Forex Glossary

Here are some of the most common terms used in FOREX trading.

Ask Price — Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote — e.g. EUR/USD 1.1965 / 68 — means that one euro can be bought for 1.1968 UD dollars.

Bar Chart — A type of chart used in Technical Analysis. Each time division on the chart is displayed as a vertical bar which show the following information — the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.

Base Currency — is the first currency in a currency pair. A quote shows how much the base currency is worth in the quote (second) currency. For example, in the quote — USD/JPY 112.13 — US dollars are the base currency, with 1 US dollar being worth 112.13 Japanese yen.

Bid Price — is the price a trader can sell currencies. The Bid Price is shown on the left side of a quote — e.g. EUR/USD 1.1965 / 68 — means that one euro can be sold for 1.1965 UD dollars.

Bid/Ask Spread — is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.

Broker — the intermediary between buyer and seller. Most FOREX brokers are associated with large financial institutions and earn money by setting a spread between bid and ask prices.

Candlestick Chart — A type of chart used in Technical Analysis. Each time division on the chart is displayed as a candlestick — a red or green vertical bar with extensions above and below the candlestick body. The top of the extension shows the highest price for the chart division and the bottom of the extension shows the lowest price. Red candlesticks indicate a lower closing price than opening price, and green candlesticks indicate the price is rising.

Cross Currency — A currency pair that does not include US dollars — e.g. EUR/GBP.

Currency Pair — Two currencies involved in a FOREX transaction — e.g. EUR/USD.

Economic Indicator — A statistical report issued by governments or academic institutions indicating economic conditions within a country.

First In First Out (FIFO) — refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.

Foreign Exchange (FOREX, FX) — Simultaneously buying one currency and selling another.

Fundamental Analysis — Analysis of political and economic conditions that can affect currency prices.

Leverage or Margin — The ratio of the value of a transaction to the required deposit. A common margin for FOREX trading is 100:1 — you can trade currency worth 100 times the amount of your deposit.

Limit Order — An order to buy or sell when the price reaches a specified level.

Lot — The size of a FOREX transaction. Standard lots are worth about 100,000 US dollars.

Major Currency — The euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies.

Minor Currency — The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.

One Cancels the Other (OCO) — Two orders placed simultaneously with instructions to cancel the second order on execution of the first.

Open Position — An active trade that has not been closed.

Pips or Points — The smallest unit a currency can be traded in.

Quote Currency — The second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency.

Rollover — Extending the settlement time of spot deals to the current delivery date. The cost of rollover is calculated using swap points based on interest rate differentials.

Technical Analysis — Analysis of historical market data to predict future movements in the market.

Tick — The minimum change in price.

Transaction Cost — The cost of a FOREX transaction — typically the spread between bid and ask prices.

Volatility — A statistical measure indicating the tendency of sharp price movements within a period of time.

What Is It And How Does It Work?

The Foreign Exchange market, also referred to as the "Forex" is the biggest and largest financial market in the world. It has a daily average turnover of US$1.9 trillion- just imagine that amount of money! Don't you want to join this trillion-dollar industry?

Forex is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, Forex is trading.

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency.

The other 95% is trading for profit, or what you call speculation. Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market.

On one side of each speculative stock trade is a participant who believes he has superior information and on the other side is another participant who believes his information is superior.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid- meaning its in cash or convertible to cash) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur — real time- day or night.

The Forex market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets.

Understanding Forex quotes

Reading a Forex quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading Forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).