Introduction
The simultaneous transaction of one currency for another.
An informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the 'interbank market'. The foreign exchange market has no central clearing house or exchange and is considered an over-the-counter (OTC) market.
The market for buying and selling currencies at the current market rate.
A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.
The first currency in the pair. Also the currency your account is denominated in.
The second currency in the pair. Also known as the terms currency.
USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar
For a full list, see ISO Currency Codes
EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"
Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept monies from clients to trade them.
A market maker provides liquidity for a particular currency pair by standing ready to buy or sell that currency by displaying a bid and offer price. Market makers earn their commission from the spread between the bid and offer price.
ECN is an acronym for Electronic Communications Network. A Forex ECN does not operate a dealing desk, but instead provides a marketplace where multiple market makers, banks and traders can enter competing bids and offers into the platform either inside or outside the spread, allowing traders to trade on those prices. Orders are matched to the best available bid/offer price for a small fee or commission.
A dealing desk provides prices and executes trades.
An acronym for 'No Dealing Desk'. A no dealing desk broker acts as an agent, matching up orders to one or more liquidity providers connected to their platform.
One of the participants in a transaction.
The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200.
The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203.
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.
The value of a pip. Pip value can be fixed or variable depending on the currency pair and base currency of your account. e.g. The pip value for EURUSD is always US$10 for standard lots and US$1 for mini-lots. A simple way of calculating pip value is as follows: Divide 1 pip by the exchange rate and multiply it by the lot size to get the base currency pip value. To convert it to your account currency, multiply it by the applicable exchange rate. For example;
EURUSD = 0.0001 / 1.30000 = €0.0000769 * 100,000 = €7.69 * EUR/USD 1.30000 = US$10.00 pip value (fixed)
USDJPY = 0.01 / 120.00 = US$0.0000833 * 100,000 = US$8.33 pip value (variable)
The standard unit size of a transaction. Typically, one "standard" lot is equal to 100,000 units of the base currency, or 10,000 units if it's a "mini" lot, and even 1,000 units if it's a "micro" lot. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit!
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Trading with standard lot sizes, generally 100,000 units of the base currency.
Trading with mini lot sizes, generally 10,000 units of the base currency.
Trading with micro lot sizes, generally 1,000 units of the base currency.
The deposit required to open or maintain a position. A 1% margin requirement allows you to control a $100,000 position with a $1,000 margin deposit.
The extent to which you are using borrowed funds to gear your account. Increasing your leverage magnifies both gains and losses. To calculate leverage used, divide total open positions by account equity to get the leverage ratio. e.g. If a trader has $1,000 in his account and opens a $100,000 position, he is leveraging his account by 100 times, i.e. 100:1 leverage. If he opens a $200,000 position with $1,000 in his account, he is leveraging his account by 200 times, i.e. 200:1 leverage.
An order which is executed by dealer intervention.
The order is executed by the broker without dealer intervention or involvement.
The difference between the order price and the executed price.
The extent to which equity is lost in a trading account from a trade or series of trades, measured from peak to subsequent trough, most commonly in percentage terms.
Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.
Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.
Common Order Types
An order to buy or sell at the current market price.
An order to buy or sell at a specified price level.
An order to restrict losses at a specified price level.
An order to buy below the market or sell above the market at a specified level, believing that the price will reverse direction from that point.
An order to buy above the market or sell below the market at a specified level, believing that the price will continue in the same direction.
One Cancels Other. An order whereby if one is executed, the other is cancelled.
Good Till Cancelled. An order stays in the market until it is either filled or cancelled.
Common Trade Types
A position in which the trader attempts to profit from an increase in price. i.e. Buy low, sell high.
A position in which the trader attempts to profit from a decrease in price. i.e. Sell high, buy low.
Common Trading Styles
A style of trading that involves analysing price charts for technical patterns of behaviour.
A style of trading that involves analysing the macroeconomic factors of an economy underpinning the value of a currency and placing trades that support the trader's outlook.
A style of trading that attempts to profit from riding short, medium or long term trends in price.
A style of trading that attempts to profit from buying technical levels of support and selling technical levels of resistance. The upper level of resistance and lower level of support defines the range.
A style of trading whereby a trader attempts to profit from fundamental news announcements on a country's economy that may affect the value of a currency, usually seeking short term profit immediately after the announcement is released.
A style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.
A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.
A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.
A position whereby the trader attempts to profit from holding a currency with a higher interest rate and shorting a currency with a lower interest rate.
A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.
A style of trading that involves the human decision making process for every trade.
A style of trading that involves neither human decision making or involvement, but uses a pre-programmed strategy based on technical or fundamental analysis that automatically places trades via automated trade execution software.
Example Trade
Assume you have a trading account at a broker that requires a 1% margin deposit for every trade. The current quote for EUR/USD is 1.3225/28 and you want to place a market order to buy 1 standard lot of 100,000 Euros at 1.3228, for a total value of US$132,280 (100,000 * $1.3228). The broker requires you to deposit 1% of the total, or $1322.80 to open the trade. At the same time you place a take-profit order at 1.3278, 50 pips above your order price. In taking this trade you expect the Euro to strengthen against the U.S. dollar.
As you expected, the Euro strengthens against the U.S. dollar and you take your profit at 1.3278, closing out the trade. As each pip is worth US$10, your total profit for this trade is $500, for a total return of 38%.
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