Forex Glossary

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Here are some of the most common terms and actions used in FX. Check our Forex Glossary:

• Adjustment
  Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate
• Appreciation
  An increase in the value of a currency.
• Arbitrage
  The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.
• Ask
  The price requested by the trader. This usually indicates the lowest price a seller will accept.
• Base currency
  The currency that the investor buys or sells (i.e. EUR in EURUSD).
• Bear
  Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly.
• Bid
  The price offered by the trader. This usually indicates the highest price a purchaser will pay.
• Bid/Ask
  The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.
• Bull
  Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.
• Cash Market
  The market in the actual financial instrument on which a futures or options contract is based.
• Closed Position
  Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will ’square’ the postion.
• Cross
  When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.
• Cross rate
  An exchange rate that is calculated from two other exchange rates.
• Currency symbols
  AUD - Australian Dollar
  CAD - Canadian Dollar
  EUR - Euro
  JPY - Japanese Yen
  GBP - British Pound
  CHF - Swiss Franc
• Depreciation/decline
  A fall in the value of a currency.
• Devaluation
  The deliberate downward adjustment of a currency’s price, normally by official announcement.
• Exchange rate
  What one currency is worth in terms of another, for example the Australian dollar might be worth 58 US cents or 70 yen. Countries can determine their exchange rates in a variety of ways:
  1. A floating exchange rate system where the currency finds its own level in the market.
  2. A crawling or flexible peg system which is a combination of an officially fixed rate and frequent small adjustments which in theory work against a build-up of speculation about a revaluation or devaluation.
  3. A fixed exchange-rate system where the value of the currency is set by the government and/or the central bank.
• EURUSD
  Means that you trade EUR against dollars. If you buy euro you pay in dollars and if you sell euro you receive dollars.
• FX, Forex, Foreign Exchange
  All names for the transaction of one currency for another, e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00.
• Interbank
  Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions.
• Interest rate differential
  The yield spread between two otherwise comparable debt instruments denominated in different currencies.
• Leverage (gearing)
  The investor only funds part of the amount traded.
• Long
  To buy.
• Long position
  A position that increases its value if market prices increase.
• Liquid (-ity)
  The capacity to be converted easily and with minimum loss into cash. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. Ultra-short-dated treasury notes are an example of a liquid investment.
• Margin
  The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.
• Net Position
  The amount of currency bought or sold which have not yet been offset by opposite transactions.
• NYSE
  The New York Stock Exchange.
• Open position
  A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY, you have an open position in USDJPY until you offset it by selling 100,000 USDJPY, thus “closing” the position.
• Over the counter
  When trading takes place directly between two parties, rather than on an exchange. Over the counter trades can be customised whereas exchange-traded products are often standardised.
• Pips
  A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
• Position
  Traders talk of “taking a position” which simply means buying or selling currency cross. “Position” can also refer to a trader’s cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.
• Quote
  An indicative market price, normally used for information purposes only.
• Risk
  Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one’s business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile – whether one is risk – averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.
• Secondary currency (variable currency or counter currency)
  The currency that the investor trades the base currency against (i.e. USD in EURUSD).
• Short position
  A position that benefits from a decline in market prices.
• Short
  To sell.
• Speculative
  Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.
• Spot
  A Spot rate is the current market price of an asset.
• Spot market
  The part of the market calling for spot settlement of transactions. The precise meaning of “spot” will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, “spot” means delivery two working days hence.
• Spread
  The difference between the bid and the ask rate.
• Tick
  A minimum change in price, up or down.
• Two-Way Price
  When both a bid and offer rate is quoted for a FX transaction.
• Yard
  Slang for a billion.