Forex Trading Dictionary

Ask - The quoted price at which a customer can buy a currency pair from a broker/dealer.  Also referred to as the "Offer", "ask price" or "ask rate".

Bid - Price at which broker/dealer is willing to buy.

Bid/Ask Spread ("Spread") - The distance, usually in pips, between the Bid and Ask price.  A tighter spread is better for the trader.

Cost of Carry (or "Premium" or "Interest") - The cost, often quoted in terms of dollars or pips per day, of holding an open position.

Currency Futures:  Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME").  Always quoted in terms of the currency value with respect to the US Dollar.  Parameters of the futures contract are standardized by the exchange.

Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough.  For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.

EBS:  "Electronic Brokerage System", the electronic system on which major banks trade with each other.  This is considered to be the most definitive indicator of prices at which currencies are "really" trading, at least for EUR/USD and USD/JPY.

Forex - Short for "Foreign Exchange". Also called "FX". Refers generally to the Foreign Exchange trading industry and/or to the currencies themselves.

Fundamental Analysis:  Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.

Leverage - Also referred to as "Gearing". The usage of a margin to trade on a larger capital base. In foreign exchange a trader's leverage is often represented as a percentage of margin requirements. For example a 2% margin will give a 50:1 leverage, and so a trader with a deposit of $10,000 will be able to hold open positions of $500,000 being 50 times his net equity. The high degree of leverage that is obtainable in the trading of off-exchange foreign currency transactions can work against you as well as for you. Leverage can lead to large losses as well as gains.

Limit: An order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.

Liquidity - The ability of a market to accept large transactions.

Margin:  The amount of funds required in a clients account in order to open a position or to maintain an open position.  For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.

Margin Call:  A requirement by the broker to deposit more funds in order to maintain an open position.  Sometimes a "margin call" means that the position which does not have sufficient funds on deposit will simply be closed out by the broker.  This procedure allows the client to avoid further losses or a debit account balance.

Market Order:  An order to buy at the current Ask price.

Offer: Price at which broker/dealer is willing to sell.  Same as "Ask".

Pip - The smallest price increment in a currency.  Often referred to as "ticks" in the futures markets.  For example, in EURUSD, a move from .8998 to .8999 is one pip. In USDJPY, a move from 138.54 to  138.55 is one pip.

Premium (also "Interest" or "Cost of Carry"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.

Quote currency - The second currency in a currency pair is referred to as the quote currency. For example, in a USD/JPY currency pair, the Japanese yen is the quote currency. Also referred to as the secondary currency or the counter currency.

Roll over - The process of extending the settlement date on an open position by rolling it over to the next settlement date.

Spot Foreign Exchange:  Often referred to as the "interbank" market. Refers to currencies traded between two counterparties, often major banks.  Spot Foreign Exchange is generally traded on margin and is the primary market that this website is focused on.  Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.

Stop: An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.

Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.

Tick - The smallest price increment in a CFD or futures price.  Often referred to as a "pip" in the currency markets.  For example, in Down Jones Industrials, a move from 7845 to 7846 is one tick. In S&P 500, a move from 801.65 to 801.66 is one tick.