Forex Definitions

Forex - Foreign Exchange Rate

FX - same as forex

4x - another name on the internet for fx / forex

Foreign Exchange Rate - what one currency is worth in terms of another, for example yen to the dollar, pesos to the dollar, etc,

spot exchange rate - current exchange rate.

forward exchange rate - exchange rate that is quoted and traded today but for delivery and payment on a future date.

Quote Currency / term currency / price currency - the number of currency units that can be bought with 1 unit of base or unit currency

Base Currency - the currency used to price another currency - from the example: EURUSD exchange rate is 1.4320 (1.4320 USD per EUR), the term currency is USD and the base currency is EUR.

Direct quotation or price - Quotes that use of a country’s home currency as the price currency (e.g., EUR 1.00 = USD 1.58)

Indirect quotation or price - Quotes using a country’s home currency as the unit currency (e.g., AUD 0.97 = USD 1.00)

PIP - Market convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outrights or swaps. The fourth decimal place is usually referred to as a “pip.”

The smallest price increment in a currency.  Often referred to as “ticks” in the futures markets.  For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.

Free-floating - A free floating currency has an exchange rate that is allowed to vary against that of other currencies.

Pegged - The exchange rate remains the same

Market convention - determines which is the base currency and which is the term currency. In most parts of the world, the order is: EUR – GBP – AUD – NZD – USD – others. Thus if you are doing a conversion from EUR into AUD, EUR is the base currency, AUD is the term currency and the exchange rate tells you how many Australian dollars you would pay or receive for 1 euro.

Derivatives - financial contracts, or financial instruments, whose values are derived from the value of something else, known as the underlying.

The main types of derivatives are forwards, futures, options, and swaps.

Forex Scam - a trading scheme used to defraud individual traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market.
“In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists.”

U.S. Commodity Futures Trading Commission (CFTC) - loosely regulates the foreign exchange market in the United States.

High Risk Investment - an investment where you may most likely lose money

Ask - Same as Offer. price broker is willing to sell for

Bid: Price at which broker is willing to buy.

Bid/Ask Spread or Spread - The distance, usually in pips, between the Bid and Ask price.  A tighter spread is better for the trader.

Cost of Carry - The cost, often quoted in terms of dollars or pips per day, of holding an open position.

Currency Futures: Contracts traded on futures.

Drawdown - A decline in account value  - may be measured in prcent or dollar value.

Leverage - The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade.  For example, if the notional amount traded (also referred to as “lot size” or “contract value”) is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).

Limit - A order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.

Liquidity - Volume against activity in a certain market. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

Margin - The amount of funds required in a clients account in order to open a position or to maintain an open position.  For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.

Margin Call - When a broker requires more funds to be deposited to keep an open position.

Market Order - An order to buy at the current Ask price.

Premium  - The cost in pips per day, of holding an open position.

Spot Foreign Exchange / Interbank - currencies traded between two counterparties, often major banks or institutions.

Stop - An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.