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Forex Trading Education: Learn the strategic terms
This write-up on forex trading education will give you the strategic terms connected with the forex trading system. Proper understanding and remembrance of these forex trading terms will give you the power to understand the forces that make the largest trading market – that of the forex currency trading. Here’s the list in alphabetical order:
Glossary
• Appreciation :When a currency increases in value.
• Ask : It points to the lowest price that a seller may accept. Therefore, ‘Ask’ is that price which is sought by the trader.
• Base currency : is that currency an investor buys or sells (for example ‘EUR’ in EURUSD ).
• Bear : This epithet applies to anyone who thinks that prices are moving down.
• Bear market : It refers to the market that witnesses a sustained or continued fall in prices. Such a market generally takes time to recover.
• Bid :It is offered by the trader. Bid refers to the highest price that a purchaser would dish out.
• Bid/ Ask rate : The ‘Bid rate’ is the rate at which you sell. The ‘Offer/Ask rate’ is the rate offered to the investor to buy.
• Bull : A bull is any person who harbors optimistic sentiment on the market.
• A bull market : Such a market witnesses sustained and enthusiastic and buying.
• cross : In the forex trading market, one trades in two currencies. In simple terms, the investor buys a currency with another. Both the currencies are called the cross: for instance, EURUSD .
• Cross rate :The rate of exchange calculated by taking two other exchange rates.
• Decline/ Depreciation :The decline in a currency’s value.
• Exchange rate :The ratio in which a currency is rated with respect to another. For instance, the Australian dollar may be valued at the exchange rate of 70 yen or 58 US cents.
Exchange Rates
Currencies traded freely on foreign-exchange markets have a forward rate a spot rate and a ‘spot rate’. Countries determine their rates of exchange with reference to the currencies in the following different ways:
1. A floating exchange rate system;
2. A crawling or flexible peg system;
3. A fixed exchange-rate system.
1. Floating Exchange rate :The currency charts out its own value in the forex exchange market.
2. A crawling or flexible peg system : This forex currency exchange rate system is a combination of an officially fixed rate and small adjustments made frequently. This, in theory, works against a speculation build-up about a devaluation or revaluation.
3. A fixed exchange-rate system : Here the currency value is determined by the central bank and/or the government.
• Spot market :That portion of the forex exchange which calls for spot settlement of the transactions.
• Spot rate : The connotation of ‘spot’ varies as per the prevalent custom for a currency, security or commodity. In the Australian, US and UK foreign-exchange markets, ‘spot’ means delivery two working days hence or ‘Spot’. It is an asset’s current market price.
• EURUSD : Here you trade EUR against dollars. You buy Euro by paying in dollars and sell Euro by receiving dollars.
• FX, Forex, Foreign Exchange : These are different terms for the act of selling or buying (transaction of) one currency for another. For example, by paying USD 150.25, you buy £100.00; or vice versa, i.e., sell USD 150.25 for £100.00.
• Interbank :This is often the overnight (Short-term) lending and borrowing between banks. It is rather different from banks’ business with their other financial institutions or corporate clients.
• Interest rate differential : This is the difference (yield) spread between two comparable debt instruments denoted in different currencies.
• Gearing (Leverage) :The leverage refers to the action when the investor funds only a part of the traded amount.
• Long :It means ‘to buy’.
• Long position :This position increases in value if the market prices increase.
• Liquid (-ity) : The possibility to convert into cash with minimal loss. In a liquid market, enough activity takes place to satisfy the buyers as well as the sellers. An apt instance of ‘Liquid investment’ is the ‘Ultra-short-dated treasury notes’.
• Margin : The deposit one has to make while placing a position and also while one intends to hold on to an ‘Open position’. The Account Summary reflects your margin status.
• NYSE : The New York Stock Exchange.
• Open position :This position with reference to any currency means that the currency is yet to be offset. For instance, when you buy 100,000 USDJPY, you are in an open position in USDJPY. This is offset by selling 100,000 USDJPY , when, of course you ‘Close’ your position.
• Over the counter : The trading occurs straight between two parties, and not on the exchange. You can customize ‘Over the counter’ trades. On the other hand, the exchange-traded products are standardized, more often than not.
• Pips :It is the minutest unit in which a Forex cross price quote changes. For instance, if the EURUSD bid is now quoted at 0.9767 and it moves up 5 pips, it will be quoted at 0.9772.
As you trade in the majors, there is usually a 3-pip spread. It is revealed as you compare the ask and bid price. For instance, EURUSD is quoted at a bid price of 0.9876 and an ask price of 0.9879. The difference is USD 0.0004, which is equal to 3 “pips”. On a position or contract, the pip value can easily be calculated.
Note that the EURUSD is quoted with four decimals, so just cancel the four zeros on the trade amount and you’ll have the value of 1 pip. Therefore, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.
• Position : When as a trader you talk of “taking a position” you are simply meaning that you are either selling or buying currency cross. “Position” also refers to any trader’s currencies balance securities/cash, irrespective of whether the trader is oversold or overbought in a currency, has money to lend, or short of cash, among other such situations.
• Risk : It refers to your attempt to check outcomes to that of a predictable or a known range of losses or gains.
To be an expert of ‘Risk management’, you need to take certain significant steps. They start with an expert understanding of one’s risks or exposures that have to be shielded for protecting the business value. Risk management further entails that one understands one business well. The assessment is calculated on the types of variables affecting the business and the best possible way for protecting one’s business against inclement weather. One must also pay attention to the opted risk profile: it again depends on whether one is fairly aggressive or risk- averse in approach. One must also decide on the instruments one will use to manage the risk, and also the natural hedge that can be manipulated.
Risk-management strategy should be continually assessed for cost and effectiveness.
• Secondary currency : It is also known as ‘Counter currency or ‘Variable currency’. This is the currency the investor trades against the base currency (e.g., USD in EURUSD ).
• Short position : This position benefits when the market declines.
• Short :It means ‘To sell’.
• Speculative :When you buy and sell to pocket a profit. This is different from any business-related transaction.
• Spread : It is the difference between the ask rate (you can buy currency at) and the bid rate (you can sell currency at).
When the spread on majors is three pips under the normal market conditions, it is the ‘Spread’.
