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Glossary
Appreciation - A currency is said to
"appreciate" when it strengthens in price in
response to market demand.
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 (Offer) Price - The price at which
the market is prepared to sell a specific Currency
in a Foreign Exchange Contract or Cross Currency
Contract. At this price, the trader can buy the
base currency. In the quotation, it is shown on
the right side of the quotation. For example, in
the quote USD/CHF 1.4527/32, the ask price is
1.4532; meaning you can buy one US dollar for
1.4532 Swiss francs.
Balance of Trade - The value of a
country's exports minus its imports.
Bar Chart - A type of chart which
consists of four significant points: the high and
the low prices, which form the vertical bar, the
opening price, which is marked with a little
horizontal line to the left of the bar, and the
closing price, which is marked with a little
horizontal line of the right of the bar.
Base Currency - The first currency in a
Currency Pair. It shows how much the base currency
is worth as measured against the second currency.
For example, if the USD/CHF rate equals 1.6215
then one USD is worth CHF 1.6215. In the FX
markets, the US Dollar is normally considered the
'base' currency for quotes, meaning that quotes
are expressed as a unit of $1 USD per the other
currency quoted in the pair. The primary
exceptions to this rule are the British Pound, the
Euro and the Australian Dollar.
Bid Price - The bid is the price at
which the market is prepared to buy a specific
Currency in a Foreign Exchange Contract or Cross
Currency Contract. At this price, the trader can
sell the base currency. It is shown on the left
side of the quotation. For example, in the quote
USD/CHF 1.4527/32, the bid price is 1.4527;
meaning you can sell one US dollar for 1.4527
Swiss francs.
Bid/Ask Spread - The difference between
the bid and offer price.
Big Figure Quote - Dealer expression
referring to the first few digits of an exchange
rate. These digits are often omitted in dealer
quotes. For example, a USD/JPY rate might be
117.30/117.35, but would be quoted verbally
without the first three digits i.e. "30/35".
Broker - 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.
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.
Chartist - An individual who uses charts
and graphs and interprets historical data to find
trends and predict future movements. Also referred
to as Technical Trader.
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
position.
Collateral - Something given to secure a
loan or as a guarantee of performance.
Commission - A transaction fee charged
by a broker.
Counter Currency - The second listed
Currency in a Currency Pair.
Country Risk - Risk associated with a
cross-border transaction, including but not
limited to legal and political conditions.
Cross Currency Pairs or Cross Rate - A
foreign exchange transaction in which one foreign
currency is traded against a second foreign
currency. For example; EUR/GBP.
Currency Symbols
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
USD- US Dollar
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc
Currency - Any form of money issued by a
government or central bank and used as legal
tender and a basis for trade.
Currency Pair - The two currencies that
make up a foreign exchange rate. For Example, EUR/USD
Currency Risk - the probability of an
adverse change in exchange rates.
Dealer - An individual or firm that 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.
Depreciation - A fall in the value of a
currency due to market forces.
Devaluation - The deliberate downward
adjustment of a currency's price, normally by
official announcement.
Economic Indicator - A government issued
statistic that indicates current economic growth
and stability. Common indicators include
employment rates, Gross Domestic Product (GDP),
inflation, retail sales, etc.
Euro - the currency of the European
Monetary Union (EMU). A replacement for the
European Currency Unit (ECU).
European Central Bank (ECB) - the
Central Bank for the new European Monetary Union.
Federal Reserve (Fed) - The Central Bank
for the United States.
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.
Foreign Exchange - (Forex, FX) - the
simultaneous buying of one currency and selling of
another.
Fundamental Analysis - Analysis of
economic and political information with the
objective of determining future movements in a
financial market.
FX - Foreign Exchange.
G7 - The seven leading industrial
countries, being the US, Germany, Japan, France,
UK, Canada, Italy.
Going Long - The purchase of a stock,
commodity, or currency for investment or
speculation.
Going Short - The selling of a currency
or instrument not owned by the seller.
Gross Domestic Product - Total value of
a country's output, income or expenditure produced
within the country's physical borders.
Gross National Product - Gross domestic
product plus income earned from investment or work
abroad.
Hedge - A position or combination of
positions that reduces the risk of your primary
position.
Inflation - An economic condition
whereby prices for consumer goods rise, eroding
purchasing power.
Initial Margin - The initial deposit of
collateral required to enter into a position as a
guarantee on future performance.
Interbank Rates - The Foreign Exchange
rates at which large international banks quote
other large international banks.
Leading Indicators - Statistics that are
considered to predict future economic activity.
Leverage - Also called margin. The ratio
of the amount used in a transaction to the
required security deposit.
Limit order - An order with restrictions
on the maximum price to be paid or the minimum
price to be received.
Liquidity - The ability of a market to
accept large transaction with minimal to no impact
on price stability.
Long position - A position that
appreciates in value if market prices increase.
When the base currency in the pair is bought, the
position is said to be long.
Lot - A unit to measure the amount of
the deal. A standard size Lot is $100,000 (or
$100K).
Margin - The required equity that an
investor must deposit to collateralize a position.
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 customer. Should your equity fall below the minimum margin required to maintain all open positions, some or all positions may be closed by the trading platform.
Market Risk - Exposure to changes in
market prices.
Mark-to-Market - Process of
re-evaluating all open positions with the current
market prices. These new values then determine
margin requirements.
Maximum Drawdown - Maximum drawdown
means the most (based on testing) that a system
has ever gone down from a previous high (peak to
valley). In terms of your own account, using a
percentage makes explanation easiest. If the
maximum drawdown of a trading system is 20%, it
means that theoretically the most your account
should ever go down is 20% from whatever the
highest total your account reaches. For example:
If you opened an account with $25,000 and you
experienced the maximum drawdown of 20%
immediately (that would be really bad luck, but
could happen), your account might go to $20,000
(down 20% or $5,000 of your initial $25,000)
before it started increasing in value again. If
you started out making a profit (more likely, but
no guarantees), it would refer to the highest
amount your account reached prior to the maximum
drawdown, i.e., if your $25,000 account went up to
$50,000 and you had a maximum drawdown of 20%,
your account would go down to $40,000 (down 20% or
$10,000 of your new high value of $50,000) before
it started increasing in value again.
Offer (ask) - The rate at which a dealer
is willing to sell a currency. See Ask (offer)
price
Open position - An active trade with
corresponding unrealized P&L, which has not been
offset by an equal and opposite deal.
Over the Counter (OTC) - Used to
describe any transaction that is not conducted
over an exchange.
Overnight Position - A trade that
remains open until the next business day.
Pips - The smallest unit of price for
any foreign currency. Digits added to or
subtracted from the fourth decimal place, i.e.
0.0001. Also called Points. A pip (on most major
currencies) is normally worth between $9 and $10
each.
Political Risk - Exposure to changes in
governmental policy which will have an adverse
effect on an investor's position.
Position - The netted total holdings of
a given currency.
Price Transparency - Describes quotes to
which every market participant has equal access.
Profit /Loss or "P/L" or Gain/Loss - The
actual "realized" gain or loss resulting from
trading activities on Closed Positions, plus the
theoretical "unrealized" gain or loss on Open
Positions that have been Mark-to-Market.
Range - The difference between the
highest and lowest price of a currency recorded
during a given trading session.
Rate - The price of one currency in
terms of another, typically used for dealing
purposes.
Resistance - A term used in technical
analysis indicating a specific price level at
which analysis concludes people will sell.
Revaluation - An increase in the
exchange rate for a currency as a result of
central bank intervention. Opposite of
Devaluation.
Risk - Exposure to uncertain change,
most often used with a negative connotation of
adverse change.
Risk Management - the employment of
financial analysis and trading techniques to
reduce and/or control exposure to various types of
risk.
Roll-Over - Process whereby the
settlement of a deal is rolled forward to another
value date. The cost of this process is based on
the interest rate differential of the two
currencies. This occurs every day at 5:00PM EST
when your account is traded in a PAMM (Percent
Asset Management Module) account such as you would
be using if you trade the POWER FOREX™ System.
Round Turn (or Round Trip) - Buying and
selling of a specified amount of currency,
basically meaning one completed trade.
Short Position - An investment position
that benefits from a decline in market price. When
the base currency in the pair is sold, the
position is said to be short.
Slippage - The difference in price
between what the computer signal indicates and the
actual price that gets executed on the trading
platform. For example: if the computer signals a
"buy" at a price of 1.3200 and the trading
platform actually executes the "buy" at 1.3202,
there would be 2 pips of "slippage" or difference
between the signal price and actual execution
price.
Spread - The difference between the bid
and offer prices.
Stop Loss Order - Normally a stop order is used to automatically close an open position before additional losses are incurred.
Support Levels - A technique used in
technical analysis that indicates a specific price
ceiling and floor at which a given exchange rate
will automatically correct itself. Opposite of
resistance.
Technical Analysis - An effort to
forecast prices by analyzing market data, i.e.
historical price trends and averages, volumes,
open interest, etc.
Tick - A minimum change in price, up or
down.
Unrealized Gain/Loss - The theoretical
gain or loss on Open Positions valued at current
market rates, as determined by the broker in its
sole discretion. Unrealized Gains/Losses become
Profits/Losses when position is closed.
US Prime Rate - The interest rate at
which US banks will lend to their prime corporate
customers.
Volatility (Vol) - A statistical measure
of a market's price movements over time.
Whipsaw - slang for a condition of a
highly volatile market where a sharp price
movement is quickly followed by a sharp reversal.
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