The Forex market is also referred to as the ‘FX market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most liquid financial market in the world, where approximately $5 trillion worth of currency is swapped every day. The FX market is open 24 hours a day, 5 days a week with the most important world trading centers being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. It offers many benefits for traders-including convenient market hours, high liquidity and the ability to trade on margin.
A contract for difference is just the most effective way, legally, for Forex brokers to offer shares and commodities and indices for trading to their clients. In simple terms, it is just a contract which says the broker pays you if the trade ends in the direction you wanted it to go, and you pay the broker if the opposite happens.
The reasons why people want to speculate in forex, including:
- Largest and the most liquid market in the world
- Open 24 hours a day, five days a week
- Centralized, transparent market
- Low barriers to entry, and no one can corner the market
- No fixed lot size and low transaction cost
- Trade a wide range of currency pairs
- Profit from movement in either direction (long/short selling)
- Use leverage to maximize potential profits, with reduced outlay
- Allow retail clients to trade Forex online via various trading platforms
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. Forex transactions always involve two currencies e.g. Euro and US dollar or EUR/USD, called currency pairs. The quotation EUR/USD = 1.1500 means that one euro is exchanged for 1.1500 U.S. dollars. In this case, EUR is the base currency and USD is the quote currency (counter currency). This means that 1 euro can be exchanged for 1.15 U.S. dollars. Another way of looking at this is that it will cost you $115 to buy EUR 100.
Major Currency Pairs:
- EUR/USD (Euro-zone/ United States)
- USD/JPY (United States/ Japan)
- GBP/USD (United Kingdom/ United States)
- USD/CHF (United States/ Switzerland)
- USD/CAD (United States/ Canada)
- AUD/USD (Australia/ United States)
- NZD/USD (New Zealand/ United States)
Spot Forex was only traded in specific amounts called lots, or basically the number of currency units you will buy or sell. In most currency pairs, 1 lot represents 100,000 units of one of the currencies, usually the second currency. For example, 1 lot of EUR/USD equals $100,000. Luckily, almost all Forex brokers allow clients to trade in quantities as small as 0.01 lots (1 micro lot, equaling $1,000), as well as offering leverage, which means you don’t need to deposit $100,000 or even $1,000 to make a trade.
The two different prices that you see quoted on your trading platform for each currency pair are the respective Bid and Ask (or Sell and Buy) prices available for that pair, the difference between these two prices is known as the spread. The Bid is the price on the left, this is the price at which you can sell a given currency pair and is the lower of the two prices listed. The Ask is the price on the right, it’s the price at which you can buy a given currency pair and is the higher of the two prices listed.
A pip stands for percentage in point is known to be the smallest numerical price move in the exchange market. It is usually the last decimal place of a quotation. As most currency pairs are priced to 4 decimals places ($0.0001) the smallest change would be to the last number after the decimal point.
Spread is the difference between the Bid and Ask prices. In the case of the USD/CAD forex quote mentioned 1.0180/83, the spread is .0003, often expressed as "3 pips".
Leverage is defined as the ratio of the amount of capital used in a transaction to the required margin. In other words, leverage gives you the ability to control much larger dollar amounts in a trade with only a relatively small deposit (your margin). For example, to control a $100,000 position, broker will set aside $1,000 from the account. The leverage, which is expressed in ratios, is now 100:1.
Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit.
A stop loss is an order which give the Forex broker to exit the trade when it has reached a certain maximum loss. Take Profit Order is the level at which exit a trade which is making a profit. Place the order in the broker’s platform and should implement the exit if the level is reached.
Forex Terms and Definitions
The terms had been prepared to help understand the importance of trading terminology. Simply click on a letter, it will be quickly taken to the relevant place in the alphabet to find the word or term that need to look up.
Also known as the offer, it's the price a seller is willing to sell at.
The currency used as the base to quote a pair. For instance in the EURUSD pair, the EUR is the base currency, in the USDJPY, the USD is the base.
Someone who believes the prices/market will decline.
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
The price at which a trader will buy a currency.
An agent who handles investors' orders to buy and sell currency.
A market characterised by rising prices.
Dealers slang for the Sterling/US Dollar exchange rate.
The overnight interbank interest rate.
The market for the purchase and sale of physical currencies.
The institution that manages a country's monetary policy.
The customer or bank with whom a deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.
Trading unit. A standard lot in the forex market is $100,000. A mini lot is $10,000.
Agreement between a client and a provider to exchange the difference between the opening and the closing value of the contract.
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.
Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.
Agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency.
Refers to opening and closing the same position or positions within one day.
Describes an excess of liabilities over assets, of losses over profits, or of expenditure over income.
A decrease in the general price level of goods and services, whereby the inflation rate falls below zero percent, resulting in an increase in the real value of money.
Decline in the value of an asset, currency, or security.
Electronic Funds Transfer.
The Central Bank of the United States.
Exchange rate regime in which a currency is pegged by the Central Bank so that it cannot fluctuate against other currencies. Currencies can be pegged to other currencies or commodities, such as gold.
To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.
As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates.
Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract and again at a date further in the future at a rate agreed at the time of the contract.
A forward is an agreement with us to exchange one currency for another on an agreed date in the future, at an agreed exchange rate.
Analysis of economic and political data with the goal of determining future movements in a financial market.
"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.
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.
Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.
The required initial deposit of collateral to enter into a position as a guarantee of future performance.
The foreign exchange rates at which large international banks quote other large international banks.
Cost of using/borrowing money, expressed as a rate per period of time.
The ability to borrow money to fund trading/investing activity. The amount that can be borrowed varies between brokers, and is quoted as a multiple of maximum position size to deposited funds.
An order to buy at or below a specified price or to sell at or above a specified price.
A market position where the client has bought a currency he/she previously did not hold/ own.
Standardized quantity in forex, composed of 100,000 units of a particular currency pair.
The amount a customer must deposit as collateral to cover any potential losses from adverse movements in prices.
A demand for additional funds. A requirement by a clearing house that a clearing member brings margin deposits up to a required minimum level to cover an adverse movement in price in the market.
Refers to any dealer who provides a two-way quote a bid and ask price in which they stand ready to buy or sell.
Date (or number of years) on which payment of a financial obligation is due.
The price, or rate, that a willing seller is prepared to sell at.
A contingent order where the execution of one part of the order automatically cancels the other part.
Used to describe any transaction that is not conducted over an exchange.
The term used in currency market to represent the smallest incremental move an exchange rate can make.
A price level at which you would expect selling to take place.
Where the settlement of a deal is rolled forward to another value date.
For spot foreign exchange trades it is the actual physical exchange of one currency for another.
To go 'short' is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.
Refers to the phenomenon whereby the actual fill price differs from the expected fill price, as a result of a fast-moving market or broker error.
A transaction that occurs immediately, but for foreign exchange transactions the funds will usually change hands within two days after deal is struck.
The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
Spread betting is a type of speculation that involves betting on the price movement of a currency pair without actually purchasing or selling lots.
An order to buy or sell at the market when a particular price is reached.
The price at which a stop order is triggered. For purchases, the stop price acts as a minimum price you will pay if an investment is made. For sales, the stop price acts as the maximum price you will receive if a holding is sold.
A price level at which you would expect buying to take place.
Type of derivative in which two parties agree to exchange one stream of cash flows against another.
An order placed to close a position so as to lock profits once it hits a specific price.
An order specifying the exact rate or number of pips from the current price point at which point a current position should be closed, and gains will be locked in.
An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
Both a bid and offer are quoted.
The amount of a specific financial instrument which has exchanged hands during a trading day.
International financial institution that provides leveraged loans to poorer countries for capital programs with a goal of reducing poverty.