Forex Glossary

Here we've compiled a glossary of  words and phrases used in the trading of Forex.

Ask - (or offer) is the rate at which you can buy the base currency, in our case US Dollars, and sell the quote currency, i.e. Japanese Yen.

Bid - Bid is the rate at which you can sell the base currency, in our case it is the US Dollar, and buy the quote currency, i.e. Japanese Yen.

Candlestick Chart - Technical Analysis charting.  Each time division on the chart is displayed as a candlestick – a red or green vertical bar with extensions above and below the candlestick body. The top of the extension shows the highest price for the chart division and the bottom of the extension shows the lowest price.  Red candlesticks indicate a lower closing price than opening price, and green candlesticks indicate the price is rising.

Currency Rate - is the ratio of one currency valued against another. It depends on the demand and supply within a free market or a market restricted by a government or central bank.

Forex Broker - the intermediary between the buyer and seller.  Most Forex brokers are associated with large financial institutions and earn money by setting a spread between bid and ask prices.

Fundamental Analysis - Analysis of political and economic conditions that affect currency prices on a daily basis.

Leverage is the term used to describe margin requirements. It is expressed as the ratio between the collateral and borrowed funds, i.e. 1:20, 1:40, 1:50, 1:100. Leverage of 1:100 means that when you wish to open a new position you need just 1/100th of the contract size in available capital.

Lot is a fixed standard amount of a given currency for the purpose of trading. Sometimes it is known as the contract size.

Margin trading -  assumes that Forex dealing is based on the margin, the collateral, and the provided leverage. Such credits are provided by the brokerage companies, in addition to their informational services, and make it possible for a trader to enter into positions larger than his/her account balance. This collateral is typically referred to as margin. Margin is the sum of a guarantee pledge under which leverage is provided.

One Cancels Other Order (O.C.O. Order):  A contingent order where the execution of one part of the order automatically cancels the other part.

Overbought - A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Traders who were bullish and long in their trading have turned bearish. 

Oversold - A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors. Traders who were bearish and short in the market have turned bullish.

Pip - is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this instance, a single pip equals the smallest change in the fourth decimal place, that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.

Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.

Short - to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit. 

Spread - is the difference between the 'bid' and 'ask' prices.

Stop Loss order - is used to minimize losses if the security price has started to move in an unprofitable direction. If the security price reaches this level, the position will be closed automatically.

Technical Analysis - Analysis of historical market data to predict future movements in the market.