Glossary of Forex Trading Terms

Glossary of FX trading terms. Highlighting the main ones used with the currency markets. If in doubt, double check or ask questions. It’s the wise man who knows what he doesn’t know.

  • American Option – An option that may be exercised at any time prior to its expiration date.
  • Ask – The price at which a currency pair may be purchased. Also called the offer, ask price or ask rate. (also see Bid – e.g. Bid/Ask Spread)
  • Base Currency – The first currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the U.S. Dollar would be the Base Currency. Also called the primary currency. The U.S. Dollar is the most common base currency
  • Bearish – Defines a market where prices are declining. Also known as a Bear Market.
  • Bid – The price that a currency pair can be sold at. Also known as a bid price or bid rate. (see Offer)
  • Bid/Ask Spread – The difference in points between the bid and ask price. Also called the Bid/Offer Spread.
  • Bullish – Defines a market where prices are rising. Also known as a Bull Market.
  • Call – A call option gives the buyer the right, but not the obligation, to purchase a specific currency pair at a pre-agreed price. An option to Buy.
  • Cross-rate – The exchange rate between two currencies, neither of which are the U.S. dollar.
  • Currency Pair – The two currencies comprising the FX rate. The USD/AUD represents a currency pair.
  • Dealer – A trading firm that is the other party in a FX transaction.
  • Euro – The official currency of many European countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. The Euro is also the official currency of Montenegro and Kosovo, Andorra, Monaco, San Marino, the Vatican, and these French territories: Martinique, Guadalupe, Reunion.
  • European Option – An option that can only be exercised on the date it expires.
  • Expiration – The date on which an option must be exercised or offset. (or maturity)
  • Forward Transaction – An agreement for actual delivery and payment for currency to occur at a specific date in the future.
  • Interbank Market – Currency transactions that are negotiated between banks or between large financial organizations. An individual can not trade on the Interbank Market directly.
  • Leverage (or Gearing) – A trader’s ability to control a large amount of currency with a relatively small amount of capital invested.
  • Long – A position that is expected to appreciate in value as the market increases. (compare with Short)
  • Limit Order – An order which is placed with some pre-condition, usually the maximum price the trader is willing to pay.
  • Margin – The amount of money required before anyone can open or maintain a position. Also called a Security Deposit.
  • Offer – The price at which a currency pair may be purchased. Also called the ask price or ask rate.
  • Open position – Any transaction which has not been closed out by an opposite transaction. This is a position at “risk”
  • Pip – The smallest FX currency unit of price movement.
  • Premium – The priced paid by an option buyer. Does not include commissions.
  • Profit – The difference between the selling and the buying price. Not a profit may be realised (ie safe), and unrealised (i.e. exposed to risk – e.g. on an open position)
  • Put – A Put option gives the buyer the right, but not the obligation, to sell a specific currency pair at a pre-agreed price. The opposite of a Put is a Call.
  • Quote Currency – The second currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the AUD would be the Quote Currency Also called the secondary or counter currency.
  • Rollover – The act of extending the settlement date for an open position until the next settlement date.
  • Resistance – A price level beyond which the currency finds it difficult to move.
  • Settlement – The delivery of the currency upon the trade’s maturity date. Trades can settle 1,2,3,or x days after trade date.
  • Short – The act of selling a currency that the trader believes will decline in value. The trader need not actually own the currency being sold. It can be borrowed from the broker and repaid at a future date when the price is more advantageous. (Short Selling)
  • Spot Market – A transaction where payment and delivery of currency is immediate.
  • Spread – The pip difference between the ask and bid price of a currency pair. The smaller the spread the better, when you are trading as otherwise any profits are reduced by trading costs.
  • Stop Loss – A standing order which instructs the broker to liquidate an open position if the price falls to a pre-specified level. In essence “Stopping any further losses”
  • Strike Price – The exchange rate at which the buyer of a call or the seller of a put can exercise a trade. Also called the exercise price.
  • Support – The price level at which traders feel comfortable enough to buy.
  • Trend – The direction in which the market is heading. The three categories of trends are: major, intermediate and short-term. Trends move in one of three directions: up, down, sideways.
  • Turning point – The point where a market ceases being though of as being bullish or bearish and moves in the opposite direction.

FX Rates and Graphs

There are lots of FX rates available online and free graphing of “live” fx rates.

Many of these come from trading platforms, others via exchanges, and other information providers.

Consider the source of your data

It’s important to consider:

  • Why they are providing the data
  • The cost of the data
  • Whether the data is live, delayed, indicative, tradeable
  • The display of the data
  • The currency of the prices
  • The timezone of the data (London, Paris, Tokyo, New York – what is 9am?)

Also consider why you are looking at the currency

  • Are you doing a short term trade
  • A long term currency play
  • Ensure you review both the short term (mins, hours) and long term (weeks, months, years) trends

What’s the base currency?

Currency rates are usually displayed with the USD cuurency as the base currency. It’s important to know what the currency you are looking at is being quoted against.

Example of Graphs

This is an example of a Candle Graph showing the GBPUSD at 15minute intervals, and below 1 minute intervals. Notice the difference in the graphs.

Essential News and Information Sources

Keeping up to date, with the latest news in general, currency movements, economic indicators and other factors which can impact the markets, and traders views is essential.

General News Sources

The BBC website is very useful, and is a well established news source. This covers a large variety of content, the business section is more specialised.

The Financial Times is a good website for financial and general news, as well as assessing sentiment.

Reuters and Bloomberg are good information sources but to get up to date information you need to pay for a feed, which isn’t practical for most traders.

Forex , FX, Currency News

Forex News Macroeconomic views how the the economic calendar and central banks can affect the currency markets.

FX Street – daily listing of major daily currency analysis and forecasts with support and trading suggestion forecasts.

Currency Pro – A Forex Portal with strong analysis on the Major Currency pairs.

Euromoney – Lottery – you could win millions

It may not be an fx trade, but a possible £95million seems to good an opportunity to miss. In this article we’ll highlight a key question to ask yourself.. are you gambling or trading?

Play EuroMillions Online


Play EuroMillions Online

So did you gamble, did you trade, did you bet? There is a question of when a trade becomes a gamble, when logic gives way to sentiment, and when the idea of something becomes more attractive than the real statistical probability would suggest it should be.

Me personally I like the lottery from time to time, ensure I only play a small amount that I really am prepared to lose, and look at it as entertainment. Where as my fx trading, well that is something much more serious.

The Dangers of FX trading and Forex for Beginners And How To Remove Them

When you begin trading fx, you have new dangers to face. Learn about some of these dangers and what you can do about them.

When trading forex, it’s important to remember that there are dangers.

When you start trading forex, those dangers are at their greatest. You lack experience, your understanding of the forex market, forex trading strategies and the factors that influence currencies might be relatively small… and mistakes can be very expensive!

When you’re just starting out in the forex markets then, bear in mind the following:

The danger — The forex market moves fast and you can lose your money just as quickly. And because it moves constantly, 24 hours a day, you can even lose it while you sleep, waking up to a giant loss.

The solution — Prepare well before you start trading forex. Take a forex trading course, make dummy trades using the sort of amounts that you’ll be investing and make sure before you create your first position that you know exactly how the forex market works.

The danger — Because forex trading by the public is relatively new, a number of unscrupulous traders have sprung up who operate illegally or scam their clients. There aren’t many of them, but they do exist and you do want to avoid them.

The solution — Make sure that your trading firm is accredited and legal, and read the small print in the website terms or contract carefully. They might not be the most interesting read in the world, but they should be read.

The danger — Place a bet on a roulette wheel or on a horse and the amount you put down is the amount you stand to lose. Take a position in the forex market, and it’s might not be completely clear how much you’re risking. Leverage, in which small amounts of money control large units of currency, make those risks even greater.

The solution — Use strategically placed stop-losses to minimize your risks and ensure that a losing position is ended before the losses grow too large.

There are risks in any form of investment. Understand the risks of the forex market — and how to reduce them — and while you won’t be able to remove them entirely, you should be able to protect yourself.

Don’t be too scared though.. try this in practice in a demo account for example at paddypowertrader.com

Protect your trades – Stop Loss Orders and Take Profit Orders

Protecting Yourself When Trading Forex by Knowing the risks and preparing for them

Like any investment system, trading in the forex markets carries risks. It is possible to suffer losses as well as gains. Lose more than you can afford and it’s unlikely that you’ll get a second chance. Those risks are particularly acute when you’re starting to trade forex and have yet to gain experience.

Fortunately, there are a number of tools that you can use to reduce your risks and minimize any losses that you might suffer.

You can’t watch the markets all the time, what if even if you worked out correclty what the market was going to do.. you’re waiting to trade.. then the phone rings.. oops.. well .. you can set up automated orders to keet you safe.. Stop Loss Orders and Take Profit Orders.

Use Stop Loss Orders (Stop Losses)

The first is a stop-loss. A stop-loss automatically closes your position in the forex market when the bid or offer price of a currency you’re holding reaches a set level. For example, you might place a stop-loss just below the purchase price of your currency. If that currency were to fall dramatically, you would only lose up to the amount of the stop-loss.

For people just starting to trade forex, stop-losses can be very useful ways to remove the confusion that can slow a decision — and increase losses — when a currency suddenly drops.

Guaranteed stop-losses are similar to stop-losses but provide an extra level of protection. Occasionally, a currency can fall so fast that it skips past the price set for the stop-loss. A guaranteed stop-loss ensures that your currency will be sold at the price you have set, even if the market has fallen beneath that level.

Take Profit Orders

Profit caps are similar to stop-losses in that they also trigger an automatic sell. In this case though, they’ll trigger a sale intended to guarantee a profit rather than to protect against a loss.

You can think of profit caps as tools to snatch opportunities at times when you’re not alert to them. If a currency you’re holding spikes at some time on the 24-hour forex market when you’re not watching it, you’ll still be able to benefit.

So you can protect yourself against a free-falling currency, and you can earn from a suddenly rising currency. But the best way to protect yourself when trading forex is to manage your money carefully. Place no more than 10 percent of your available funds in any one trade and never invest more than you can afford to lose

You can find out more at paddypowertrader.com

How to Avoid Forex Trading Scams

Be careful out there – tips and guidance to avoid scams in the FX Trading World. Our tips and suggestions on avoiding Forex Trading Scams

More and more people have started forex trading in the last few years and while many of them have done very well, a few have become victims of the increasing numbers of forex scammers. Tempted by the promises of easy profits at little risk playing a market they know little about, some new forex traders have lost money to con-artists who knew an easy mark when they saw one.

Don’t be one of them. Get educated, and don’t become a scam victim.

There’s NO such thing as a FREE lunch

The easiest way to spot a forex scam is by its promises.

There’s no such thing as a high profit and low risk investment. Anyone who tells you there is is likely to be generating a few high profits for himself… and running the risk of going to jail. Really if there was an easy fool proof way to make unlimited money with no effort and no risk, then you can bet that the people doing it wouldn’t share the secret for $99.99. Why would they bother..? They could train you for free if money wasn’t an issue, or simple give out money to worthy causes, couldn’t they..

IIf a forex deal looks too good to be true — like anything — it probably is.

Steer clear too of highly leveraged margin trading, at least when you’re starting to trade forex. As you can find yourself easily wiping out completely over small market movements.

Margins are similar to deposits. They let traders commit to larger deals in the future, and allow unscrupulous traders to gamble with other people’s money without fully explaining to them what they’re risking. An investor might believe that he or she has only risked $1,000 when in fact they’ve committed to a trade several times that figure. If the trade becomes unprofitable, the victims of such forex scams could find themselves with much larger losses than they anticipated.

Another sign that a trader might be looking to take you for a ride is if they claim that they can trade in the Interbank Market. This is a network of currency transactions involving banks and other large organizations. Because the volumes are much higher, prices can be higher too. It’s not usually the sort of place where small investors tend to trade so being told by a trader that he can put your money there is a little like buying a watch from a man in a bar: there’s a good chance the person you’re dealing with isn’t the most honest.

Forex scams have become more common but they’re still pretty rare. The best protection is an understanding of the forex market and a lot of common sense.

Key Points to remember:

  • Get educated – don’t be the rabbit..
  • Question everything – even what I tell you (Buddhist idea)
  • There’s no such thing as a free lunch
  • If the sales pitch involves pictures of guys with swimming pools, cars, beaches.. it’s probably not real – just that a sales pitch
  • Start with FREE demo accounts – no risk – no loss
  • Check who regulates the company
  • Check where the company is based
  • Can you call them? if not why not? What if something goes wrong.. what would you do
  • Ask your independent financial advisor
  • Check the trading forums, search engines and sites like StartTradingFx.co.uk

List of FX Trading Companies

What Affects the value of a currency

As the currency’s value changes so does the profit or loss you make

Trying to track the reasons behind the rise and fall of a currency — and trying to predict whether it will rise or fall in the future — isn’t easy. But there are a number of factors that you can depend on to determine the value of a currency.

When you’re just starting to trade in forex, it’s important to understand those factors.

Perhaps the most important factor is demand for the currency. Demand for a country’s currency rises when: exports rise (and foreign currency flows in which needs to be converted by the exporters); the country receives foreign investment; or when the central bank or speculators buy currency.

All of these things push up the price of that currency on forex markets.

The supply of a currency is also important, of course. Supply falls when: goods or services are imported (and the currency is exported); investment capital flows out of the country; or when central banks or speculators sell the currency.

When any of these things happen, the price of the currency rises on forex markets.

In addition to supply and demand, a rise in interest rates can also increase the value of a currency (while a fall in interest rates can cause a currency to drop.)

Economic growth also affects the value of a currency on forex markets. Countries experiencing strong export growth — and that show signs that their exports will continue — are likely to enjoy high currency values. Weak economies — or economies that are perceived by forex traders to be weak — will suffer from low currency values.

A growing economy though, might suffer from rising inflation. That can cause exports to fall, reducing demand for the country’s currency and increasing imports. Both of those can cause the currency to drop in the forex markets.

The state of a country’s economy is often revealed, at least in part, by its balance of payments. A country that exports more than it imports will see a large demand for its currency, and therefore a high price. A country that imports more than it exports will see its currency fall.

And finally, speculators can cause a currency to rise and fall too when the trades are large enough. When you’re starting to trade forex, it’s unlikely that your forex trades will be large enough to do this!

See how this works in practice at paddypowertrader.com

Interesting Facts about the United States Dollar (USD)

Things You Might Like To Know About The Dollar Before You Start Trading Forex. A useful guide to one of the major world currencies. So before you start to trade USD – know what it is you are choosing to buy, sell or hold.

The US dollar remains the world’s foremost reserve currency. That means it’s the currency most held by other countries rather than being converted into their own currency. Holding large dollar reserves allows those countries to purchase foreign goods without paying the transaction fees involved in converting their own currency into dollars.

By choosing not to buy back their own currencies on forex markets, countries holding dollars also make their currencies cheaper and improve their exports.

On the other hand, the constant demand for dollars as a reserve currency has allowed the United States to run up large trade deficits without being punished by a weaker currency in the same way that other currencies would suffer.

The dollar is also the standard unit of currency for many commodities traded internationally such as gold and oil.

The relative strength of the dollar is indicated by the US dollar index: the larger the index figure, the stronger the dollar. Over the last two decades, the US dollar index has fallen consistently — a response to consistent budget deficits.

The main body used to control the supply of money in the United States — and therefore a major influence on the price of the dollar — is the Federal Reserve. The “Fed” has three tools that can affect the price of the dollar: open-market operations, the discount rate and reserve requirements.

Open-market operations refer to the actions the Fed takes on forex markets (such as buying or selling dollars); the discount rate measures how much of a value is interest and how much is capital; and reserve requirements refer to the amount of money banks must hold against their deposits.

Although each of those tools gives the Fed some control over the dollar, the international nature of the forex markets means that that control will always be limited.

When you start trading forex, it’s likely that you’ll be using the dollar a lot. But you don’t have to. There are plenty of other major currencies that you could specialize in…

To see how the dollar is moving now, take a look at paddypowertrader.com where you can open a free demo account and start trading today.

What makes the Forex Market Unique

Unique features of the FX Forex Currency Markets

For investors hoping to start trading forex, the forex market can look pretty unfamiliar. Compared to other kinds of financial markets, much is different. Here are just some of the things that make the forex market a unique trading environment.

1. Long trading hours – Trade 24/7
While some trading on stock exchanges might continue after closing, the forex market has a weekly closing time rather than a daily closing time. Forex is, by definition, international. Someone, somewhere in the world, will be trading forex at any time of day… except the weekend. Forex traders like to leave some time to enjoy the profits they’ve made without being tempted to look at what’s happening in the market.

2. Low profit margins
On the whole, currencies tend to be fairly stable. While there might be occasional collapses, currencies tend to rise and fall in fairly narrow bands. That’s quite a contrast to stocks and shares which can shoot upwards following a positive announcement or drop suddenly following a profit warning. That means profits tend to be small, but made up for by the large volume of trade.

3. Geography
Every country in the world has to trade foreign currency if it’s going to buy foreign products. That means you can find forex markets everywhere — although the major currencies still make up the bulk of trades.

4. The variety of traders
This wasn’t always the case. Forex trading used to be limited to banks with deep pockets and plenty of volume to move around. Today though, almost anyone can start trading forex. The result is that you could be buying your currencies from a multinational corporation and selling them to brokers in Indonesia.

5. The variety of factors that influence prices
While the price of company shares can be affected by macroeconomic factors such as the employment rate or taxation, the most important measure of a company is its profits. Currencies though can be affected by all sorts of things: by the Chinese government selling Treasury bonds, by oil prices, by inflation in the EU and by house prices in Wisconsin to name just a few of the things that make forex trading so exciting.

Try it out today with an account at paddypowertrader.com