Forex Trading Glossary
- Automated Forex Trading
Automated forex trading is a system of trading foreign currencies with a computer program based on a set of analyses that help determine whether to buy or sell a currency pair at a given time. Automated forex trading uses a computer program that the trader “teaches” to make decisions based on a set of technical rules. The signal generates an actual buy or sell order that is executed.
- Bank of England (BoE)
The Bank of England (BoE) is the central bank for the United Kingdom. It has a wide range of responsibilities, similar to those of most central banks around the world. It acts as the government's bank and the lender of last resort. It issues currency and, most importantly, it oversees monetary policy.
- Binary Option
A binary option is a derivative financial product with a fixed (or maximum) payout if the option expires in the money, or the trader losses the amount they invested in the option if the option expires out of the money.
- British Pound
The British pound has one of the highest trading volumes in the world, trailing only the U.S. dollar, euro and Japanese yen in daily volume. The British pound accounts for about 13 percent of the daily trading volume in foreign exchange markets.
- Call Option
Call options are an agreement that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset.
- Central Bank
A central bank or monetary authority is a monopolized and often nationalized institution given privileged control over the production and distribution of money and credit. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.
- Contract For Differences (CFD)
A contract for differences (CFD) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than by the delivery of physical goods or securities.
- Cross Currency
A cross currency transaction is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having first to exchange the currencies into American dollars.
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers.
- Currency Exchange
A currency exchange is a business or financial institution that has the legal right to exchange one currency for another currency to its customers. A currency exchange may be a stand-alone business or may be part of the services offered by a bank or other financial institution.
- Currency Pair
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.
D-Mark (Deutsche Mark) was the official currency of the Federal Republic of Germany until 2002. First issued in 1948, it was the official currency of West Germany, and later, the unified German state until the final adoption of the euro (EUR) in 2002. The official currency code is DEM.
- Digital Currency Exchanger (DCE)
A digital currency exchanger (DCE) is a market maker who exchanges legal tender for electronic currency, or who exchanges one electronic currency for another. Most exchanges happen online rather than at physical locations.
- Economic Growth
Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.
The Euro is the official currency of 19 of the 28 European Union countries. The euro was introduced by the EU in to the financial community in 1999 and physical euro coins and paper notes were introduced in 2002. Euros are printed and managed by the European System of Central Banks (ESCB). The euro is abbreviated by the EUR symbol.
- European Central Bank (ECB)
The European Central Bank (ECB) is the central bank responsible for monetary policy of those European Union (EU) member countries which have adopted the euro currency. This region is known as the euro area or eurozone and currently comprises 19 members. The principal goal of the ECB is to maintain price stability in the euro area, thus helping preserve the purchasing power of the euro.
- Exchange Rate
An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an exchange rate has two components, the domestic currency, and a foreign currency, and can be quoted either directly or indirectly.
- Exotic Currency
An exotic currency is a foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large.
- Federal Reserve System
The Federal Reserve System is the central bank of the United States and arguably the most powerful financial institution in the world. The Federal Reserve System was founded by the U.S. Congress in 1913 to provide the nation with a safe, flexible, and stable monetary and financial system.
- Fiat Money
Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.
- Foreign Exchange Market
The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
- Forex Broker
Forex brokers are firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market. Currency traders use these brokers to access the 24-hour currency market.
- Forex Futures
A forex future is an exchange-traded contract to buy or sell a specified amount of a given currency at a predetermined price on a set date in the future. All forex futures are written with a specific termination date, at which point delivery of the currency must occur unless an offsetting trade is made on the initial position.
- Forex Market
The forex market is the market in which participants can buy, sell, exchange, and speculate on currencies. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
- Forex Market Hours
The term forex hours refers to the time in which forex market participants can buy, sell, exchange and speculate on currencies. The forex market is open 24 hours a day, five days a week. International currency markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors around the world.
- Forex Options Trading
Forex options trading is a strategy for use in the foreign exchange (FX) marketplace which allows traders to trade without taking actual delivery of the asset. Forex options trade over-the-counter (OTC), and traders can choose prices and expiration dates which suit their hedging or profit strategy needs.
- Forex Scalping
Forex scalping is a trading strategy used by forex traders to buy or sell a currency pair and then hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time.
- Forex Signals System
A forex signal system is a set of analyses that a forex trader uses to determine whether to buy or sell a currency pair at any given time. Forex signal systems could be based on technical analysis charting tools or news-based events. The day trader's currency trading system is usually made up of a multitude of signals that work together to create a buy or sell decision.
- Forex Spread Betting
Forex spread betting is a category of spread betting that involves taking a bet on the price movement of currency pairs. A company offering currency spread betting usually quotes two prices, the bid and the ask price - this is called the spread. Traders bet whether the price of the currency pair will be lower than the bid price or higher than the ask price.
- Fundamental Analysis
Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors and microeconomic factors.
A greenback is a slang term for U.S. paper dollars. Greenbacks got their name from their color, however, in the mid-1800s, "greenback" was a negative term. During this time, the Continental Congress did not have taxing authority. As a result, the greenbacks did not have a secure financial backing and banks were reluctant to give customers the full value of the dollar.
- Hedge Fund
Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns.
- Interbank Market
The interbank market is the global network utilized by financial institutions to trade currencies between themselves. While some interbank trading is done by banks on behalf of large customers, most interbank trading is proprietary, meaning that it takes place on behalf of the banks' own accounts.
Forex traders use borrowed money to control a larger position than they'd otherwise by able to control with their own invested capital. The use of leverage in trading is often likened to a double-edged sword, since it magnifies both gains and losses.
- Liquid Market
A liquid market is a market with many bids and offers, low spreads, and low volatility. In a liquid market, it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers. In a liquid market, changes in supply and demand have a relatively small impact on price.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market, such as a country's stock market or a city's real estate market, allows assets to be bought and sold at stable prices.
- Managed Forex Account
Managed forex accounts are a type of foreign exchange (FX) account in which a money manager trades on a client's behalf for a fee. Managed forex accounts are similar to hiring an investment advisor to maintain a traditional investment account of equities and bonds.
- Monetary Policy
Monetary policy consists of the process of drafting, announcing and implementing the plan of actions taken by the central bank, currency board or other competent regulatory authority of a country that determines the scope and impact of the key drivers of the economic activity in that country.
- Mutual Fund
A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors.
- No Dealing Desk
No dealing desk is a way of forex trading that provides immediate access to the interbank market. The interbank market is where foreign currencies are traded. This is different than trading through the dealing desks that are found in many banks and financial institutions.
- Over-The-Counter (OTC)
The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments, such as derivatives, which are traded through a dealer network.
- Put Option
A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.
Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. Slippage often occurs during periods of higher volatility when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.
- Spot Trade
A spot trade is the purchase or sale of a foreign currency, financial instrument or commodity for instant delivery. Most spot contracts include physical delivery of the currency, commodity or instrument; the difference in price of a future or forward contract versus a spot contract takes into account the time value of the payment, based on interest rates and time to maturity.
A spread can have several meanings in finance. Basically, however, they all refer to the difference between two prices, rates or yields. In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond or currency. This is known as a bid-ask spread.
- Technical Analysis
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. The technical analysts focus on patterns of price movements, trading signals and various other analytical charting tools to evaluate a security's strength or weakness.
- Technical Indicators
Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. By analyzing historical data, technical analysts use indicators to predict future price movements. Examples of common technical indicators include Relative Strength Index, Stochastic Oscillator, MACD and Bollinger Bands.
- U.S. Dollar
The U.S. dollar has been the official currency of the United States since the passage of the National Currency Act of 1785. Before that, the United States used a patchwork system of unreliable continental currency, British pounds and various foreign currencies. The USD is the abbreviation for the U.S. dollar in the world of currency trading.
- Vanilla Option
A vanilla option is a financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a given timeframe. A vanilla option is a call or put option that has no special or unusual features.
- Velocity of Money
The velocity of money is the rate at which money is exchanged from one transaction to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it's the rate at which people spend money.