Glossary

account A record of transactions of goods and services owed to one person by another.

ADX. See Average Directional Index.

agent An intermediary or person hired to carry out transactions on behalf of another person.

aggregate demand Total demand in an economy, consisting of government spending, private/consumer purchasing, and business investment.

all or none Refers to requests for a broker to fill an order completely at a predetermined price or not at all. Refers to both buy and sell orders.

anonymous trading Visible bids and offers on the market without the identity of the bidder and seller being revealed. Anonymous trades allow the high-profile investors to execute transactions without the scrutiny of the whole market.

appreciation An increase in the value of a currency in response to market demand.

arbitrage A riskless opportunity to profit, with no uncertainty involved. In the foreign exchange market, arbitrage arises when a profit can be made by locking in differentials in exchange rates of identical currency pairs. For example, a trader who is able to execute equal-amount purchases of GBP/USD and USD/JPY against a sale of GBP/JPY for a profit would be engaging in arbitrage. Arbitrage opportunities in the foreign exchange market are rare.

ascending triangle A bullish continuation pattern that is shaped like a right triangle consisting of two or more equal highs forming a horizontal line at the top.

ask rate The lowest price at which a financial instrument will be offered for sale, such as the bid/ask spread in the foreign exchange market.

ask size The number of units a seller is willing to sell at his/her ask rate.

asset allocation The diversification of one's assets into different sectors, such as real estate, stocks, bonds, and forex, to optimize growth potential and minimize risk.

asset swap An interest-rate swap used to alter the cash flow characteristics of an institution's assets in order to provide a better match with its liabilities.

attorney in fact A person given the right or authority to act on behalf of another to carry out business transactions and implement documents.

authorized forex dealer A financial institution or bank authorized to deal in foreign exchange.

Aussie Term for Australian dollar.

Average Directional Index (ADX) Unlike most oscillators, ADX does not attempt to gauge the direction of the trend; instead, it works to gauge the strength of the trend. ADX operates on a scale of 0 to 100; the higher the oscillator, the stronger the trend. Typically readings of 20 or higher indicate presence of trend.

away from the market When the bid on an order is lower (or the ask price is higher) than the current market price for the security traded.

back office Refers to the administrative departments of financial service companies, which carry out and confirm financial transactions. Duties include accounting, settlements, clearances, regulatory compliance, and record maintenance.

back-testing The process of designing a trading strategy to be tested on historical data of the financial instrument. Most technical analysis strategies are tested via this approach.

balance/account balance The net value of an account.

balance of payments A record of all transactions made by one particular country with the rest of the world. It compares the amount of economic activity between a specific country and all other countries within a certain period. This number includes trade balance, foreign investments, and investments by foreigners.

balance of trade Net flow of goods (exports minus imports) between two countries.

Bank for International Settlements (BIS) An international organization fostering the cooperation of central banks and international financial institutions. BIS, located in Basel, Switzerland, is essentially a central bank for central banks. It monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.

bar chart On a daily bar chart each bar represents one day's activity. The vertical bar is drawn from the day's highest price to the day's lowest price. Opening price and closing price are represented by marks on the bar to the left and right, respectively.

base currency In general terms, currency in which an investor or issuer maintains its book of accounts. In the FX markets, the base currency is the first currency of the currency pair, meaning that quotes are usually expressed as one U.S. dollar per the other currency. USD/JPY = 120 would mean that one dollar would purchase 120 yen. The primary exceptions to this rule are the British pound, the euro, and the Australian dollar, which are quoted as EUR/USD, GBP/USD, and AUD/USD.

basis The difference between the cash price and the futures price.

basis point Measure of a bond's yield equal to 1/100th of 1 percent. A 1 percent change in yield is equal to 100 basis points, and 0.01 percent is equal to one basis point.

bear Investor acting on the belief that prices will decline.

bear market Any market that exhibits a declining trend. Typically bear markets are defined as declines of 20 percent or more from peak to trough.

bear trap A bear trap occurs when prices break below a significant level and generate a sell signal, but then reverse direction and hence invalidate the sell signal. Bear traps serve as opportunities for reversal traders, whereas trend/momentum traders suffer losses due to the whipsaw change in direction.

bid The price an investor is willing to pay for an asset.

bid/ask spread The difference between the bid price and the ask price.

big figure Refers to the first number to the left of the decimal point in an exchange rate quote, which changes so infrequently that dealers often omit them in quotes. For example, EUR/USD may be trading 1.2000 by 1.2003 with 1 considered to be the big figure.

Bollinger bands An indicator that allows users to compare volatility and relative price levels over a period of time. This indicator consists of three bands designed to encompass the majority of a security's price action: a simple moving average in the middle; an upper band 2 standard deviations away from the simple moving average (usually set to a time frame of 20); and a corresponding lower band that is also 2 standard deviations away from the moving average. Since the band width is a function of standard deviation, assets with greater volatility will have wider bands.

bonds Debt instrument used to raise capital, issued for a period greater than one year. Bondholders are loaning money (investing in debt) to companies and governments for a defined period of time, at the end of which they will be repaid the principal and paid a specified interest rate. Bond prices are inversely related to interest rates; as interest rates rise, bond prices fall. There are numerous types of bonds, including Treasury bonds and notes, municipal bonds, and corporate bonds.

book Recording of the total positions held by a trader or desk.

Bretton Woods Accord This 1944 accord established a fixed exchange rate regime, whose aim was to provide stability in the world economy after the Great Depression and World War II. The agreement fixed the exchange rates of major currencies to the U.S. dollar and set the price of gold to $35. It required central bank intervention to maintain the fixed exchange rates. The U.S. central bank was required to exchange dollars for gold, which eventually led to the demise of this system when the demand for the dollar declined, forcing President Richard Nixon to stop the exchange of dollars for gold, effectively ending the system in 1971.

broker Individual or firm acting as an intermediary to bring together buyers and sellers typically for a commission or fee.

bull Investor who expects markets to rise.

bull market A market where prices are rising.

bull trap The opposite of a bear trap; occurs when indicators suggest an uptrend, but the market reverses its momentum and begins to decline once more.

Bundesbank/Buba Central bank of Germany—the largest economy in European Union.

buy a bounce A recommendation to initiate a long trade if the price bounces from a certain level.

buy break A recommendation to buy the currency pair if it breaks the current level specified.

buy stops above A recommendation to enter the market when the exchange rate breaks through a specific level. The client placing a stop entry order believes that when the market's momentum breaks through a specified level, the rate will continue to move in that direction.

cable Term used to describe the exchange rate between the U.S. dollar and the British pound.

candlestick chart Identical to a bar chart in the information conveyed, but presented in an entirely different visual context. The candlestick encapsulates the open, high, low, and close of the trading period in a single candle. If the close is above the open, the actual candle is either hollow or green in color. If the close is below the open, the actual candle is filled in or red in color.

capital markets Markets in which capital (stocks, bonds, etc.) are traded.

carry trade An investment strategy of buying a higher-yielding currency with the capital of a lower-yielding currency to gain an interest rate differential. In late 2005 the NZD/JPY pair serves as a classic example of a carry trade. With the New Zealand dollar yielding 7.25 percent and the yen yielding 0 percent, the investor would in effect be able to generate a 7.25 percent rate of return from interest rate differentials but would of course be exposed to any capital depreciation risk should the exchange rate decline.

central bank A banking organization, usually independent of government, responsible for the control and production of the country's monetary stock and implementation of the country's monetary policy.

channel An upward or downward trend whose boundaries are marked by two straight lines. A break above/below the channel lines signals a potential change in the trend.

chartist Refers to a technical analyst or one who analyzes charts/graphs and data to uncover potential trends and price patterns.

clearing Refers to the confirmation and final settlement of trades.

close a position (position squaring) Refers to getting rid of a position by either buying back a short position or selling a long position.

commission A fee charged by a broker or an agent for carrying out transactions/orders.

confirmation A written document verifying the completion of a trade/transaction to include such things as date, fees or commissions, settlement terms, and price.

confirmation on a chart A subsequent indicator or chart pattern, following an initial alert for a trade opportunity, which serves to legitimize the initial alert. Confirmation of a trade is believed to reduce the risk associated with that trade by forcing the trader to comply with more rigorous conditions before putting on a position.

contagion Term used to describe the spread of economic crises from one country to another within close geographic proximity. This term was first used following the Asian financial crisis in 1997, which began in Thailand and soon spread to other East Asian economies. It subsequently has been used to refer to the recent crisis in Argentina and its effects on other Latin American countries.

continuation Refers to an extension of the trend. The trend continues to have momentum, and hence it moves onward without reversal.

contract (unit or lot) The standard trading unit on certain exchanges. A standard lot in the forex market is 100,000 units of currency. In the larger institutional interbank market a standard lot is one million units of currency.

convertible currency Currencies that can be exchanged for other currencies or gold.

correction A partial reversal of trend to correct a potentially overbought or oversold condition.

cost of carry When an investor borrows money to sustain a position. For example, a cost of carry for an investor short the NZD/USD pair at the end of 2005 would accrue to 7.25 percent annually on a cash-on-cash basis.

counterparty A participant, either a person or an institution, involved in one side of a financial transaction. With such transaction there is an associated risk (counterparty risk) that the counterparty will not be able to meet the terms outlined in the contract. This risk is usually default risk.

country risk The risk that a government might default on its financial commitments/contracts, which typically brings serious harm to capital markets of that country, creating massive depreciation of assets.

cover on a bounce A recommendation to exit trades on a bounce out of a support level.

cover on approach A recommendation to exit trades for profit on approach to a support level.

credit checking The process of verifying the creditworthiness of the counterparty. Before making a large financial transaction, it is imperative to check whether the counterparty has enough available credit to carry out/honor said transaction.

credit netting Agreements that are made to avoid having to continually recheck credit, usually established between large banks and trading institutions.

cross rate The exchange rate between two countries’ currencies. Cross rates usually refer to pairs quoted that do not include the domestic currency. For example, in the United States, the EUR/JPY rate would be called a cross rate.

cup with handle A chart pattern that resembles the formation of a cup and handle and offers insight into where a bullish trend can begin. Once the pattern begins to curve upward and reaches the cup line, the asset is believed to have bullish tone and be set for a rise.

currency Notes and coins issued by the central bank or government, serving as legal tender for trade.

currency (exchange rate) risk Risk associated with drastic changes/ fluctuations in exchange rates in which one could incur a major loss.

daily charts Charts that encapsulate the daily price movement for the currency pair traded. Since the currency market operates 24 hours a day, the daily chart typically runs from 5 P.M. New York time to the same time on the following day.

day trading Refers to the process of entering and closing out trades within the same day or trading session.

dealer One who acts as a principal in the transaction and accepts the order to buy or sell. A dealer differs from an agent in that he takes ownership of the asset, and thereby is exposed to market risk.

deficit An excess of liabilities over assets, of losses over profits, or of expenditure over income.

delivery The exchange by both parties (buyer and seller) of the traded currency.

deposit Refers to the process of borrowing and lending money. The deposit rate is the rate at which money can be borrowed or lent.

depreciation The decline in the value of an asset or a currency.

derivative A security derived from another and whose value is dependent on the underlying security from which it is derived. Examples of derivatives are future contracts, forward contracts, and options. Underlying securities can include stocks, bonds, or currencies. Derivatives can be very actively traded, often in greater volume than the underlying asset, and are usually used to hedge portfolio risk.

descending triangle A bearish continuation pattern indicating distribution consisting of two or more comparable lows forming a horizontal line at the bottom. Descending triangles are bearish patterns that indicate distribution. The definitive bearish signal of a descending triangle is when support on the lower edge of the triangle is broken.

devaluation When the value of a currency is lowered against another (i.e., it takes more units of the domestic currency to purchase a foreign currency). This differs from depreciation in that depreciation occurs through changes in demand in the foreign exchange market, whereas devaluation typically arises from direct government policy. A currency is usually devalued to improve the country's balance of trade, so that its exports become cheaper for the rest of the world and imports more expensive to domestic consumers.

dirty float (managed float) An exchange rate system in which the currency is not pegged, but is managed by the central bank to prevent extreme fluctuations in the exchange rate. The exchange rate is managed through changes in the interest rate to attract/detract capital flows or through the buying and selling of the currency. This system is contrasted with a pure float.

double top and bottom A pattern that implies an upper limit—the top—and lower limit—the bottom—that the currency pair has touched twice but has failed to penetrate. Accordingly, the asset can be expected to meet resistance or find support at those price levels.

Dow Theory One of the first technical analysis ideas, the Dow Theory holds that all major trends can be subdivided into three phases: entrance, whereby savvy market participants enter the market; acceleration, whereby a slew of additional participants see the trend and enter the market, thereby accelerating the trend; and consolidation, a period characterized by the initial participants exiting their trades.

economic exposure When the cash flow of a country is vulnerable to changes in the exchange rate.

economic indicator An economic statistic used to indicate the overall health of an economy, such as gross domestic product (GDP), unemployment rates, and trade balances. Used in fundamental analysis of foreign exchange markets to speculate on the direction of an exchange rate.

efficient markets Markets where assets are traded at prices that are reflective of all current and relevant information.

Efficient Market Theory The theory that the current market price reflects all information and expectations regarding the asset in question. The theory also assumes that the market cannot overprice or underprice an asset such as a currency pair, and hence the current price is the correct valuation at the time.

Elliott Wave Theory A theory based on the notion that the market moves in waves consisting of trends followed by partial corrections. The Elliott Wave Theory states that there are five waves within an overall trend with each wave experiencing three corrections.

end of the day (mark to market) Accounting measure, referring to the way traders record their positions, in which the value of an asset is recorded at the end of each trading day at the prevailing market price at the time. Another way that a trader can record his positions is to use the accrual system, in which only cash flows from closed-out trades are recorded.

envelopes While Bollinger bands place boundary lines based on standard deviation, envelopes place lines at fixed percentage points above and below a moving average line. The upper and lower limits specify entry and exit points for traders.

equilibrium A price region that suggests a balance between demand and supply for a currency pair in the marketplace.

euro The monetary unit of the European Monetary Union (EMU) used by 12 countries in the European Union. It is now the legal tender in Germany, France, Belgium, the Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Ireland, Finland, and Greece.

European Central Bank The central bank of the EMU, responsible for the monetary policy of all member countries.

European Monetary Union (EMU) An institution of the European Union (EU), whose primary goal is to establish a single currency (the euro) for the entire EU.

exponential moving average (EMA) While the simple moving average distributes weight equally across the data series, exponentially weighted moving averages give greater weight to more recent data.

Federal Deposit Insurance Corporation (FDIC) A regulatory agency of the United States created to oversee that bank deposits are insured against bank failures. It was created in 1933 to restore confidence in the banking system. It insures up to U.S. $100,000 per banking institution.

Federal Reserve/Fed The central bank of the United States, responsible for monetary policy of the country.

Fibonacci numbers Derived from a sequence of numbers in which each successive number is the sum of the two previous numbers, Fibonacci numbers quickly dovetail to stable ratios. These Fibonacci ratios are used frequently in the FX market to project possible price retracement and extension levels or recent moves.

fixed exchange rate When the exchange rate of a currency is not allowed to fluctuate against another (i.e., the exchange rate remains constant). Typically, under fixed exchange rate regimes, currencies are allowed to fluctuate within a small margin. Fixed exchange rate regimes require central bank intervention to maintain the fixed rate.

fixed interest rate An interest rate used for loans, mortgages, and bonds that remains constant throughout the period of the loan.

flag/pennant A flag or pennant formation is characterized by a quick price thrust followed by a period of consolidation. It is considered a continuation pattern with price expected to follow through in the direction of the original thrust.

flat on a failure A recommendation to take profits on a long trade if the rate tests but fails to break the specified level.

flat/square To have either no positions or positions that cancel each other out.

floating interest rate An interest rate that is allowed to adjust with the market. The opposite of a fixed interest rate.

foreign currency effect Refers to how changes in the exchange rate affect the return on foreign investments such as stocks or bonds.

foreign exchange (FX, forex) The buying and selling of currencies.

forward contract A deal in which the price for the future delivery of a commodity is set in advance. The forward rate is obtained by adding the margin to the spot rate. It is used to hedge against adverse fluctuations in the exchange rate that can affect the amount of profit or loss at that future date.

forward points Refers to the pips that were added to or subtracted from the current exchange rate to obtain the forward price/rate.

forward rate agreement (FRA) An agreement that allows for borrowing and lending at a constant interest rate for a specified period in the future.

front office Refers to the sales personnel (trading and other business personnel) in a financial company.

fundamental analysis The analysis of economic indicators and political and current events that could affect the future direction of financial markets. In the foreign exchange market, fundamental analysis is based primarily on macroeconomic events.

futures (financial futures) Future contracts that commit both sides to an exchange/transaction of financial instruments, currencies, or commodities at a future date and a predetermined price. Future contracts are similar to forward contacts, but have uniform size and settlement dates and are traded on central exchanges rather than over-the-counter.

good till canceled (GTC) Refers to an order given by an investor to a dealer to buy or sell a security at a fixed price that is considered good until the investor cancels it.

head and shoulders pattern A pattern resembling two peaks (the shoulders) with a higher peak between the two shoulders (the head). The neckline, or the bottom boundary that both shoulders reach, is regarded as a key point traders can use to enter/exit positions.

hedge/hedging Strategy to reduce the risk of adverse price movements on one's portfolio and to protect against the volatility of the market. Hedging typically involves selling or buying at the forward price or taking a position in a related security. Hedging becomes more prevalent with increased uncertainty about current market conditions.

high/low Refers to the daily traded high and low price.

historical volatility A measure of the change in price over a specified time frame. Higher volatility suggests that the asset is more likely to trade within a wider range, while reduced volatility suggests the asset will trade in a tighter range.

inflation Refers to the increase in prices (price level) over time that decreases the purchasing power of the consumer. It is calculated from changes in the price index, usually a consumer price index or a GDP deflator.

initial margin The percentage of the price of a security that is required for the initial deposit to enter into a position. The Federal Reserve Board requires a minimum of 50 percent initial margin. For futures contracts, the market determines the initial margin. Typically in futures markets the margin is set at 5 percent. In currencies standard margin is set at 1 percent.

interbank rate The dealing rate at which the major banks (UBS, Deutsche Bank, Citibank, Bank of Tokyo) trade in foreign exchange.

interest parity Theory that says that the difference in interest rates across countries should be equal to the difference between the forward rate and the spot rate.

interest-rate swap Interest-rate swaps are often used by companies to reallocate their exposure to interest-rate fluctuations, typically by exchanging fixed-rate obligations for floating-rate obligations.

interest-rate swap points Refers to the basis point differential between the swap rate and some reference point, usually Treasury yields.

intermarket analysis An analysis of an underlying asset that incorporates the interrelationship of various markets—typically currencies, commodities, stocks, and bonds. Intermarket analysis is centered on the idea that the four markets are correlated.

International Swaps and Derivatives Association (ISDA) Organization defining the terms and conditions for trade in derivatives.

kiwi Term for New Zealand dollar.

leading economic indicators Such statistics as unemployment rates, consumer price index, federal funds rate, retail sales, personal income, discount rate, and the prime rate that are used to predict economic activity.

LIBOR. See London Interbank Offered Rate.

LIFFE. See London International Financial Futures Exchange.

limit order An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/JPY is 120.00/05, then a limit order to buy USD 119.80 would mean that the trader would receive an execution at 119.80 or better if prices traded down that far.

liquid and illiquid markets A liquid market is one in which changes in supply and demand have little impact on the asset's price. It is characterized by many bids, offers, and players/traders; low volatility; and tight spreads. Illiquid markets have fewer players, larger spreads, and usually less volume.

liquid assets Those assets, usually short-dated assets like Treasury bills, that can easily be turned into money.

liquidation The process of closing out long or short positions by offsetting transactions. Also refers to the process of selling all assets of a bankrupt company to pay off first creditors and then shareholders.

liquidity The ability of a market to absorb large transactions with minimal to no impact on price.

London Interbank Offered Rate (LIBOR) The rate at which major international banks lend to one another. It is widely used as the benchmark for short-term interest rates.

London International Financial Futures Exchange (LIFFE) Exchange made up of the three largest futures exchanges in the United Kingdom.

long (position) Refers to the ownership of securities, commodities, or currencies.

loonie Term for Canadian dollar.

MACD. See moving average convergence/divergence.

margin A percentage of the total value of a transaction that a trader is required to deposit as collateral. Buying on margin refers to investing with borrowed funds, and the margin requirement serves essentially as good faith deposit.

margin call A call by a broker or dealer to raise the margin requirement of an account by seeking additional funds for deposit. The call is typically made after one or more securities have significantly declined in value.

market maker A broker-dealer firm that trades a particular financial instrument and is willing to buy and sell at the quoted bid and ask prices. The firm lists buy and sell prices to attract customers.

market order An order to buy or sell at the best price available in the market at present.

market risk The risk associated with investing in the market that has not been hedged through other instruments.

maturity The date that the security is due to be redeemed or repaid.

mine and yours Terms used to signal when a trader wants to buy (mine) and sell (yours). As in, “Mine at 03,” meaning that a trader is buying EUR/USD at 1.2003, or “Yours at 00,” meaning that the trader is selling at 1.2000.

momentum The term has two meanings: (1) a trading style by which traders go with the direction of the current trend; and (2) a technical indicator that measures the rate of change of an asset over a given time frame.

money market Highly liquid markets for short-term investing in monetary instruments and debts, typically maturing in less than one year. Because of relatively small yields due to the short-term nature of the instruments, transactions occur in large amounts and thus participants are mainly banks and other large financial institutions.

moving average An average of a number of specified historical time periods from the point on the chart. Moving averages offer an indication of the clear direction and slope of the trend in the market.

moving average convergence/divergence (MACD) The MACD indicator relies on plotting the difference between two moving average lines—typically 12- and 26-day EMAs—as well as a signal line, which is usually the 9-day EMA of the MACD itself. If the signal line—the line used to denote the rate of change—is sloping upward, this suggests that momentum is bullish; if downward, the indication is that momentum is bearish.

negative or bearish divergence Occurs when two or more indicators or chart patterns do not yield the same analysis as price direction.

net worth The difference between the values of assets and liabilities. For public companies this is referred to as shareholder's equity.

off-balance sheet Refers to financing or the raising of money by a company that does not appear on the company's balance sheet, such as interest-rate swaps and forward rate agreements.

offer The price (or rate) at which a seller is willing to sell.

offsetting transaction When a trader enters an equivalent but opposite position to an already existing position, thereby balancing his positions. An offsetting transaction to an initial purchase would be a sale.

one cancels other order (OCO order) An if-then order that cancels the other part of the same order once it is executed. An OCO order for a long EUR/USD position at 1.2000 with 1.2100 limit sell and 1.1900 stop would cancel the 1.1900 stop if the 1.2100 limit exit was executed, and vice versa.

open order An order to buy or sell that remains valid until it is executed or canceled by the customer. An order that is executed when the price of a share or currency reaches a predetermined price.

options Tradable contracts giving the right, but not the obligation, to buy or sell commodities, securities, or currencies at a future date and at a prearranged price. Options are used to hedge against adverse price movements or to speculate against price rises or falls.

order An instruction by a customer to a broker/dealer to buy or sell at a certain price or market price. The order remains valid until executed or canceled by the customer.

overbought A term used to characterize a market in which asset prices have risen at a pace that is above typical market acceleration, and hence may be due for a retracement.

overnight A position that remains open until the start of the next business day.

oversold The opposite of overbought; exists when the price of a market declines at an abnormally fast rate, and hence is due for an upward reversal.

over-the-counter market A market not regulated by a central exchange such as the New York Stock Exchange or the Chicago Mercantile Exchange. The spot forex market is an example of an over-the-counter market.

parabolic stop and reversal (SAR) Best used in trending markets, parabolic SAR specifies where traders should place their stops. If parabolic SAR is above the market rate, the recommendation is to short; if it is below, the recommendation is to go long.

pegging When a country fixes the exchange rate to another country's currency, usually to achieve price stability. Most countries that peg their currencies do so against the U.S. dollar or the euro.

pip Standing for percentage in point, a pip is the smallest amount an exchange rate can move, typically 0.0001.

point and figure (P&F) Unlike conventional bar, candlestick, and line charts, point and figure charts completely disregard the passage of time, opting to display only changes in prices.

political business cycle A theory that explains changes in the economy as a result of political tactics before and after elections. Politicians will often expand the economy prior to elections to gain voter support, and implement reforms just after the elections to avoid punishment by the polity.

political risk Risk that changes in government policies will negatively impact an investor. Political risk is especially prevalent in emerging growth markets without a long history of political stability.

position The amount of currency or security owned or owed by an investor.

premium The amount added to the spot price of a currency to get the forward or future price.

price transparency Refers to the degree of access to information regarding bids and offers and respective prices. Ideally, every investor/trader would have equal access to all information in the marketplace.

pure float An exchange rate system in which there is no central bank intervention and the exchange rate is entirely determined by the market and speculation.

quote The offer price of a security.

rate The price of one currency in terms of another (exchange rate).

realized and unrealized profit Realized profits are made from the cashing in of profitable positions, while an unrealized profit is a gain from an increase in the price of an asset that has not yet been cashed in.

rectangle Similar to the consolidation portion of a flag pattern, a rectangle is a continuation pattern denoting a trading range characterized by strong support and resistance lines. Unsurprisingly, rectangles are often known as trading ranges, consolidation zones, or congestion areas.

Relative Strength Index (RSI) An oscillator that measures the size of recent upward trends against the size of downward trends within the specified time frame. High RSI scores—above 70 or perhaps 80—indicate that the currency is oversold, and hence due for a reversal. Alternatively, low RSI scores indicate that the currency is overbought, and hence due for a fall in price.

repurchase (repo) Involves the sales of securities now for cash with the promise made by the borrower to the lender of repurchasing those securities later at the implicit interest rate known as the repo rate. Thus a repo agreement is a temporary transaction in the money market. Any security can be used in a repo; so Treasury or government bills, corporate and Treasury/government bonds, and stocks/shares may all be used as securities involved in a repo.

resistance A price level that a currency pair has had trouble breaking through, and hence consolidation is expected. If the resistance line holds and the currency pair retraces, the sellers have outnumbered the buyers; on the other hand, buyers have outnumbered sellers if the resistance level is broken, and price may continue higher as a new trend tries to establish itself.

retracements Denotes a temporary reversal in the overall trend of the market to accommodate excessive acceleration or deceleration of asset price movement. Synonymous with correction.

revaluation An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of devaluation.

revaluation rates Generally, in the FX market, the revaluation rates are market rates at 5 P.M. EST. Any profit or loss is marked to the market and the trader will start the next day with the position valued at the prior day's closing rate.

reversal A pattern that suggests a potential shift or deceleration of the current trend. A reversal of an up move will be reflected in a downward price movement.

risks Uncertainty in the possible outcomes of an action (i.e., possible returns on an investment). Risk is most commonly measured from the variance of possible outcomes. Higher risks are associated with higher rates of return, in order to induce investment in riskier ventures.

risk capital The capital that an investor does not need to maintain his/her living standard.

risk management Strategies and tactics the trader employs to avoid substantial risks to his portfolio.

rollover Rolling forward to another date the value of the position and in the process accounting for the interest rate differential of the two currencies. In the FX market rollover interest is paid daily 365 days per year. Because settlement is two days forward, on Wednesdays the rollover interest is accrued for three days to account for the weekend.

rounding top and bottom Similar to a cup with handle pattern, a rounding top signifies a rounded resistance line and a bearish overall trend. Alternatively, a rounding bottom is a bullish pattern for which the bottom curve can serve as a support line. Both patterns are best suited to longer-term analyses.

RSI. See Relative Strength Index.

settlement The actual finalization of a contract in which the goods, securities, or currencies are paid for or delivered and the transaction is entered in the books.

short position The selling of a borrowed security, commodity, or currency. Traders sell when they expect prices to fall.

spike (high or low) A significantly lower low or higher high within a data series. Points where a currency spikes often signify a potential reversal in the direction of the trend, and hence can be valuable tools in analyzing a chart.

spot market A market in which commodities, securities, or currencies are immediately delivered.

spot price The current market price.

spread The difference between the bid and offer price that is offered by a market maker.

sterling Refers to the UK currency, the pound.

stochastics Like RSI, stochastics are a momentum indicator that indicates overbought/oversold levels. High levels (above 70 or 80) are indications to enter short orders; low levels (below 30 or 20) are indications to buy. Like all oscillators, stochastics work best as a momentum indicator that measures the price of a security relative to its high/low range over a set period of time. The indicator fluctuates between 0 and 100, with readings below 20 considered oversold (bullish) and readings above 80 considered overbought (bearish).

stop order (stop-loss order) An order used to hedge against excessive loss in which a position is liquidated at a specific prearranged price.

support The opposite of resistance, a point on the chart where a currency pair has repeatedly held its value. When a currency pair tests support but does not break through it, buyers have outnumbered sellers; alternatively, sellers have gained control of momentum if support is broken and the currency pair continues to plunge downward.

swap When a trader exchanges one currency for another, holding it for only a short period. Swaps are typically used to speculate on interest rate movements. Price is calculated using the interest rate differentials between the two currencies.

swap spread The difference between the negotiated and fixed price of the swap. The size of the spread depends on market supply and participating parties’ quality of credit.

swing high/low A point on the chart that represents a relative peak or bottom in price. Technical traders often use swing highs and lows as reference points to place stop or entry orders at those levels.

Swissie Refers to the Swiss franc.

symmetrical triangle Also referred to as a coil, usually forms during a trend as a continuation pattern. It contains at least two lower highs and two higher lows. At the time these points are conjoined, the lines converge as they are extended and the symmetrical triangle takes shape.

technical analysis A technique used to try to predict future movements of a security, commodity, or currency, based solely on past price movements and volume levels. It examines charts and historical performance.

tick A minimum price movement in the futures markets.

ticker Depicts current or recent history of a currency, usually in the form of a graph or chart.

tomorrow next (tom/next) When a trader buys and sells a currency today for delivery tomorrow.

trade price response This term advises that price reaction to a certain level is critical. If this level breaks, then the recommendation would be to run with the market direction (i.e., buy a break above resistance level; sell a break below a support level). However, if a price stalls at this level and is rejected, then the recommendation is to go with this also (i.e., sell at a resistance level that is tested and holds; buy at a support level).

transaction costs The costs that are incurred by a trader when buying or selling securities, commodities, or currencies. These costs include broker commissions and spreads.

transaction date The date a trade occurs.

trend line A straight line drawn across a chart that indicates the overall trend for the currency pair. In an upward trend, the line is drawn underneath and acts as a support line; the opposite holds true for a downward trend. Once the currency breaks the trend line, the trend is considered to be invalid.

triple top A pattern in which a currency has reached a price three times previously, yet has been unable to sustain movements beyond those three peaks. A triple top signifies a strong resistance level.

turnover The number or volume of shares traded over a specific time period. The larger the turnover, the more active the market.

two-way price A price that includes both the bid and offer price. The National Association of Securities Dealers (NASD) requires that market makers have both bid and ask prices for any security, currency, or commodity in which they make a market. This is called a two-sided market.

uptick A price quote that is higher than the preceding quote for the same currency.

uptick rule A regulation pertaining only to the stock market, requiring that if a security is to be traded short, the price in the trade prior to the short trade has to be lower than the price of the present short trade.

U.S. prime rate The interest rate at which the major U.S. banks lend to major clients.

value date The date that payment is exchanged between two parties.

variance Measures the volatility of a data set/data points from the mean. It is calculated by adding the squares of the standard deviations from the mean and dividing by the number of data points (i.e., taking the average of the standard deviations).

variation margin A call by a broker to increase the margin requirement of an account during a period of extreme market volatility.

volatility The tendency of prices/variables to fluctuate over time. It is most commonly measured using the coefficient of variation (the standard deviation divided by the mean). The higher the volatility, the higher the risk involved.

volume The number of shares or contracts traded for a certain security or on an exchange during a period. The FX market does not report volume.

weekly charts Charts for which each candlestick or bar encapsulates data for the currency pair for the prior week.

whipsaw Term used to describe sharp price movements and reversals in the market. An example of a whipsaw would be when shortly after a trader opens a long position the currency pair plummets and then just as quickly recovers its value.

yard Term for a billion units of currency, as in “I am selling a yard of sterling.”