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Market Terminology

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Back Office 

The departments and processes related to the settlement of financial transactions.

Base Currency

The currency against which other currencies are quoted. Example, the primary base currency is the u.s. dollar. 

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market). Bear Markets are generally shorter in duration than Bull Markets.

Bid

The rate at which a dealer is willing to buy the base currency.

Bid-Offer Spread

The difference between the buy (bid) and sell (offer) price of a currency or financial instrument.

Bull Market

A market characterized by rising prices.

Bretton Woods

The site of the conference, which in 1944 led to the establishment of the post war foreign exchange system, that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Broker

An agent who handles investors' orders to buy and sell currency.

Buying Rate

Rate at which a bank is prepared to buy foreign exchange. Also known as the Bid Rate.

Buying Selling FX

Buying and selling in the foreign exchange market always happens in the currency, which is quoted first. "Buy dollar/mark" means buy the dollar/sell the mark. Traders buy when they expect a currency's value to rise and sell when they expect a currency to fall.

Candlestick Chart

A chart that indicates the trading ranges for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

Cash Settlement

A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central Bank

A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates.

Central Rate

Exchange rates against the ECU adopted for each currency within the EMS. Currencies have limited movement from the central rate according to the relevant band.

CHIPS

(Clearinghouse House Interbank Payment System) A computerized system used for foreign exchange dollar settlements.

Currency

The type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another. If one US dollar can buy 1.55 Deutschmarks, then one Deutschmark can buy 0.65 US dollars.

Day Trading

Refers to opening and closing the same position or positions before the close of that day's trading (3:00p.m. EST).

Deal Ticket/Deal Slip

The primary method of recording the basic information relating to a transaction.

Dealer 

An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

Dealing Systems

On-line computers, which link the contributing, banks around the world on a one-on-one basis.

Direct Quotation

Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Forex

An abbreviation of foreign exchange.

Foreign Exchange Market

Market where currencies are traded internationally. About a trillion (million million) dollars-worth of foreign exchange is traded globally every day, making forex larger than all bond markets put together. Currency markets exist in the form of spot, forward, futures and options markets. Foreign exchange transactions are made up of: Trade flows Only 5% to 10% of total forex transactions. Imports usually need to be paid for in the currency of the country from which they originate. Exports are usually paid for in one's own currency. A trade deficit therefore causes a currency to depreciate. Flow-ons Created when a large trade is split up into several smaller trades. Capital flows Cross-border investment. Speculation Short-term investment based on expected currency movements. This accounts for the lion's share of forex market volume.

Forward Rate

Forward rates are quoted in terms of forward points , which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefore the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.

Fundamental Analysis

Analysis based on economic factors.

Gold Standard

The original system for supporting the value of currency issued. The way that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Good Until Cancelled

An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

GTC

"Good Till Cancelled." An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

Head and Shoulders

A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedging 

The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits. 
High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Interbank Rates

The FX rates large international banks quote other large international banks. Normally the public and other businesses do not have access to these rates.

Limit Order

An order given which has restrictions upon its execution, where the client may specify a price and the order can be executed only if the market reaches that price.

Long

A market position where the Client has bought a currency he previously did not own. Normally expressed in base currency terms. For example: long Dollars (short Japanese Yen).

Margin

Margin is a cash deposit provided by clients as collateral to cover possible future losses that may result from the clients Foreign Exchange trades.

Margin Call

A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimum level to cover an adverse movement in price in the market.

Offer

The rate at which a Dealer is willing to sell the base currency.

Open Position

Any deal which has not been offset or reversed by an equal and opposite deal.

Pip or Points

Depending on context, normally one basis point, i.e. 0.0001.

Resistance Point or Level

A price recognized by technical analysts as a price, which is likely to result in a rebound, but if broken through is likely to result in a significant price movement.

Risk Management

The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organization. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counter party risk.

Rollover

An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Scalping

A strategy of buying at the bid and selling at the offer as soon as possible. 

Short

A market position where the Client has sold a currency he does not already own. Normally expressed in base currency terms, example, short Dollars (long D. Marks).

Spread

The difference in prices between bid and offer rates.

Stop Loss Order

An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.

Spot

(1) The most common foreign exchange transaction
(2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation. 

Straddle

The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date. 

Technical Analysis

Analysis based on market action through chart study, moving averages, volume, open interest, formations, and other technical indicators.

Tick

A minimum change in price, up or down.

Tomorrow to Next

Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.

Transaction Date

The date on which a trade occurs.

Value Date

Settlement date of a spot or forward deal.

Volatility

A measure of price fluctuations.

Whipsaw 

Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

Yard 

Slang for a billion.