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Forex Glossary

Base currency:
The first currency quoted in a currency pair on Forex. It is sometimes referred to as the primary currency.

In the USD/CAD currency pair, the US dollar would be the base currency and the Canadian dollar would be the quote currency.

The difference between the spot price and the futures price.

Basis point:
One hundredth of a percentage point.

A bearish investor believes that a particular asset or the market as a whole will decline in value.

Bid/Ask Spread:
The difference between the bid price and the offer price.

Bullish refers to an optimistic outlook, while bearish means a pessimistic outlook.

Buy Entry Limit:
An order to buy at a price below the current market price.

Buy Entry Stop:
An order to buy at a price above the current market price.

Central Bank:
The principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency; setting monetary policy, interest rates, and exchange rate policy; and regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

The graphing of market variables in an attempt to determine trends and project future values. Also called technical analysis.

Closed position:
See liquidated.

The cost that a broker will charge a client for buying/selling a financial product. FX Solutions offers 'commission free dealing' because we make money off the bid-offer spread.

Any bulk good traded on an exchange or in the cash market.

Grain, oats, gold, oil, beef, silver, and natural gas

Contracts for Difference:
A contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time.

The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

The act of completing a transaction in order to remove any obligations.

Cross rates:
An exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency.

A country's unit of exchange issued by its government or central bank whose value is the basis for trade.

Currency (exchange rate) risk:
The risk of incurring losses resulting from an adverse change in exchange rates.

A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index.

A deliberate downward adjustment to a country's official exchange rate relative to other currencies. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.

There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners, and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit.

A share of a company's earnings paid to each shareholder. Typically, dividends are paid bi-annually and are determined by the company's board of directors. Dividends are paid to all holders of long CFD positions, but usually at a rate of 90% of their value. Short sellers using CFDs will always have to pay the full 100% of the dividend.

The peak-to-trough decline during a specific record period of an investment or fund. It is usually quoted as the percentage between the peak-to-trough.

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.

Entry Limit Order:
An order initiating an open position to sell as the market rises, or buy as the market falls. The client believes the market will reverse direction at the level of the order.

Entry Order:
An order used to enter a trade once a specific security hits a pre-determined price level.

Entry Stop Order:
An order initiating an open position to sell as the market falls, or buy as the market rises. The client believes that prices will continue to move in the same direction as the previous momentum after hitting the order level.

Exchange rate:
The price of one country's currency expressed in another country's currency.

The price at which an order is executed.

Fixed exchange rate:
A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies. In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

Foreign exchange (Forex):
The simultaneous buying of one currency and selling of another in an over-the-counter market.

The seven leading industrial countries, being the United States, Germany, Japan, France, Britain, Canada, and Italy.

G7 plus Belgium, Netherlands and Sweden, a group associated with the IMF discussions. Switzerland is sometimes involved.

A group composed of the finance ministers and central bankers of the following 20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that "promote international financial stability".

See Leverage

Germany 30:
An index of 30 top German stocks.

Good till Canceled Order (GTC):
An order to buy or sell an asset that is good until you execute or cancel it.

A strategy designed to reduce investment risk. Its purpose is to reduce the volatility of a portfolio by investing in alternative instruments that offset the risk in the primary portfolio.

A market that doesn't have much volume, usually characterised by wide bid-offer spreads. Illiquid markets are therefore expensive to trade.

Initial margin:
The amount of cash deposit that is needed to trade a given position.

The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Limit Orders:
An order to buy or sell a predetermined quantity of a security at a specificed price or better. A limit order placed on a buy position is an order to sell. A limit order placed on a sell position is an order to buy. All limit orders remain in effect until the position is liquidated or cancelled by the client.

Any transaction that offsets or closes out a long or short position.

The ability of a market to accept large transactions. 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 tighter bid/ask spread.

London Inter-Bank Offer Rate or LIBOR:
The standard for the interest rate that banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank deposit market, and applies to very large loans borrowed from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Long Position:
Having bought, but not yet sold. A long position is entered with the aim of profiting from an increase in price.

Maintenance Margin:
The dollar amount required to be kept available throughout the life of contract or position; percentage of the dollar amount of securities that must always be kept as margin.

Funds that customers must deposit as collateral to cover any potential losses from adverse movements in prices. With margined products only a percentage of the nominal value has to be depostited in cash.

Margin Call:
When one or more of the securities you have bought (with borrowed money) decreased in value past a certain point.

Market Maker:
A dealer that supplies prices, and is prepared to buy and sell at those bid and ask prices.

Market Order:
An order to buy or sell a currency pair, indice or commodity immediately at the best available current price.

Market-on-Close (MOC) Order:
A market order to be executed as near to the end of the exchange day as possible. Also known as an "at-the-close order."

Noise (aka Market Noise):
Price and volume fluctuations in the market that can confuse one's interpretation of market direction.

OCO (One Cancels the Other):
When either order is executed, closing the position, the other is automatically cancelled.

Offer or Ask:
Indicates a willingness to sell at a given price.

Open Position:
A currency pair or CFD contract that has been bought or sold and that has not yet been offset or settled through delivery.

Opening Range:
Markets, especially busy ones, never really open at one price; rather they are given an opening range (usually the first 2 minutes) where opening orders are filled.

A technical analysis term describing a situation where a security has risen to such a price, usually on high volume, that an oscillator has reached its upper bound. Technicians will suggest that a security that is overbought is at levels not technically justified; as a result it will be sold off and its price will decrease.

A term used to describe a market or a stock that has declined so rapidly and has generated such excessively bearish sentiment that a near-term rally is highly likely.

Pip (tick):
The smallest denomination that a currency can make.

The smallest move the USD/CAD currency pair can make is $0.0001, or one basis point.

The amount of a security either owned (which constitutes a long position) or borrowed (which constitutes a short position) by an individual trader. In other words, a trade an investor currently holds open.

Premium (cost of carry):
Direct costs paid by an investor to maintain a security position. For example, an individual purchasing securities on margin must pay interest expenses on borrowed funds. Likewise, an investor selling stock short is responsible for making dividend payments to the buyer.

An effective upper bound on prices achieved because of many willing sellers at that price level.

A calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency.

Rollover or overnight finance charges are applied to CFD and Forex positions that are held open at 17:00 Eastern Time (US). If the trader is "short" on the position, it will be credited finance. Similarly, if the trader is “long” on the position, it will be debited a financing charge.

Sell Entry Limit:
An order to sell at a price above the current market.

Sell Entry Stop:
An order to sell at a price below the current market.

Short Position:
A net investment position in a security in which the security has been borrowed and sold but not yet replaced. Essentially, it is a short sale that has not been covered. Eventually, the position must be bought back to close out the transaction. This technique is used when an investor believes the security price will drop.

The difference between estimated transaction costs and the amount actually paid.

Spot Market:
A commodities market in which goods are sold for cash and delivered immediately.

Spot Price:
The current price at which a particular commodity can be bought or sold at a specified time and place.

The difference between the bid and offer (ask) price of a currency, used to measure market liquidity. Narrower spreads usually signify high liquidity.

Stop-Loss Orders:
A predetermined price at which a position will be closed to protect against further loss. This is sometimes called a "stop-market order". All stop-loss orders remain in effect until the position is liquidated or cancelled by the client.

An effective lower bound on prices supported because of many willing buyers at that price level.

A foreign exchange swap is a trade that combines both a spot and a forward transaction into one deal, or two forward trades with different maturity dates.

Technical analysis:
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity.

Trading Range:
The spread between the high and low prices traded during a period of time.

A new price quote that is higher than the preceding quote for the same currency, index or commodity.

A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.

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