Forex Definitions and Terms

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

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

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

Cost of Carry (also "Interest" or "Premium"): 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.

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: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value") is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).

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: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

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 .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 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.

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: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors. Below are the most common technical studies. Click to view a description:

Bollinger Bands

Moving Averages

Parabolic SAR

MACD

RSI

Momentum

Stochastic

Slow Stochastic

CCI ("Commodity Channel Index")

ATR ("Average True Range")

Rate of Change

Standard Deviation

CURRENCY PAIRS:

Symbol		Currency Pair		Trading Terminology
GBPUSD		British Pound / US Dollar		"Cable"
EURUSD		Euro / US Dollar		"Euro"
USDJPY		US Dollar / Japanese Yen		"Dollar Yen"
USDCHF		US Dollar / Swiss Franc		"Dollar Swiss", or "Swissy"
USDCAD		US Dollar / Canadian Dollar		"Dollar Canada"
AUDUSD		Australian Dollar / US Dollar		"Aussie Dollar"
EURGBP		Euro / British Pound		"Euro Sterling"
EURJPY		Euro / Japanese Yen		"Euro Yen"
EURCHF		Euro / Swiss Franc		"Euro Swiss"
GBPCHF		British Pound / Swiss Franc		"Sterling Swiss"
GBPJPY		British Pound / Japanese Yen		"Sterling Yen"
CHFJPY		Swiss Franc / Japanese Yen		"Swiss Yen"
NZDUZD		New Zealand Dollar / US Dollar		"New Zealand Dollar" or "Kiwi"
USDZAR		US Dollar / South African Rand		"Dollar Zar" or "South African Rand"
GLDUSD		Spot Gold		"Gold"
SLVUSD		Spot Silver		"Silver" for info click here

Controlling Risk

Controlling risk is one of the most important ingredients of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he is willing to lose on each trade before cutting losses, and how much he is willing to lose in his account before ceasing trading and re-evaluating.

Risk will essentially be controlled in two ways: 1) by exiting losing trades before losses exceed your pre-determined maximum tolerance (or "cutting losses"), and 2) by limiting the "leverage" or position size you trade for a given account size.

Cutting Losses

Too often, the beginning trader will be overly concerned about incurring losing trades. He therefore lets losses mount, with the "hope" that the market will turn around and the loss will turn into a gain.

Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a positions, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he can expect to lose on the trade.

The other key element of risk control is overall account risk. In other words, a trader should know before he begins his trading endeavor how much of his account he is willing to lose before ceasing trading and re-evaluating his strategy. If you open an account with $2,000, are you willing to lose all $2,000? $1,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it.

Determining Position Size

Before beginning any trading program, an assessment should be made of the maximum account loss that is likely to occur over time, per lot (see "Drawdown" in "Glossary of Terms"). For example, assume you have determined that your worse case loss on any trade is 30 pips. That translates into approximately $300 per $100,000 position size. Further assume that the $100,000 position size is equal to one lot. Five consecutive losing trades would result in a loss of $1,500 (5 x $300); a difficult period but not to be unexpected over the long run. For a $10,000 account trading one lot, this translates into a 15% loss. Therefore, even though it may be possible to trade 5 lots or more with a $10,000 account, this analysis suggests that the resulting "drawdown" would be too great (75% or more of the account value would be wiped out).

Any trader should have a sense of this maximum loss per lot, and then determine the amount he wishes to trade for a given account size that will yield tolerable draw downs.

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Technical Analysis

Technical Analysis is probably the most common and successful means of making trading decisions and analyzing forex and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell signals or to predict market direction.

Click on the technical study below for a definition and to learn how it may be applied to trading:

Bollinger Bands

Moving Averages

Parabolic SAR

MACD

RSI

Momentum

Stochastic

Slow Stochastic

CCI ("Commodity Channel Index")

ATR ("Average True Range")

Rate of Change

Standard Deviation

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Trading Strategy and Decision Making

Making trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies. Please visit these pages for detailed information. Sample Strategy 1 - Simple Moving Average Successful trading is often described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will illustrate one decision making model which uses a Simple Moving Average ("SMA") technical study, based on a 12-period SMA, where each period is 15 minutes. This is one example of a trading decision making strategy, and we encourage any trader to research other strategies as thoroughly as possible. We will use a simple algorithm: when the price of the currency crosses above the 12-period SMA, it will be taken as a signal to buy at the market. When the currency price crosses below the 12-period SMA, it will be a signal to "Stop and Reverse" ("SAR"). In other words, a long position will be liquidated and a short position will be established, both with market orders. Thus this system will keep the traders "always in" the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90: This is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or "filters". Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI's integrated charting application. Sample Strategy 2 - Support and Resistance Levels One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past. For example, in chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move beyond that point: The trading strategy would then be to sell EURUSD the next time it gets close to .9015, with a stop placed just above .9015, say at .9025. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the .9015 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD). for more info...click here

Forex Background

The global marketplace has changed dramatically over the past several years. New investment strategies are becoming more important in order to minimize risk, as well as to maintain high portfolio returns. Among the most rewarding of the markets opening up to traders is the Foreign Exchange market. Identifiable trading patterns, as well as comparatively low margin requirements, have rewarding trading opportunities for many.

In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread).

As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions. Today, this market is more widely available to the individual trader than ever before.

Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions:

Symbol		Currency Pair		Trading Terminology
GBPUSD		British Pound / US Dollar		"Cable"
EURUSD		Euro / US Dollar		"Euro"
USDJPY		US Dollar / Japanese Yen		"Dollar Yen"
USDCHF		US Dollar / Swiss Franc		"Dollar Swiss", or "Swissy"
USDCAD		US Dollar / Canadian Dollar		"Dollar Canada"
AUDUSD		Australian Dollar / US Dollar		"Aussie Dollar"
EURGBP		Euro / British Pound		"Euro Sterling"
EURJPY		Euro / Japanese Yen		"Euro Yen"
EURCHF		Euro / Swiss Franc		"Euro Swiss"
GBPCHF		British Pound / Swiss Franc		"Sterling Swiss"
GBPJPY		British Pound / Japanese Yen		"Sterling Yen"
CHFJPY		Swiss Franc / Japanese Yen		"Swiss Yen"
NZDUSD		New Zealand Dollar / US Dollar		"New Zealand Dollar" or "Kiwi"
USDZAR		US Dollar / South African Rand		"Dollar Zar" or "South African Rand"
GLDUSD		Spot Gold		"Gold"
SLVUSD		Spot Silver		"Silver"

Spot Forex versus Currency Futures

Many traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.

The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.

The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):

Forex Symbol		Currency Pair		Futures Symbol		Directional Relationship
GBPUSD		British Pound / US Dollar		BP		Parallel
EURUSD		Euro / US Dollar		EU		Parallel
USDJPY		US Dollar / Japanese Yen		JY		Inverse
USDCHF		US Dollar / Swiss Franc		SF		Inverse
USDCAD		US Dollar / Canadian Dollar		CD		Inverse
AUDUSD		Australian Dollar / US Dollar		AD		Parallel
NZDUSD		New Zealand Dollar / US Dollar		ND		Paralle

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