Glossary of Forex Trading Terminology

Often, one of the most challenging things for the forex newbie to learn and understand is the industry jargon. This article will help you learn the terminology, and, in doing so, will begin to teach you some of the important principals that are inherent in the definitions themselves. Read and consider the most commonly used forex trading terminology or jargon that follows:

Ask (Offer): This is the price at which the trader is willing to sell or buy a currency in forex trading.

Ask Price/ Ask Rate: The price at which a currency is offered for sale (as in bid/ask spread).

Minor Currency: The less traded currencies in the forex market are referred to as the minor traded currencies. These currencies are less traded in terms of volumes and thus have less liquidity. Mexican Peso and Singapore dollar are two such examples.

ABC Wave: Elliot definition of corrective waves that reflect countertrend price movements in forex trading. It comprises of 3 such waves.

Account Balance (Account Information): It is the money in the trader’s account that he holds. This might include market gain or losses.

Adaptive Techniques: This is used in contrast to fixed parameter techniques. Most indicators include some look back periods while calculating. The adaptive techniques consider adjustments and factors like error between the real and forecasted price and others.

Balance of Payments: It is the difference between the country’s import and exports including the capital and services that flow. This is a testimony of a nation’s transaction of goods and services with the rest of the world.

Bid/ask spread: This is the difference between the bid price and the ask price.

Base Currency: it is the first currency in the pair of the currency that is being traded. It is also the currency against which the second currency is quoted. US dollar is considered to the base currency for the most commonly traded pairs.

Bear Market: A forex trading market that features a period of steadily declining prices.

Bull Market: A forex trading market that features a period of steadily rising prices.

Breakeven Stop: A breakeven stop order is generated to protect the trade from not allowing it to turn it into a loss. It is generally operative at trade entry points.

Forex Broker: The mediator/ arbitrator that matches buyers and sellers in the forex trade.

Commission: It is the fees paid to the brokerage firm for their services and guidance in forex trade.

Breakout: It is referred to the price points when prices move through support and resistance levels in the direction of a break.

Buy Order: It is the order to purchase the base currency in terms of quote currency.

Buy Limit Order: It is the order generated to buy a currency in a price which is lower than its recent price.

Currency pair: Forex currencies are always traded in pairs like US dollar/Japanese Yen is represented as USD/JPY where USD forms the base currency.

Capital Risk Limit: This puts a ceiling on trading capital anticipating that is risked.

Central Bank: The main bank in the nation or the highest regulatory financial authority in nation. A central Bank regulates the money supply in a country. It is also responsible for formulating the monetary policy and ensuring the financial stability in a country.

Chart-Based Stops: This indicates the signals when to come out of the forex trade. This is operative due to break in trend line, support or resistance levels or moving average.

Closed Trades: This is the phase when long position are sold off or bought back to cover short positions. The liquidity of open positions is listed in closed trades.

Commercial Banks: Banks that operate for profit and trade huge amount of money everyday.

Correction: A correction is often referred to as the retracement of the major previous trends. This is operation in times when market prices fluctuate rapidly by sharp fall or rises in the forex market.

Corrective Wave: The Elliot’s Waves. The, b, c waves are generally called corrective waves. These are operational or featured in between two cycles of impulse waves in the forex charts.

Counter Trend: The minor trend that runs in opposite direction to a major market trend.

Cross Rate: when the currency pair does not include USD then the rate is called across rate. The most popular cross rates are EUR/JPY, EUR/GBP etc.

Day Trading: When the trading start and ends in the same day and no position are carried forward for the next day.

Dealer: An individual or Brokerage fir that deals in foreign currency by offering buy and sell quotes i.e. bids and offers are provided simultaneously.

Devaluation: A significant fall in currency value regulated by the central bank to control the financial position of a country. In this process the central banks usually discards the pegging of the nation’s currency against a fixed exchange rate.

Forex: This is the acronym or abbreviation for foreign exchange.

FX: (Forex or FX) are used to describe the trading process of one currency against another at a predetermined rate. FX is also the name for the global currency market.

FX market hours: this refers to the foreign exchange trading hours. This is basically 5 and a half days a week and round the clock. The FX market remains closed on weekends.

Fixed Exchange Rate: It is the pegged rate as against floating exchange rate. This rate is determined by the country’s central bank against one or more currencies.

Impulse Wave: The five waves in Elliot Wave Theory 1, 2, 3, 4, 5

Interbank Market: Foreign exchange transactions are often conducted by banks via phone or electric network. So the FX market is referred to as the interbank market incase of such transactions.

Leverage: The small amount of money that is invested to have control over large trading positions.

Limit Order: Limit orders are used to enter or exit the forex trade. This is subjected to specific price levels and specific profit targets.

Major Currencies: There are seven major currencies: the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), and Canadian Dollar (CAD).

Margin: The amount of money that an individual trader should have in his account to start trading in the forex market and support a currency position.

Pip (Point): The movements in exchange rate are measured in forex trading. The smallest rise in exchange rate is the pip. For most of the currencies the pip is measured at .00001 except for USD/JPY and EURO/JPY where a pip is found to be .01 of an exchange rate.

Quote Currency (Pricing Currency): It is the second or other currency in a currency pair e.g. in the currency pair USD/JPY USD is the base currency and JPY is the quote currency.

Reward-Risk Ratio: This ratio calculates the potential gain in forex trading versus a potential loss.

Rollover: Rollover in forex market is the process of lengthening the settlement date in an open position. Mostly traders take delivery of their currency within two days after the deal is done in currency trading. But if they rollover their position then they close the existing position and simultaneously reenter anew position next trading day. This is an artificial extension by a trader for one more day. The concept of rollover is not applicable when a trader is engaged in day trading.

Spread: In Forex trade the difference between the bid price and the ask price is referred to as the Spread.

Stop Limit Order: When a stop order is coupled with a limit order in the forex market this situation arises. A stop limit order is generally implemented at a price beyond the stop price. Once the market reaches the stop price this order transforms into a limit order where you can buy or sell at the limit price or any price better that the limit price.