a physical payment.
Open Order - An open order is a request that a trade should be made automatically when the exchange rate of the specified currency pair crosses a specified threshold. The request will remain open until the specified threshold is reached. (see entry order)
Over-The-Counter Market (OTC) - A market, such as the FX market, in which counterparties trade via telephone, fax or electronic distribution network rather than from a physical exchange location.
Overnight - A trade that remains open until the next business day.
P
PIP - Typically stands for the smallest unit of measurement denoting price movement. One basis point (0.0001 or .01%) but depends on currency pair in reference. (see basis point)
Position - The aggregation of all trades made in a currency pair. If the position is open, it is exposed to market risk. If a position is closed, profit/loss has been realized.
Q
Quotation - Often shortened to quote and also referred to as bid-asked. The highest bid or lowest offer price currently available on a security/commodity.
Quote - An indicative market price, normally used for information purposes only.
R
Rate - The price of one currency in terms of another, typically used for dealing purposes.
Realized and Unrealized P/L - Realized P/L is equal to the value in an investor/speculators balance minus the amount of funds he/she has transferred into the account. Unrealized P/L is the amount of profit or loss that is held in current open positions. If one were to clear all open positions, then this amount would be added to the Realized P/L amount.
Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Risk - The degree of uncertainty or exposure associated with an investment. Investments with greater inherent risk must promise higher expected returns if investors are to be attracted to them. The main types of foreign exchange risk are: 1) exchange rate risk 2) interest rate risk 3) credit risk (aka counterparty) 4) country risk (includes political). (each of these risks can be referred to in other sections of this document).
Risk Management - The process of actively monitoring /controlling exposure to various types of risks while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.
Roll-Over - Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.
S
Settlement - A trade is settled when the trade and its counterparts have been entered into the books/records. In regards to FX trading, it is important to note that settlement may or may not involve the actual physical exchange of currencies.
Short (Short Position) - To go short is to sell a currency / security. For example, if an investor believes that the Japanese economy is getting weaker and that, as a result, the Japanese Yen will depreciate in value, then he/she may want to sell Japanese Yen and take what is called a short position. It is not necessary to own the quote currency prior to selling, as it is sold short.
Spot Market / Spot Rate - The spot market refers to instruments that are traded and settle within two business days of the transaction. The spot rate refers to the current market rate for a currency. Interest is either added on (premium) or subtracted from (discount) this rate to determine pricing for non-spot trades, which are referred to as forwards in the FX market.
Spread - (see bid / ask spread)
Stochastic oscillator - A technical indicator which compares a stock's closing price to its price range over a given period of time. The belief is that in rising market stocks will close near their highs, while in a falling market they will close near their lows.
Stockholder / shareholder - One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors.
Stop-Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Support Levels - A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.
Swap - A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.
Swissy - Slang for Swiss Franc.
T
Take-Profit Order - An order to automatically liquidate a position if the exchange rate reaches a specified level. Take profit orders are typically used to lock-in profit.
Technical Analysis - Studying charts that display the historic behavior of market data/statistics (price open, high, low and close, volume, open interest, etc.) in order to forecast future performance.
Tick - A price movement.
Transaction Cost - The cost of buying or selling a financial instrument.
Turnover - The total money value of all executed transactions in a given time period; volume.
Two-Way Price - When both a bid and offer rate is quoted for a FX transaction.
U
Uptick - a new price quote at a price higher than the preceding quote.
Unrealized and Realized P/L - Unrealized P/L is the amount of profit or loss that is held in current open positions. If one were to clear all open positions, then this amount would be added to the Realized P/L amount. Realized P/L is equal to the value in an investor/speculators balance minus the amount of funds he/she has transferred into the account.
V
Value Date - The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.
Variation Margin - Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.
Volatility - A measure by which an exchange rate is expected to fluctuate or has fluctuated over a given period. Volatility figures are often expressed as a percentage per annum.
W
Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Y
Yard - Slang for a billion.
Appreciation - A rise in the price or value of a currency (or other asset) over time.
Arbitrage - The purchase of securities on one market for simultaneous or immediate resale on another market with the goal of profiting from a price discrepancy. Currency traders often arbitrage against exchange risk by buying a currency for immediate delivery but also selling that currency on the forward market at the same time.
Ask Rate - The price at which sellers offer currencies to buyers.
Asset - Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
Asset Allocation - The division of funds between different assets (items of value such as property, financial instruments, commodities and cash) with the goal of diversifying ones personal holdings to manage specific risk / reward expectations.
B
Back Office - The departments and processes related to the settlement of financial transactions.
Bank Wire - A computer message system linking major banks. It is used as a mechanism to advise the receiving bank of some action that has occurred, i.e., the payment by a customer of funds into that bank's account.
Base Currency - In the following pair USD/EUR, the first currency (in this case USD) is referred to as the base currency. The primary base currency is the US dollar, meaning that quotes are most commonly expressed as a unit of $1 USD per the other currency quoted in the pair.
Basis Point - One hundredth of a percentage point - 0.01%.
Bear (bearish) - Someone who expects the price of a given financial instrument or the overall value of a given financial marketplace to decline in value and thereby is a seller of the instrument(s). This individual is said to be bearish on the instrument / marketplace. Opposite of bull (bullish).
Bear Market - A market distinguished by declining prices.
Big Figure - Dealer expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verbally without the first three digits i.e. "30/35".
Bid Rate - The price at which buyers offer to buy currencies from sellers.
Bid / Ask Spread - The difference between the buy (bid) and sell (ask) price. In the following example - 0.9853/58 the spread is 0.0005 or 5 PIPs.
Bretton Woods Agreement - An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (I.M.F.) and the post-World War II international monetary system of fixed exchange rates.
Broker - Any individual or firm in the business of buying and selling securities for itself and others. When acting as a broker, a broker/dealer executes orders on behalf of his/her client.
Bull (bullish) - Someone who expects the price of a given financial instrument or the overall value of a given financial marketplace to rise in value and thereby is a purchaser of the instrument(s). This individual is said to be bullish on the instrument / marketplace. Opposite of bear (bearish).
Bull Market - A market distinguished by rising prices.
Buying / Selling FX - An investor/speculator buys a currency pair (takes a long position), if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up. Selling the currency pair implies selling the first, base currency, and buying the second, quote currency. An investor / speculator sells a currency pair (takes a short position), if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.
C
Cable - Refers to the Sterling/US Dollar exchange rate. Derived from mid-1800s practice of New York sending sterlings dollar rate to London via a transatlantic cable.
Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.
Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.
Clearing - The process of settling a trade.
Commission - Fee charged by a broker for executing a trade.
Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction.
Contract - The standard unit of trading.
Counterparty - One of the participants in a financial transaction.
Cross Rate – Refers+ to an exchange rate between two non-US dollar currencies. Trading between two non-US dollar currencies usually occurs by first trading one currency against the US Dollar and then trading the US Dollar against the second non-US dollar currency.
Currency - Any form of money issued by a government or central bank and used as legal tender and a basis for trade.
Currency Risk - The probability of an adverse change in exchange rates.
D
Day Trader / Day Trading - Speculators trying to take advantage of market movements in very short time periods --- buying a currency and then selling it again may happen within hours or even minutes. Day traders are attracted to currency trading because of the size, liquidity, volatility, and accessibility of the market.
Dealer - An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.
Delivery - A trade where both sides make and take actual delivery of the currencies traded. Delivery is not the norm in FX trading. More commonly, an FX trade involves cash settlement of the difference between spot and delivery prices. Spot refers to any delivery within two business days. Forward refers to delivery beyond two days and usually quoted one year out in increments of 30 days (i.e. 1 month, 2 month, etc.).
Directional Forecast - A projection of bid/ask prices for a currency pair for a point in the future. The forecast displays the most likely future direction of prices. This direction reflects the latest price fluctuations as they are influenced by economic and political events. Directional Forecasts are designed for: Investors and traders who trade small to large volumes in the foreign exchange markets daily Professionals who do business internationally and who want to minimize foreign exchange risk due to currency price fluctuations. To find out more about directional forecasting, visit www.oanda.com.
Dollar Rate - The exchange rate of a foreign currency as quoted against the US dollar (USD). Some currencies are typically only quoted against the US dollar, such as the Algerian dinar (DZD) and the Andorran franc (ADF). The exchange rate of the Algerian dinar against the Andorran franc is thus computed from DZD-USD and ADF-USD.
E
Entry Order - An order to buy/sell a currency pair when the market reaches a specified price.
EURO - The currency of the European Union (EU) since January 1, 1999. The following countries have adopted the EURO in addition to maintaining their own unique currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.
Exchange Rate - The price of one country's currency expressed in another country's currency.
Exchange Rate Risk - The potential loss that could be incurred from a movement in bid/ask prices, or exchange rates.
Exposure - The risks that an investor accepts when holding an open position. When an investor buys EUR/USD, he exposes himself to risks associated with changes in the valuation of the EURO and/or USD markets.
F
Flat/square - Dealer slang used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.
Foreign Exchange Market - Market for trading currencies internationally. The foreign exchange market, also referred to as the Forex and FX market, is a decentralized market that has no physical exchange floor. Trading is done over the counter via phone, fax or electronic distribution networks. Turnover in this market is approximately $1.5 trillion USD daily, making it the largest, most liquid financial marketplace.
Forex - (see foreign exchange market).
Forward - The pre-set exchange rate for an FX contract that settles at a pre-determined future date. The forward rate is based upon the interest rate differential between the two currencies involved. Forward rates can be calculated easily given the fixed term interest rates of each currency and their current spot rates.
Forward Points - The PIPS added to or subtracted from the current exchange rate to calculate a forward price. If points are added, then the forward is priced at a premium. If points subtracted, then the forward is priced at a discount.
Fundamental Analysis - The study and analysis of economic, political and social data/events to predict the future movements of the market and guide ones FX trading decisions.
G
Gearing - (refer to margin trading or leverage)
Good 'Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.
H
Hedging - A strategy used to offset market risk, whereby one position protects another. Traders and investors in foreign exchange hedge to protect their investment or portfolio against currency price fluctuations.
I
Initial margin - The initial deposit of collateral required to enter into a position as a guarantee on future performance.
Interbank Prices - Currency prices/rates quoted between the large international banks, typically on transactions of US $1 million or more. These rates differ and are often more favorable than those quoted for smaller, retail transactions.
Interest Rate - Differential In FX trading, interest rate charges are determined by the difference between the interest rate on the base currency less the interest rate on quote currency. Interest rates are only paid on positions held over night.
L
Leverage - Refers to margin trading or gearing. The use of credit or borrowed funds to increase ones buying power.
Letter of credit - A document issued by a bank which guarantees the payment of a customer's drafts for a specified period and up to a specified amount.
Limit Order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 102.00/05, then a limit order to buy USD would be at a price below 102. (ie 101.50)
Liquidity - Refers to the ability to buy and sell with little or no impact on price stability. The number of players in a market/security has a direct impact on this ability. The FX market is the most liquid market in the world.
Long - To go long is to buy a currency / security. For example, if an investor believes that the Japanese economy is getting stronger and that, as a result, the Japanese Yen will appreciate in value, then he/she may want to buy Japanese Yen and take what is called a long position.
M
Margin - Collateral (could be cash, securities and/or unrealized profit) that an investor is required to keep on deposit to cover potential losses. If the margin requirement is 10% and a speculator wishes to buy $1 million EURO/USD, that speculator must have $100 thousand EUROS in value in his/her account.
Margin Call - A call for additional capital to bolster the equity in an investors margin account. Occurs when equity in the account is in danger of going below the required margin percentage threshold.
Market Maker - A pricing source that regularly quotes a two-sided market, meaning it supplies executable bid and ask prices.
Market Order - An order to buy/sell at the best price available when the order reaches the market.
Marking to Market - Common valuation method for calculating ones foreign exchange exposure at current market prices. Adjusting book value of holdings to reflect current market value.
O
Offer - The rate at which a dealer is willing to sell a currency.
One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.
Open position - A deal not yet reversed or settled with a physical payment.
Open Order - An open order is a request that a trade should be made automatically when the exchange rate of the specified currency pair crosses a specified threshold. The request will remain open until the specified threshold is reached. (see entry order)
Over-The-Counter Market (OTC) - A market, such as the FX market, in which counterparties trade via telephone, fax or electronic distribution network rather than from a physical exchange location.
Overnight - A trade that remains open until the next business day.
P
PIP - Typically stands for the smallest unit of measurement denoting price movement. One basis point (0.0001 or .01%) but depends on currency pair in reference. (see basis point)
Position - The aggregation of all trades made in a currency pair. If the position is open, it is exposed to market risk. If a position is closed, profit/loss has been realized.
Q
Quotation - Often shortened to quote and also referred to as bid-asked. The highest bid or lowest offer price currently available on a security/commodity.
Quote - An indicative market price, normally used for information purposes only.
R
Rate - The price of one currency in terms of another, typically used for dealing purposes.
Realized and Unrealized P/L - Realized P/L is equal to the value in an investor/speculators balance minus the amount of funds he/she has transferred into the account. Unrealized P/L is the amount of profit or loss that is held in current open positions. If one were to clear all open positions, then this amount would be added to the Realized P/L amount.
Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Risk - The degree of uncertainty or exposure associated with an investment. Investments with greater inherent risk must promise higher expected returns if investors are to be attracted to them. The main types of foreign exchange risk are: 1) exchange rate risk 2) interest rate risk 3) credit risk (aka counterparty) 4) country risk (includes political). (each of these risks can be referred to in other sections of this document).
Risk Management - The process of actively monitoring /controlling exposure to various types of risks while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.
Roll-Over - Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.
S
Settlement - A trade is settled when the trade and its counterparts have been entered into the books/records. In regards to FX trading, it is important to note that settlement may or may not involve the actual physical exchange of currencies.
Short (Short Position) - To go short is to sell a currency / security. For example, if an investor believes that the Japanese economy is getting weaker and that, as a result, the Japanese Yen will depreciate in value, then he/she may want to sell Japanese Yen and take what is called a short position. It is not necessary to own the quote currency prior to selling, as it is sold short.
Spot Market / Spot Rate - The spot market refers to instruments that are traded and settle within two business days of the transaction. The spot rate refers to the current market rate for a currency. Interest is either added on (premium) or subtracted from (discount) this rate to determine pricing for non-spot trades, which are referred to as forwards in the FX market.
Spread - (see bid / ask spread)
Stochastic oscillator - A technical indicator which compares a stock's closing price to its price range over a given period of time. The belief is that in rising market stocks will close near their highs, while in a falling market they will close near their lows.
Stockholder / shareholder - One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors.
Stop-Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Support Levels - A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.
Swap - A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.
Swissy - Slang for Swiss Franc.
T
Take-Profit Order - An order to automatically liquidate a position if the exchange rate reaches a specified level. Take profit orders are typically used to lock-in profit.
Technical Analysis - Studying charts that display the historic behavior of market data/statistics (price open, high, low and close, volume, open interest, etc.) in order to forecast future performance.
Tick - A price movement.
Transaction Cost - The cost of buying or selling a financial instrument.
Turnover - The total money value of all executed transactions in a given time period; volume.
Two-Way Price - When both a bid and offer rate is quoted for a FX transaction.
U
Uptick - a new price quote at a price higher than the preceding quote.
Unrealized and Realized P/L - Unrealized P/L is the amount of profit or loss that is held in current open positions. If one were to clear all open positions, then this amount would be added to the Realized P/L amount. Realized P/L is equal to the value in an investor/speculators balance minus the amount of funds he/she has transferred into the account.
V
Value Date - The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.
Variation Margin - Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.
Volatility - A measure by which an exchange rate is expected to fluctuate or has fluctuated over a given period. Volatility figures are often expressed as a percentage per annum.
W
Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Y
Yard - Slang for a billion.
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