Glossary - Basic Forex Trading Terms and Concepts

Trading the stock and Forex markets, by themselves, can be challenging. We will try to make the process easier by helping you to understand the basic concepts and terms that Forex traders, dealers, brokers, commentators, and fund managers use. While this article is focused on Forex trading, most of the concepts and terms also apply to trading in other financial markets.

Appreciation - An increase in the value of a currency or trading instrument.

Base currency - The base or home currency; it is the first currency that appears in a currency pair (i.e. EUR in EURUSD).

Bear - Someone who believes prices are heading down, and will continue to fall.

Bear Market - A bear market is defined as one in which there has been a sustained fall in prices, and there is no sign the market will change direction in the near future.

Bid/Ask Prices - There are always two prices quoted to a trader, a bid price, and a ask price. If the trader buys a currency pair, he will be entered using the ‘ask price’ or the ‘bid price’ when a currency pair is sold.

Bull - A bull is defined as someone who is optimistic about the market, or who expects prices to go up.

Bull Market - In a bull market, prices are consistently on the rise, on the back of trader enthusiasm and continuous buying. As a result, prices show no sign of turning around in the short-term.

Carry Trade - The carry trade is a common Forex trading strategy by which traders seek to profit from the difference in interests rates of two currencies. To do this, the trader buys the currency with the higher interest rate and sells the one with the lower rate. For example, if the interest for the Euro is 4%, and the Japanese Yen is 1%, buying the EUR/JPY will earn the trader 3%. This Forex trading strategy seems to only work when the financial markets, in general, are bullish.

Cross Currency - A cross currency pair is one that does not include the USD (i.e. EUR/JPY and the EUR/GBP).

Cross rate - An exchange rate that is calculated from two other exchange rates. For example you can calculate the AUD/JPY rate by dividing the USD/JPY by the AUD/USD (AUD/JPY= USD/JPY/AUD/USD).

Currency Nicknames – Besides their official names, currencies are often referred to by their nicknames. Some popular ones include: the green back which refers to the US dollar, and the Loonie which refers to the Canadian dollar. Below is a list of the most popular currencies, along with their symbols and nicknames.

AUD – Country: Australia, Currency: Dollar, Nickname: Aussie

CHF – Country: Switzerland, Currency: Franc, Nickname: Swissy

CAD – Country: Canada, Currency: Dollar, Nickname: Loonie

EUR – Country: Euro members, Currency: Euro, Nickname: Fiber

GBP – Country: Great Britain, Currency: Pound, Nickname: Cable

JPY – Country: Japan, Currency: Yen, Nickname: Yen

NZD – Country: New Zealand, Currency: Dollar, Nickname: Kiwi

USD – Country: United States, Currency: Dollar, Nickname: Buck

Currency Pair - A currency pair is a trading instrument comprising two separate currencies, such as the Euro and the US dollar, which make up the EUR/USD pair. The first currency is usually referred to as the base or transaction currency and the second as the quote, payment or settlement currency. The currency pair is a way of stating the cost of converting one unit of the base currency to the counter currency. Using the EUR/USD as an example, if the current rate is 1.5000, it would cost US$1.50 to buy one Euro.

Depreciation/Decline - A fall in the value of a currency.

Exchange Rate - The exchange rate is what one currency is worth in terms of another, or when exchanged for another. Countries can determine their exchange rates in a variety of ways.

1. A floating exchange rate system allows the market to determine the correct price of the currency. This is allowed to happen with minimal intervention from the government and/or the central bank.
2. In a fixed exchange-rate system, the government and/or the central bank set the exchange rate.
3. A crawling or flexible peg system is a combination of a fixed rate and frequent small adjustments. This system may be used to control speculation about the revaluation or devaluation of the base currency.

Forex, FX, Foreign Exchange - The names that are used to refer to the markets in which currencies are traded.

Fundamental Analysis - Currency traders who speculate on the direction of a currency pair based on their interpretation of economic data, geopolitical events, and natural phenomena are using fundamental analysis.

Interbank – This refers to borrowing and lending between banks, as distinct from transactions with other institutions, clients and retail customers.

Interest Rate differential - The yield spread between two comparable debt instruments, denominated in different currencies. Higher spreads generally make currencies more attractive. As a result, traders tend to be bullish on these instruments (i.e. the carry trade).