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Forex Glossary

Arbitrage: The act of taking advantage of countervailing prices within different markets through the sale or purchase of a currency. Thus, simultaneously taking an equal and opposite position in a related market to profit from small price differentials.

Ask: “Ask” (or “ask price”) is a term used to describe the price at which a trader accepts to buy a particular currency.

Asset: “Asset” refers to an item or resource of value, such as a currency or currency pair.

Base Currency: Within a currency pair, the first currency listed is known as the “base currency”. For example, when it comes to the GBP/USD pairing, the GBP functions as the base currency.

Bear Market: The opposite of a bull market, the term “bear market” is used to describe the price of an asset, currency, or security that is in decline. “Bear market” can also be shortened to simply “bear”, while the term “bearish” is also used to describe the state of the forex market when it’s in decline.

Bull Market: The opposite of a bear market, this term describes when the price of an asset, currency, or security is rising. Much like the term “bear market”, “bull market” is also often shortened, so you can expect to hear the terms “bull” and “bullish” used regularly.

Bid: “Bid” (or “bid price”) is the term used to describe the price at which a trader is willing to sell a particular currency.

Buy Limit Order: A buy limit order is an order to push through a transaction at a specified price or lower, with the term “limit” referring to the price threshold.

Carry Trade: Relates to when an investor borrows at a lower-than-average interest rate in order to buy assets that can potentially produce higher interest rates.

Closed Position: Closing a position means bringing a transaction to an end, incurring any related profits or losses as a result.

Closing Market Rate: Sometimes listed as the closing price, it represents the final value that a currency is traded at during any specific time frame, day, or candle.

Currency Appreciation: When a currency’s value rises against another, it will commonly be addressed as “currency appreciation”.

Currency Futures: Currency futures are contracts that state the price that a currency can be sold or bought for at a predetermined future date. Future contracts are a widely-used hedging tool amongst traders.

Currency Pair: The nucleus of the forex market, a currency pair is what’s being traded within any forex transaction. Currency pairs take on various forms, with most pairs labelled “major”, “minor”, or “exotic”. For example, GBP/USD qualifies as a major currency pair.

Daily Chart: A graph that breaks down the movements of a particular currency that have occurred within a single trading day.

Day Trade: A forex trade that is opened and closed on the same day.

Demo Account: Sometimes called a “demo account”, “dummy account”, “virtual currency account”, or “practice account”, a demo account is a forex trading account that makes use of virtual funds. This allows any trader to explore the market, making trades in an environment that doesn’t involve the use of any real capital.

Depth of Market: The volume of active buying and selling orders placed for a currency, covering a wide degree of prices.

Drawdown: When the price of a currency dips, the difference between the peak and the new low is labelled the “drawdown”.

ECN Broker: Representing a distinct type of broker. An ECN Broker makes use of Electronic Communications Networks (ECNs) to provide clients with access to liquidity providers.

Exchange Rate: Representing what the forex market is built upon, the exchange rate is the cost at which one currency can be traded for another.

Execution: This term refers to when a trade is put in motion and subsequently completed.

Exposure: “Exposure” is a term that is used to address the amount invested in a currency and its associated market risks.

Fill Price: Addresses the completion of an order, along with the price that it has been completed at.

Fill or Kill: If an investor has a set price in mind for a forex transaction, he or she can choose to implement a fill or kill order. What this means is that if the order isn’t fulfilled at the exact predetermined price, it is terminated.

Floating Exchange Rate: A term used to describe any exchange rate that is currently not fixed. A floating exchange rate tends to fluctuate dependent on the supply and demand (along with other factors) of a particular currency relative to other currencies.

Forex Chart: Similar to a daily chart, a forex chart is a digital chart that highlights points and price movements related to a currency pair. Forex charts can usually be extended to cover days, weeks, months, and even years.

Forex Scalping: A notable trading strategy that is based upon the idea that if you open and close a trade—buying and selling a currency—within a short space of time, you are likelier to earn profit than you would through large price movements. What forex scalping tends to represent is the “little and often” approach when it comes to forex trading.

Forex Signal System: Arguably the most commonly advertised forex service, a forex signal system works by issuing forex signals to subscribers related to current market activity. This signal (which can be issued through a number of means) can trigger a trade either automatically or manually. For example, a forex signal system may alert you that it’s a suitable time to either buy or sell a particular currency.

Forex Spot Rate: The forex spot rate determines the exchange rate that a currency can be purchased or sold at.

Forex Trading Robot: While not strictly a “robot” per se, a forex trading robot does refer to a piece of software that is designed to operate as a guide. It’s automated and should help determine when you should either buy or sell a currency pair.

Fundamental Analysis: The act of determining the impact that key political and economic events (unemployment rates, interest rate announcements, and so forth) have on the forex market. Traders conduct such analysis as a means to predict the future direction of the market with regard to their portfolios.

Hard Currency: Opposite of a soft currency, a hard currency is one that is often most resilient in times of political and economic instability and thus is generally considered to be dependable. For example, the Great Britain Pound (GBP), US Dollar (USD), and Euro (EUR) are well-known hard currencies.

Hedge: A method of trading that is used to protect an investor by reducing the risk that is associated with volatile markets. Hedging requires the trader to make two independent investments that work to balance each other out. This works to minimise the loss that could be incurred by price fluctuations.

Intervention: Intervention relates to actions committed by a nation’s central bank as a means to affect the value of its currency. This usually constitutes a direct entering of the market, which can then increase the level of control that nation has over the currency exchange rate.

Leverage: Leverage is a service offered by forex brokers that allows a trader to maximise his or her buying power. It gives the trader the ability to deposit a small amount of capital yet still trade currency in large volumes. Leverage is expressed by a ratio; for example, leverage of 1:100 increases a trader’s purchasing power by 100 times.

Limit Order: Representing an instruction to either close or open a transaction at a future price. For example, if EUR/USD is currently listed at 1.07503/1.07523, then a related limit order to buy EUR at a lower-than-current market value price would see the currency purchase occur at 1.07522 or below.

Liquidity: The amount (or volume) of a set currency currently available for active trading.

Long Position: Opposite of a short position, any investor who takes a long position buys a base currency with a view to profiting on a market price increase.

Lot: A lot is a standardised quantity of the currency you are choosing to trade with, with one lot equalling 100,000 units of a particular currency.

Margin: “Margin” refers to the amount of account balance required in order to maintain an open position.

Margin Call: This is an alert that notifies you that you need to make an additional deposit in order to increase your margin to keep remaining positions active.

Market Order: For those who want to trade instantaneously, a market order is what’s required, as it is an order for a trade to be executed immediately (if possible) at the best price available.

Micro Lot: Micro lot refers to 1,000 units of the base currency within a pair.

One Cancels the Other (OCO): Made up of two limit orders, where the execution of one automatically triggers the cancellation of the other.

Open Position: A simple term to describe the position that a trader takes on a currency pair, subject to any profits and losses that it may accrue.

Over-the-Counter: A seldom-heard term in the era of online forex trading; an over-the-counter trade is a traditional way of handling a forex transaction. It involves pushing through an order via a telephone or electronic device and thus is no longer commonly seen.

Overnight Position: When a trader decides to keep a position open overnight and carry it over into the next trading day.

Pip: Standing for “percentage in point”, it represents the smallest possible price change that can occur within an exchange rate. More often than not, a currency is presented to four decimal points, with the smallest alteration in price occurring within the final decimal of the price listed.

Profit-Taking: Closing a forex position as a means to collect the related profit.

P&L: A standard abbreviation for “profit and loss”.

Quote Currency: Within any currency pair, the second currency listed will always be referred to as the “quote currency”. For example, in the USD/GBP pairing, the GBP is the quote currency.

Rally: “Rally” references a currency’s recovery in price after a period of either short-term or long-term decline.

Resistance: The price level that a currency finds difficult to go beyond. In such instances, a currency will consistently knock on a price ceiling, only to see a decline begin when it isn’t able to break above it.

Risk Management: Considering the oftentimes-tumultuous nature of the forex market, traders must adopt risk management as a means to protect capital. Risk management practices usually take on the form of related strategies and tools that work to limit the financial risk as much as possible.

Rollover Rate: Incurring a rollover rate means the interest that a trader must pay (or earn) when he or she holds an open position overnight. Considering that such positions continue from one day to the next, the term “rollover” is fittingly used.

Short Position: Opposite of a long position, this involves taking a position that benefits from a currency’s decline in market price. When the base currency within the pair is eventually sold, then the position is assumed to be short.

Slippage: “Slippage” is a term used to describe when a trader executes a trade that goes through at a higher price than initially expected. This tends to occur during times of high volatility, when investors make use of stop-loss orders and market orders.

Soft Currency: Opposite of a hard currency, a soft currency is one that is often hit hardest by economic and political events and thus is generally considered to be unstable. For example, both the Zimbabwean Dollar (ZWD) and North Korean Won (KPW) are routinely labelled “soft currencies”.

Speculator: Representing a specific type of trader, anyone who is classified as a speculator is willing to take big risks while trading. The hope is that by embracing increasing levels of risk, the eventual profit return will be high.

Spike: Used to describe a sharp downward or upward movement in currency price that occurs during a short space of time. Contrary to popular belief that a spike can only describe an upward trend, in the world of forex, it has also been used to describe a downward trend.

Spread: The spread represents the difference between the ask and bid price of any currency pair. In most instances, this figure represents brokerage service costs and replaces transactions fees, with it usually presented in pips. It should be noted the spread could take on one of three forms through a fixed spread, a fixed spread with an extension, and a variable spread.

Stop-Loss Order: A market order to either buy or sell a currency when it hits a certain price. Generally speaking, a stop-loss order is placed in order to control losses occurring (or due to occur) in a set position.

Take-Profit Order (T/P): A market order that stipulates that a position is to be closed once it hits a predetermined price or price range, thus taking all generated profit.

Technical Analysis: Investors use technical analysis as a means to forecast future price changes within the forex market. How this is conducted is by sifting through current and prior market data via trading indicators, charts, and other related tools.

Volatility: This addresses the degree of uncertainty (and related price fluctuations) of a security, currency pair, or specific currency. It can also be used as a term to describe the state of the forex market as a whole.

Yield: “Yield” is a term that refers to the return on any forex investment made, with such usually displayed as a percentage figure within a trading platform.

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Forex trading, also known as foreign exchange trading or currency trading, refers to the buying and selling of currencies on the global foreign exchange market. It is a decentralized market where participants trade currencies with the aim of profiting from the fluctuations in their exchange rates. Forex trading involves the simultaneous purchase of one currency and the sale of another, with the expectation that the value of the currency being bought will increase in relation to the one being sold. This market operates 24 hours a day, five days a week, and offers opportunities for individuals and institutions to speculate, hedge, or engage in international business transactions. Forex trading offers high liquidity, allowing traders to easily enter and exit positions, and provides potential for substantial profits, but also carries inherent risks.

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