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Forex Basics
The Basics
Currency Pricing Factors
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Forex Keywords

Appreciation: The increase in price of a currency.

Arbitrage: Trading the same currency, commodity or security in simultaneous equal and opposing directions in two or more markets profiting from differences in price between markets when this same currency, commodity or security is traded in more than one market.

Ask: The rate at which the seller is a willing to sell a currency.

Asset Allocation: Apportioning and diversification of investment funds among different markets for risk management and meeting investorsí objectives.

Back Office: Bank or brokerage departments indirectly involved in the settlement of financial transactions.

Balance of trade: The value of a nation's exports minus its imports. A negative value is considered a deficit.

Base currency: The first listed currency in a currency pair is known as the base currency, while the second is called the counter or quote currency. The base currency is the basis for the buy or the sell. Therefore if you buy EUR/USD you have purchased Euros and sold dollars. There is a market convention that determines for any currency pair which currency is the base currency and which is the counter currency, based on the value of each currency and a hierarchy of exceptions.

Basis point: A hundredth of a percentage point (0.01%) such that the difference between 2.5% and 2.9% is 40 basis points.

Bear market: A market characterized by widespread pessimism where investors anticipate losses and therefore are motivated to sell.

Bid: The rate at which the buyer is willing to buy a currency.

Bretton Woods Agreement of 1944: An agreement signed at the Bretton Woods International Monetary Conference in 1944 that set fixed exchange rates between currencies of countries. The agreement lasted until 1971, when a floating exchange rate was adopted instead.

Broker: An individual or firm that mediates between buyers and sellers for a commission or fee.

Bull market: A market characterized with growing investor confidence and optimism, leading investors to be motivated to buy in the anticipation of further capital gains.

Bundesbank: German central bank.

Cable: A slang term for the British Pound Sterling/US Dollar exchange rate which surfaced in the 1800s when the rate was transmitted across a transatlantic cable.

Central bank: The principal government organization that manages a nation's monetary policy, sets interest rates, exchange rate policy and supervises/regulates the private bank sector. For example, in the UK, the central bank is the Bank of England; in the US it is the Federal Reserve.

Clearing: The completion of a trade; the final exchange of securities for cash on delivery.

Commission: The transaction fee charged by a broker.

Confirmation: Formal memorandum from a broker to a client that states the terms and details of a forex/securities transaction.

Cross rates: The exchange rate between two currencies. This rate is referred to as non-standard in the country where the currency pair is quoted. For instance, a GBP/USD is considered a cross rate in Japan, whereas in the UK and US, it would be considered one of the main currency pairs traded.

Currency: A unit of exchange issued by a government or central bank to facilitate the transfer of goods and services. It is a form of money which serves as a medium of exchange.

Currency option: Financial instruments that give the right but not obligation to buy or sell currency at a specified exchange rate during a specified period of time. The broker, in return for this right, is paid a premium which varies depending on the number of contracts purchased. Unlike futures, the holder is not obligated to exercise this right.

Currency Risk: The possibility of an unfavorable change in exchange rates.

Day trading: Opening and closing positions in the same day.

Dealer: An individual or a firm that, in contrast to a broker, may act as a principal and buy and sell positions for its own account. A dealer may also hold inventory to trade or fill future orders.

Decentralized Market: A network of different technical devices structured in a way to enable investors to create a marketplace without a centralized location. In such a market, investors are provided with access to bid and ask prices through the use of technology such as the Internet without the need of a given exchange, making it possible to deal directly with other dealers or investors.

Deficit: A negative balance of trade.

Deflation: Opposite of inflation, where general price levels of goods and services are decreasing over time.

Delivery: A forex trade where actual currencies get traded and physically exchanged and delivered between both sides.

Depreciation: The reduction in value of a currency due to market factors.

Derivative: A contract whose value changes depending on the performance of an underlying or related financial asset. An option is an example of a derivative, where its value changes depending on the underlying stock.

Devaluation: The deliberate lowering of a country's currency value relative to other nationsí due to central bank intervention.

Downtick: When the new quote is lower than the preceding one of the same currency pair.

Drawdown: The measure of decline in an account value between a peak and the proceeding trough. It could be measured in dollars or percentage.

Economic indicator: Governmental statistics used for measuring current economic growth and stability. These include GDP (gross domestic product), unemployment rates, retail sales, inflation, etc.

End of day order (EOD): An order that remains open until the current day close to buy or sell at a specified price.

European Central Bank (ECB): The central bank for the European Monetary Union.

Exchange rate: The price of one currency relative to another.

Federal Reserve: United States central bank.

Fixed exchange rate: When a country currency is pegged to the value of another country's currency, gold or combination of currencies. This does not prevent the fixed exchange rate from fluctuating between an upper and lower band which would lead to intervention.

Flat/square: Net zero position (neither short nor long).

Forward exchange transaction: The purchase or sale of a specified quantity of a currency at a currently established exchange rate with payment and delivery at a specified future settlement date.

Futures Contract: An agreement to buy or sell a certain amount of currency, securities or commodity at a specific price on an agreed upon date. Futures are typically traded over an exchange, unlike forwards which are regarded as over-the-counter contracts. The buyer and seller are obligated to fulfill the trade by the settlement date unless the contract is sold to another before that due date.

Fundamental analysis: Forecasting future price movements in a financial market such as the forex market, based on economic and political factors such as interest rates, gross national product, inflation, inventories and unemployment rate data.

Good-Till-Cancelled Order (GTC): An order to buy or sell when the market reaches a designated price. The order is said to be open until the designated price is reached or the client cancels the order.

Hedge: A combination of positions to reduce or cancel out the risk of another investment.

Inflation: Economic condition where the general level of prices of goods and services rises over time.

Interbank rates: Rate of interest charged on short-term loans made between banks. There is a wide range of published interbank rates such as the LIBOR.

LIBOR: Short for "London Inter-Bank Offered Rate". The standard for the interest rate that banks charge each other for loans (usually in Eurodollars).

Liquidity: The ability of the market to accept large transaction costs effectively with minimum or no effect on price stability. This is affected by the activity and volume of transactions being conducted in that market. A narrower bid/ask spread indicates high market liquidity.

Long position: A position to purchase a currency.

Margin: The equity required to be deposited as collateral to cover any potential losses from drastic swings in market prices.

Margin call: A requirement from a broker for additional funds or some other collateral to guarantee performance on a position that has moved against its holder.

Mark to market: When all open positions are re-evaluated with current market prices, usually at the end of the working day using closing market rates or revaluation rates.

Market Maker: A dealer that regularly quotes and maintains specific bid and ask prices for a given security by being ready to buy and sell at publicly quoted prices.

Maturity: Reaching the expiration date or a settlement at which a debt instrument is due and payable.

Mil: A mil (0.001 units) is 10 pips or 10 basis points.

One-Cancels-the-Other Order (OCO): Or alternative order or "either-or" order, is an order giving the broker the choice between two plans of action. When one of the two actions is executed, the second one is automatically dropped.

One-Touch Option: Type of option that rewards an investor with a payout when the underlying asset reaches or exceeds a designated price level. This type of option allows the investor to set the barrier price, the expiration date, the payout once the designated price is met. Thus the only 2 possible scenarios are either the price is met within the time limit and the payout is collected or the price is never met and the premium paid to the broker is fully lost. This can be useful for traders who speculate that the price of an asset will go up within a certain time period but the rise would not be sustained.

Open order: Associated with good-till-cancelled orders, an order which hasn't been yet executed or cancelled and will only execute when the market price reaches a designated value.

Over the Counter (OTC): A transaction not conducted over an exchange.

Pip/tick: 0.0001 units (one basis point) in most currency pairs and 0.01 units for JPY pairs.

Political Risk: Risk of governmental policy changes or decisions that may have a negative effect on an investor's position in that country's currency.

Premium cost of carry: The beneficial cost that comes with carrying an open position from one day to the next. It is equal to the differential in short-term interest rates between the two currencies in the currency pair.

Price Transparency: Access to information which reflects market depth thus enabling detection of manipulation or fraud.

Prime Rate: In the US, this is the interest rate at which banks will lend to their major corporate clients.

Quote (quoted price): The price at which the last purchase and sale of a security, commodity or currency took place.

Resistance: A price level where technical analysis indicates investors may sell.

Revaluation: The opposite of devaluation, it is the increase of a country's currency value relative to other nationsí due to central bank intervention.

Risk Management: To minimize or control exposure to different types of risk through the use of financial analysis and trading techniques.

Roll-Over: The process of postponing the settlement of a deal to a future date.

Settlement: Conclusion of a securities transaction where either the broker/dealer pays for the securities bought for a client or delivers the securities sold and gets paid by the buyer's broker/dealer. The settlement of a currency trade doesn't involve the actual physical exchange of one currency for another.

Short position: When an amount of currency is sold without actually being owned with the expectation that it will depreciate in value with the intent to cover the trade later for a profit.

Spot price: The current market price. Spot price transaction settlement occurs typically within 2 business days.

Spread: The difference between the bid and ask prices as a measurement for market liquidity. The narrower the spread, the higher the liquidity.

Stop Loss Order: A type of transaction order where an open position would liquidate at a specified price level to minimize risks and losses, in case the market moves against the investor's held position.

Support Levels: The opposite of resistance. A specific price range in technical analysis where an exchange rate should correct itself and find support.

Swap order: A simultaneous sell and buy order of the same amount of a given currency where the price difference is arranged and agreed upon as a condition for the trade's execution.

Technical Analysis: Forecasting future price movements in a financial market such as the forex market by studying historical price data behavior to project future price trends through the use of charts trends.

Tom Next(Tomorrow Next): Forex term for Eurodollar markets when the delivery date is the next business day.

Turnover: The total money value or volume of all transactions that were executed within a certain period of time.

Two-Sided Market: Market in which both bid and ask rates are firm. Thus buyers and sellers are assured of their ability to complete transactions.

Uptick: When a new currency pair price quote is higher than the preceding one.

Uptick Rule: (Eliminated by SEC on July 6, 2007) A former US financial regulation where a security can only be sold short if the last trade prior to the short sale is lower than the price at which the short sale is executed.

Value Date: Settlement date or delivery date, typically one business day for North American currencies transactions and two business days for other currencies.

Volatility: Refers to the standard deviation (statistical measure) of the change in value of a financial instrument over time.

Whipsaw: Making losing trades when prices sharply rise and fall in a highly volatile market. A trader is whipsawed when he buys just before prices fall or sells just before prices rise.

Yard: One billion currency units (usually used for Japanese yen)


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