It is important for traders to understand the jargons and terms that are used in forex trading. From arbitrage to the principle behind the carry trade, this glossary defines some to of the more common words that are used in currency trading
Forex Terms – Appreciation to Bull Market
Arbitrage – This is an attempt to take advantage of small price differences between markets by buying, or selling, an instrument in one market and simultaneous opening an opposing trade, of equal value, on a similar instrument, in another market.
Base/home Currency - The base currency is the first currency that is listed in a currency pair (i.e. GBP in GBP/USD). It is the base pair in which the exchange rate has its value. For example, a GBP/USD rate of $1.5 means that it takes $1.5 USD to buy one GBP.
Bear – This is a trader who believes that market prices will fall and will continue to do so. Usually, a bear will only look for selling opportunities despite the fact that technical indicators suggest otherwise.
Bear Market- A bear market is one in which trading sentiment is negative as traders continue to sell securities in a sustained manner, as a result the value of securities continue to fall.
Bid/Ask Prices - These are the two prices that are quoted to traders; the price trades are entered at depend on whether it is a long or short trade. If the trader buys a currency pair, the trade will be entered using the ‘ask price’ or the ‘bid price’ if a pair is being sold.
Bull- A bull is a trader who is optimistic that prices will rise, or that the market will rally. In opposition to a bear, a bull will continue to look to buy into the market though indicators may suggest that the market will be going down.
Bull Market - In a bull market, trader sentiment is positive and most traders are buying securities with the expectation that prices will continue to rise.
Forex Concepts – Broker to Currency Pair
Broker– A broker is a company or individual that acts as an intermediary between traders and the larger market. Brokers facilitate the buying and selling or currency pairs on a commission free basis. However, they do make money from the price spread.
Candlestick Pattern – These are special trading chart patterns that traders recognize and use to trade based on technical analysis.
Carry Trade – This is a forex trading strategy that involves trying to make a profit from the interest rate difference of two currency pairs. Traders make a profit by using the proceeds from the sale of a low yielding currency to purchase a higher yielding currency.
Assuming that the interest rate of the Australian dollar is 4%, and the Japanese Yen is 1%, buying the AUD/JPY will earn the trader 3% on the trade over the period of a year. If the forex account is traded on margin the trader can gain much more than 3%.
Counter/Settlement Currency - This is the currency that is traded against the base currency, i.e. the USD in the EUR/USD.
Cross Currency Pair – This is a currency pair that does not include the USD (i.e. EUR/JPY and the EUR/GBP).
Cross Rate - The cross rate is the exchange rate that is calculated or derived from two other exchange rates. For example, to calculate the EUR/JPY exchange rate, divide the USD/JPY by the EUR/USD (EUR/JPY= USD/JPY/EUR/USD).
Currency Nicknames – Currencies are sometimes referred to by their nicknames. Some popular nicknames include the loonie, which refers to the Canadian dollar and the green back that refers to the US dollar. Here is a list of some popular currency nicknames:
- Australia – Aussie
- Canada – Loonie
- Great Britain – Cable
- Japan – Yen
- New Zealand – Kiwi
- United States – Buck
- Switzerland – Swissy
Currency Pair- A currency pair is comprised of two separate currencies, such as the AUD and the Euro, that make the EUR/AUD pair. In this case the EUR will be referred to as the base currency and the AUD as the counter currency. The currency pair is a way of representing the exchange rate of one currency against another.
Understanding Basic Forex Jargons and Terms
While many of the terms explained here are common in other financial markets, they are also heavily used by forex traders as well. Therefore it is important for new traders to understand these jargons to become competent traders. Please follow these links to review other important currency trading terms:
- Glossary of Common Forex Terms and Concepts - D to L
- Glossary of Common Forex Terms and Concepts - M to Y
Sources:
Morris, Virginia B. and Kenneth M. Morris “Standard & Poor's Dictionary of Financial Terms.” Lightbulb Press, Inc., 2007
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