What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

Forex Terms (A)

Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.


Actualize - The underlying assets or instruments which are traded in the cash market.

Adjustable Peg - Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency , often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.

Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

Agent Bank - (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.

Aggregate Demand - Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.

Aggregate risk - Size of exposure of a bank to a single customer for both spot and forward contracts.

Aggregate Supply - Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

Agio - Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.

Appreciation - Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage - The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage channel - The range of prices within which there will be no possibility to arbitrage between the cash and futures market.

Around - Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation - Dividing instrument funds among markets to achieve diversification or maximum return.

Ask - The price at which the currency or instrument is offered.

Ask Rate - The rate at which a financial instrument if offered for sale (as in bid/ask spread).

Asset - In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal.

Asset Allocation - Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor’s objectives.

At best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better - An order to deal at a specific rate or better.

Authorized Dealer - A financial institution or bank authorized to deal in foreign exchange.

Forex Terms (B)

Back Office - Settlement and related processes.

Backwardation - Term referring to the amount that the spot price exceeds the forward price.

Balance of Payments - A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Balance of Trade - The value of a country’s exports minus its imports.

Bar Charts - Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar.

Band - The range in which a currency is permitted to move. A system used in the ERM.

Bank line - Line of credit granted by a bank to a customer, also known as a " line".

Bank Rate - The rate at which a central bank is prepared to lend money to its domestic banking system.

Base currency - United States Dollars. The currency to which each transaction shall be converted at the close of each position.

Basis - The difference between the cash price and futures price.

Basis point - For most currencies, denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%). For such currencies as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.

Basis trading - Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basket - A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear market - A prolonged period of generally falling prices.

Bear - An investor who believes that prices are going to fall.

Bid - The price at which a buyer has offered to purchase the currency or instrument.

Bid Rate - The rate at which a trader is willing to buy a currency.

Bid/Ask Spread - The difference between the bid and offer price, and the most widely used measure of market liquidity.

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”.

Book - The summary of currency positions held by a dealer, desk, or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the close of the day, e.g. from London to New York.

Bretton Woods - The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Broker - Brings buyers and sellers together for a commission paid by the initiator of the transaction. Brokers do not take market positions. Or An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. In contrast, a ‘dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

Bretton Woods Agreement of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies.

Bull market - A prolonged period of generally rising prices.

Bull - An investor who believes that prices are going to rise.

Bundesbank - Central Bank of Germany.

Buying/Selling - In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.

Buying Rate - Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

Forex Terms (C)

Cable - A term used in the foreign exchange market for the US Dollar/British Pound rate. Or Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s.

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.

Central Bank - A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank. others include the ECB, BOE, BOJ.

Capital Risk - The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.

Carry - The interest cost of financing securities or other financial instruments held.

Cash Delivery - Same day settlement.

Cash market - The market in the actual financial instrument on which a futures or options contract is based.

Cash - normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.

Cash and Carry - The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

Cash Settlement - A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central Bank - A nations main regulatory bank. Traditionally, its primary responsibility is development and implementation of monetary policy.

Central Rate - Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.

Chartist - An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Choice Market- A market with no spread. All trades buys and sells occur at that one price.

Clean float - An exchange rate that is not materially effected by official intervention.

Clearing - The process of settling a trade.

Closed position - A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission - The fee that a broker may charge clients for dealing on their behalf.

Confirmation - A memorandum to the other party describing all the relevant details of the transaction.

Contract - An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

Contract (Unit or Lot) - The standard unit of trading on certain exchanges.

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the ‘Asian Contagion’.

Conversion Account - A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.

Conversion - The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion arbitrage - A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

Convertible currency - A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey - Slang for the Danish krone.

Collateral - Something given to secure a loan or as a guarantee of performance.

Commission – A transaction fee charged by a broker.

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, financial instability in Thailand caused high volatility in its domestic currency, the Baht, which triggered a contagion into other East Asian emerging currencies, and then to Latin America. It is now referred to as the Asian Contagion.

Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction.

Correspondent Bank - The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Counterparty - The other organisation or party with whom the exchange deal is being transacted.

Countervalue - Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country risk - The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organisations generate country risk tables.

Cover - (1) To take out a forward foreign exchange contract. (2) To close out a short position by buying currency or securities which have been sold.

Covered Arbitrage - Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin - The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

Crawling peg - A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with certain economic or market indicators.

Credit Risk - Risk of loss that may arise on outstanding contracts should a counter party default on its obligations.

Cross deal - A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross rates - Rates between two currencies, neither of which is the US Dollar.

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.

Current Account - The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

Forex Terms (D)

Day trader - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Deal date - The date on which a transaction is agreed upon.

Deal Ticket - The primary method of recording the basic information relating to a transaction.

Dealer - One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts. Or 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.

Deficit - A negative balance of trade or payments.

Deflator - Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Delivery - An FX trade where both sides make and take actual delivery of the currencies traded.

Delivery date - The date of maturity of the contract, when the exchange of the currencies is made This date is more commonly known as the value date in the FX or Money markets.

Delivery Risk - A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Depreciation - A fall in the value of a currency due to market forces rather than due to official action.

Derivative – A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.

Desk - Term referring to a group dealing with a specific currency or currencies.

Details - All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.

Devaluation - Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Direct quotation - Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Dirty Float - Floating a currency when the rate is controlled by intervention by the monetary authorities.

Forex Terms (E)

Easing - Modest decline in price.

Economic Indicator - A statistics which indicates current economic growth rates and trends such as retail sales and employment.

ECU - European Currency Unit.

EDI - Electronic Data Interchange.

Effective Exchange Rate - An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

EFT - Electronic Fund Transfer.

End Of Day Order (EOD) - An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET.

EMS - European Monetary System.

EURO – since 2002 the Euro has been the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU). Members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

European Monetary System - A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

European Central Bank (ECB) - the Central Bank for the new European Monetary Union.

Exchange control - Rules used to preserve or protect the value of a countries currency.

Exotic - A less broadly traded currency.

Exposure - In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate. There are three primary types of exposure:

1. Economic: The change in future earning power and cash flow arising from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
2. Transnational: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or could have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
3. Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of subsidiaries and affiliates known as accounting exposure.

Forex Terms (F)

Fast market - Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.

Forward - The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

Forward Contract - A forward contract fixes the exchange rate for future delivery at a date to be agreed by both participants. A deposit (or a minimum margin) is usually required in forward transactions. For example, if I want to lock in today's rate to buy $10,000 USD at 1.5820 Canadian for the next 4 months, I will have the ability to purchase up to $10,000 USD at this rate.

Forward Rates (Swaps) - A Forward Rate refers to a cash price of 2 currencies interest difference for a fixed term. Forward rates can be calculated easily given the fixed term interest rates of each currency and the current spot rate

Forward Trading - Forward trading is making the opposite trade of a spot trade in a given period of time. Often investors will swap their trades forward for anywhere from a week or two up to several months depending on the time frame of the investment. Even though a forward trade is on a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date

Forward points - The pips added to or subtracted from the current exchange rate to calculate a forward price.

Fundamental Analysis - focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.

Fed Fund Rate - The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

Fed - The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US.

Federal Reserve System - The central banking system in the United States.

Fibonacci Retracement - A very popular tool among traders whose strategies are based on technical analysis. Fibonacci retracements are based on mathematical relationships based on ratios, the most important of which are 23.6%, 38.2%, 50%, 61.8% and 100%. A Fibonacci retracement is created by taking two extreme points on a chart (usually a peak and trough) and dividing the distance by those key ratios. DealBook® 360 includes a free Fibonacci retracement tool.

Fill or Kill - An order which must be entered for trading, normally in a pit three times, if not filled is immediately canceled.

Fisher Effect - The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fixed exchange rate - Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flat/square - Dealer jargon 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.

Flexible exchange rate - Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating exchange rate - An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

FOMC - Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.

Foreign Exchange - The purchase or sale of a currency against sale or purchase of another. (Forex, FX) is the simultaneous buying of one currency while selling for another. This market of exchange has more buyers and sellers and daily volume than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open 24-hours a day.

Forex - Term commonly used when referring to the foreign exchange market.

Forex Club - Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of Association Cambiste International.

Forward margins - Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Operations - Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright - A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Rate - Forward rates are quoted in terms of forward points , which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefor the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.

Free Reserves - Total reserves held by a bank less the reserves required by the authority.

Front Office - The activities carried out by the dealer , normal trading activities.

Fundamentals - The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

Futures Contract- An obligation to exchange a good or instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts – ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

FX - Foreign Exchange.

Forex Terms (H)

Hard currency - Any one of the major world currencies that is well traded and easily converted into other currencies.

Head and Shoulders - A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedge - The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

Hedging - A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions it would protect one against fluctuations in the foreign exchange rate. (see Forward Contract)

Hedged position - One open buy position and one open sell position in the same currency.

Hit the bid - Acceptance of purchasing at the offer or selling at the bid.

Forex Terms (I)

IMF - International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM - International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Implied Rates - The interest rate determined by calculating the difference between spot and forward rates.

Indicative quote - A market-maker's price which is not firm.

Inflation - Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial margin - The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-bank rates - The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Interest Arbitrage - Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest parity - One currency is in interest parity with another when the difference in the interest rates is equalized by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

Interest rate Swaps - An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Internationalization - Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Forex Terms (K)

Kiwi - Slang for the New Zealand dollar.

KIBOR - Karachi Interbank Offered Rate

Forex Terms (L)

Leading Indicators - Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Liability - In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Line Charts - The Line Chart connects single prices for a selected time period.

Limit order - A request to deal as a buyer or seller for a foreign currency transaction at a specified price, or at a better price, if obtainable.

Liquidation - Any transaction that offsets or closes out a previously established position.

Liquidity - The ability of a market to accept large transactions.

Long position - A position that appreciates in value if market prices increase. When one buys a currency, their position is long.

Forex Terms (M)

Magnitude - Throughout each day, markets move up, down and sideways as they’re influenced by a number of factors. The difference between the high point and low point of a price swing or trend is sometimes referred to as its “magnitude.” Foresight-A.I.™ does not forecast the magnitude of price swings or trends, only the times when such swings and trends may occur.

Maintenance margin - The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.

Make a market - A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float - When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin call - A claim by one's broker or dealer for additional good faith performance monies usually issued when an investor's account suffers adverse price movements.

Margin - The amount of money or collateral that must be, in the first instance, provided or thereafter, maintained, to ensure against losses on open contracts. Initial must be placed before a trade is entered into. Maintenance or Variation margin must be added to initial to maintain against losses on open positions. Sometimes herein the amount that needs to be present to establish or thereafter maintained is sometimes herein referred to as necessary margin.

Margin Deposit - The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value, which allow for this high leverage. In the event that funds in the account fall below margin requirements, brokerage firms will automatically close all open positions.

Margin call - A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the client. If the equity balance in your account falls below the margin requirement, a margin call will be generated. In the event that an account exceeds its maximum allowable leverage, ALL open positions are liquidated immediately, regardless of the size or the nature of positions held within the account.

Mark to market - The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market maker - A market maker is a person or firm authorized to create and maintain a market in an instrument.

Market Risk - Exposure to changes in market prices.

Market order - An order to buy or sell a financial instrument immediately at the best possible price.

Maturity - The date for settlement or expiry of a financial instrument.

Micro economics - The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-price or middle rate - The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Minimum price fluctuation - The smallest increment of market price movement possible in a given futures contract.

Monetary Base - Currency in circulation plus banks' required and excess deposits at the central bank.

Moving Average - A way of smoothing a set of data, widely used in price time series.

Forex Terms (N)

Narrow Market - occurs when there is light trading and greater fluctuations in prices relative to volume. This is often interchanged for THIN MARKET.

Net Position - The amount of currency bought or sold which have not yet been offset by opposite transactions.

Forex Terms (O)

Odd Lot - A non standard amount for a transaction.

Offer - The price at which a seller is willing to sell. The best offer is the lowest such price available.

Offset - The closing-out or liquidation of a futures position.

Offsetting transaction - A trade with which serves to cancel or offset some or all of the market risk of an open position.

Off-shore - The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Open order – An order that will be executed when a market moves to its designated price. Normally associated with Good ‘til Canceled Orders.

Open position - A deal not yet reversed or settled with a physical payment.

Overnight limit - Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically canceled.

Overnight - A deal from today until the next business day.

Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

Forex Terms (P)

Parity - (1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency.

Parities - The value of one currency in terms of another.

Pegged - A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pip - One unit of price change in the bid/ask price of a currency. For most currencies, it denotes the fourth decimal place in an exchange rate and represents 1/100 of one percent (.01%).

Pivot Levels - A pivot point level of a trading day is the point at which the market direction changes for the day. Many technical analysts attempt to predetermine a trading day’s pivot point as a high-probability time to trade. Foresight-A.I.’s™ forecast may show possible pivot points in a given trading day.

Position - The netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short ( more currency sold than bought).

Political Risk - Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

Pricing Indicator - A technical analysis tool that helps determine the prices at which a selected market may move or reverse. Pricing indicators do no indicate timing.

Price Transparency - Describes quotes to which every market participant has equal access.

Profit Taking - The unwinding of a position to realize profits.

Point & Figure charts - The Point & Figure Chart disregards Time and focuses entirely on price activity.

Premium - In the currency markets, describes the amount by which the forward or futures price exceed the spot price.

Forex Terms (Q)

Quote - An indicative price. The price quoted for information purposes but not to deal. or The price of one currency in terms of another, typically used for dealing purposes.

Forex Terms (R)

Rally - A recovery in price after a period of decline.

Range - The difference between the highest and lowest price of a future recorded during a given trading session.

Rate - (1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution.

Reaction - A decline in prices following an advance.

Reciprocal currency - A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

Resistance Point or Level - A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.

Revaluation - Increase in the exchange rate of a currency as a result of official action.

Revaluation rate - The rate for any period or currency which is used to revalue a position or book.

Risk - Exposure to uncertain change, the variability of returns significantly the likelihood of less-than-expected returns.

Risk Capital- The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.

Risk management - The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Risk Position - An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Rollover - An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Rollover Rate -The daily rollover interest rate is the amount a trader either pays or earns, depending on the established margin and position in the market. To avoid rollovers simply make sure positions are closed at the established end of the market day.

Round trip - Buying and selling of a specified amount of currency.

Forex Terms (S)

Same Day Transaction - A transaction that matures on the day the transaction takes place.

Selling Rate - Rate at which a bank is willing to sell foreign currency.

Settlement – The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

Settlement Date - The date upon which foreign exchange contracts settle.

Settlement Risk - Where a payment is made to a counter party before the counter value payment has been made. The risk is that the counter party's payment will not be received.

Short Position - An investment position that benefits from a decline in market price. When one sells a currency their position is short.

Short Sale - The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term Interest Rates - Normally the 90 day rate.

Sidelined - A major currency that is lightly traded due to major market interest being in another currency pair.

Slippage - Refers to the negative (or depreciating) pip value between where a stop loss order becomes a market order and where that market order may be filled.

Soft Market - More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot - (1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot Next - The overnight swap from the spot date to the next business day.

Spot Price/Rate - The price at which the currency is currently trading in the spot market.

Spot (Rate) - In FX Markets, Spot refers to the cash price without interest factored in.

Spread - (l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts. The difference between the bid (buy) and offer (ask, sell) prices; in other words the spread is the commission that the brokerage house makes on each trade. This can vary widely between currencies and between brokerage firms. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Square - Purchase and sales are in balance and thus the dealer has no open position.

Squawk Box - A speaker connected to a phone often used in broker trading desks.

Squeeze - Action by a central bank to reduce supply in order to increase the price of money.

Stable Market - An active market which can absorb large sale or purchases of currency without major moves.

Standard - A term referring to certain normal amounts and maturities for dealing.

Sterilization - Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling - British pound, otherwise known as cable.

Stocky - Market slang for Swedish Krona.

Stop-Loss order - Order to buy or sell at the best available price when a given price threshold has been reached.

Support levels - When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further down ward movement. See resistance point.

Swap price - A price as a differential between two dates of the swap.

Stochastics Oscillator - This technical analysis indicator is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, prices tend to close near their low.

Swap - The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swift - Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.

Swissy - Market slang for Swiss Franc.

Forex Terms (T)

Technical Analysis - Technical analysis is the study of market movements based on past prices, patterns and trends in an attempt to forecast future prices, patterns and trends. Technical analysis varies between traders, but typically involves a number of pricing and timing indicators to determine the best prices and times to place high-probability trades.

Technical Correction - An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Thin market - A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.

Thursday/Friday Dollars - A US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

Tick - A minimum change in price, up or down.

Ticker - Shows current and/or recent history of a currency either in the format of a graph or table.

Timing Indicator - A technical analysis tool that helps determine times when a selected market may experience highs, lows or general trends. A timing tool does not indicate prices, momentum or magnitude.

Today/Tomorrow - Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.

Tomorrow next (Tom next) - Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.

Trading - Buying or selling of goods and services among countries called commerce. Forex Trading is the trading of Foreign Currencies.

Trade Date - The date on which a trade occurs.

Tradeable Amount - Smallest transaction size acceptable.

Trading Strategy - A careful assessment and plan as to the methods and tools used to decide when and how to place trades. Strategies should be customized for each trader and should include trading goals, assessment of risk appetite, types of analysis and risk management tools. For more information, contact your customer service specialist.

Transaction Cost – the cost of buying or selling a financial instrument.

Transaction Date - The date on which a trade occurs.

Transaction - The buying or selling of currencies resulting from the execution of an order.

Two Tier Market - A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way Quotation - When a dealer quotes both buying and selling rates for foreign exchange transactions.

Trend - simply the direction of the market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated

Trend Line - This is a Technical Analysis indicator also called or linear regression, which is a statistical tool used to uncover trends. It is calculated by using the "Least Squares" method. There are two ways to use the linear regression line: a. Trade in the direction of the Trend line. b. Construct a parallel trend channel above and below the Trend line to be used as support and resistance levels.

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.

Forex Terms (U)

Uncovered - Another term for an open position.

Under-valuation - An exchange rate is normally considered to be undervalued when it is below its purchasing power parity...

Up tick - A transaction executed at a price greater than the previous transaction.

Uptick – a new price quote at a price higher than the preceding quote.

Uptick Rule – In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers

Forex Terms (V)

Value Date - For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value Spot - Normally settlement for two working days from today.

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 (Vol) - A measure of price fluctuations. The standard deviation of a price series is commonly used to measure price volatility.

Volume - represents the total amount of trading activity in a particular stock, commodity or index for that day. It is the total number of contracts traded during the day.

Vostro Account - A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.

Forex Terms (W)

Weak Dollar/ Strong Dollar - dollar is said to be weak (relative to a previous time period) against another currency when more dollars are required to buy one unit of another currency. The dollar is strong or has gained in strength when fewer dollars are required to buy one unit of another currency. For example, if $1 buys 10 FF in 1989 but today $1 buys only 6 FF then the dollar has weakened against the franc.

Whipsaw – slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal. or
Term for where a trader takes a position, then has to move against it triggering stop loss limits and liquidation of positions, then having to move in the original direction. Normally occurs in volatile markets...

Wash trade - A matched deal which produces neither a gain nor a loss.

Working day - A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).

Forex Terms (Y)

Yard – Slang for a billion.
YIELD - Return on capital investment.