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.