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Glossary of Terms
Ask: Price at
which broker/dealer is willing to sell. Same as "Offer".
For example, if EUR/USD is quoted at 1.1850/1.1854, the 1.1854 is the
"Ask" or "Offered" price.
Bid: Price
at which broker/dealer is willing to buy. For example, if EUR/USD is
quoted at 1.1850/1.1854, the 1.1850 is the "Bid" price.
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.
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.
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 relationship between the notional contract value and 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); or "50:1" leverage. Leverage is the inverse
of the percentage margin requirement.
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.
Long: A
market position that has been bought. It will generate profits as
the market moves up and losses as the market moves down. For
example, if you bought Euros, you will be "long" Euros.
Margin: The amount of funds
required in a clients account in order to open a position or to maintain
an open position. The percentage of the contract value required as
margin is inversely related to the leverage.
Margin Call:
A requirement by the broker to deposit more funds in order to maintain an
open position.
Market Order:
An order to buy at the current Ask price.
Offer: Price at
which broker/dealer is willing to sell. Same as "Ask".
Overnight charges: The
cost, often quoted in terms of dollars per day and per lot, of holding a
position open overnight.
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.
Short:
A market position that has been sold. It will generate losses as the
market moves up and profits as the market moves down. For example,
if you sold Euros, you will be "short" Euros.
Spot Foreign Exchange:
Often referred to as the "interbank" market. Refers to currencies
traded between two counterparties for "spot" or current delivery rather
than future delivery. 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.
For example, if EUR/USD is trading at around 1.1850, you could place a
stop order to buy at 1.1870. This order would be filled only if the
market moved up to 1.1870 or higher.
Technical Analysis:
Analysis applied to the price action of the market to develop trading
decisions, irrespective of fundamental factors.
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