Saturday, February 21, 2009

Forex Terminologies


Foreign Exchange
The simultaneous buying of one currency and selling of another.

Foreign Exchange Market
An informal network of trading relationships between the world's major banks and other market participants sometimes referred to as the 'interbank' market. The foreign exchange market has no central clearinghouse or exchange, and is considered an over-the-counter (OTC) market.

Spot Market
Market for buying and selling currencies usually for settlement within two business days (the value date). USD/CAD = 1 day.

Rollover
The process whereby the settlement of a transaction is rolled forward to the next value date, typically at 5PM EST/10PM GMT. If you open a position on Monday, the settlement date is Wednesday, however, if you hold this position past rollover on Monday, the new value date is Thursday. Most brokers will automatically roll over your open positions, allowing you to hold a position for an indefinite period of time. The cost of this process is based on the interest rate differential between two currencies. Depending on your broker's rollover policy, if you are holding a currency with a higher rate of interest in the pair, you will earn interest, however if you are holding a currency with a lower rate of interest in the pair, you will pay it.

Exchange Rate
The value of one currency expressed in terms of another. For example, if the EUR/USD exchange rate is 1.3200, 1 Euro is worth US$1.3200.

Market Maker
A market maker provides liquidity in a particular financial instrument and stands ready to buy or sell that instrument by displaying a two-way price quote. A market maker takes the opposite side of your trade.

Broker
A firm that matches buyer and seller together for a fee or a commission.

Pip
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY lot The standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, and 10,000 units for a mini.

Pip Value
The value of a pip. To calculate pip value, divide 1 pip by the exchange rate and then multiply it by the number of units traded. So for example, to calculate the pip value for USD/CHF, divide 0.0001 by the current exchange rate of 1.2765 and multiply it by 100,000 to get a pip value of $7.83. For EUR/USD, divide 0.0001 by the current exchange rate of 1.2075 and multiply it by 100,000 to get a pip value of €8.28. To convert this back to US dollars, multiply it by the current exchange rate of 1.2075 to get a pip value of $10.

Spread
The difference between the sell quote and the buy quote. For example, if the quote for
EUR/USD reads 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on your trade, your position must move in your direction by an amount equal to the spread.

Standard Account
Trading with standard lot sizes

Mini Account
Trading with mini lot sizes

Margin
The deposit required to open a position. A 1% margin requirement allows you to trade a $100,000 lot with a $1,000 deposit. A mini account is 1/10th of a standard account. A 1% margin requirement allows you to trade a $10,000 lot with a $100 deposit.
Leverage The effective buying power of your funds expressed as a ratio. Calculated by the amount of times the notional value of your transaction exceeds the margin required to trade. e.g. 100:1 leverage allows you to control a $100,000 position with a $1,000 deposit. You can get leverages as high as 400:1 with some brokers.

Long Position
A position whereby the trader profits from an increase in price. (Buy low, sell high)

Short Position
A position whereby the trader profits from a decrease in price. (Sell high, buy lower)

Market Order
An order at the current market price

Entry Order
An order that is executed when the price touches a pre-specified level

Limit Entry Order
An order to buy below or sell above the market at a pre-specified level, believing that the price will reverse direction from that point.

Stop-Entry Order
An order to buy above or sell below the market at a pre-specified level, believing that the price will continue in the same direction from that point.

Limit Order
An order to take profits at a pre-specified level

Stop-Loss Order
An order to limit losses at a pre-specified level

OCO Order
One Cancels the Other. Two orders whereby if one is executed, the other is cancelled.

Slippage
The difference in pips between the order price and the price the order is executed at.