The forex industry is made up of countless definitions and it's easy to forget a few along the way. But because no forex education can be complete without a glossary of forex terms, we've compiled one which aims at explaining key definitions in the simplest way possible. This way, you'll never be lost or confused again!
When a bank or financial body is exposed to forex contracts from a single customer.
The price at which a trader accepts to buy a security.
An item/resource of value.
The rate at which a country's central bank lends money to its domestic banks.
In a currency pair, the first currency in the pair is called the base currency. For example, in the USD/JPY pair, USD is the base currency.
When the prices of certain securities, assets, or markets are in decline.
The price at which a trader is prepared to sell a security.
When the prices of certain securities, assets, or markets are rising.
An order to carry out a transaction at, or lower than, a specified price, the word 'limit' referring to the specified price.
When an investor borrows at low interest rates so they can buy assets that are likely to produce higher interest rates.
When a position is closed, the transaction has been completed – whether the position was long or short or whether it was profitable or incurred losses.
Otherwise known as closing price, this is the final rate that a security is traded at on a specific day, candle or timeframe.
When a currency increases in value against another.
A contract that specifies the price that a currency can be bought or sold at on a set future date. Future contracts are often used by investors to hedge against risk.
The pair formed by two different currencies which are traded in a forex transaction. For example: EUR/USD.
A graph that illustrates the intraday movements of a security.
A trade opened and closed within one day.
A trading account which is funded with virtual money, giving the trader a chance to explore the markets and test the trading platform they're using before investing real money in a live trading account.
The number of open buy and sell orders placed for a security at varying prices.
When the value of an investment drops, the length between its peak and its low is called the drawdown.
A broker which uses Electronic Communications Networks (ECNs) to provide its clients with direct access to liquidity providers.
The rate at which one currency can be exchanged for another.
When a trade is carried out and completed.
This refers to the amount invested in a security and exposed to market risk.
The completion of an order.
When an investor has a very specific price they want to carry out a transaction at, they place a Fill or Kill order – this means that if the order is not filled at the desired price, it is terminated, or killed.
The price at which an order has been completed.
When an exchange rate is not fixed, but adjusts depending on the supply and demand for a particular currency relative to other currencies.
A digital chart that plots the price movements of currency pairs to help investors make informed trading decisions.
A trading strategy based on the notion that if you buy and sell (or sell and buy) a currency within a very short time frame, you are more likely to make a profit than you would with large price movements.
A system which gives out signals to traders to help them decide whether a specific time is suitable to buy or sell a currency pair.
A specific group of currencies which form a weighted average that can act as a measure to value an obligation.
The current exchange rate that a currency pair can be bought or sold at.
This refers to automated trading software which is designed to help determine whether to buy or sell a currency pair at a given time.
The impact economic and political events have on prices in financial markets (interest rate announcements, unemployment rate, etc.)
Investors use hedging to protect themselves by reducing the risk that may be caused by adverse market movements. Hedging means making two counterbalancing investments, in this way minimizing the losses which could be incurred by price fluctuations.
The interest rate charged on short-term loans between banks.
Leverage is offered by brokers to maximize traders' buying power by giving them the ability to deposit a small amount of funds and trade larger volumes. Leverage is expressed in ratio form, so if it is 1:100 for example, a trader's buying power is magnified 100 times.
An order to execute a trade at a specific price or a better one.
The specific price referred to in limit order.
The volume available in the market for a specific currency pair.
Taking a long position on a currency means that you buy it. In a currency pair, you buy the first of the two currencies – the base currency.
A lot is a standardized quantity of the instrument you are trading. In forex, one lot is 100,000 units of a particular currency.
This refers to the amount of money needed in your account to maintain an open position.
This is a notification which alerts you that you need to deposit more money in your trading account so there can be sufficient margin to keep existing positions open.
The value an open position would be if it were closed at the current market rate.
An order for a trade to be executed instantly at the best available price.
The current quote for a currency pair.
A micro lot is equal to 1,000 units of the base currency in a currency pair.
The price exactly in-between the bid and ask prices.
When traders have direct access to the interbank market and there is no dealing desk involved in their transactions.
A position taken on a currency pair/security that is subject to profits or losses.
The traditional way of trading forex was ‘over the counter’, meaning traders made forex transactions over the telephone or on electronic devices.
When a trader’s position is kept open and carried over to the next trading day.
Pip stands for Percentage in Point and it is the smallest price change that can be seen in an exchange rate. In most cases currency pairs are priced to four decimal points and the smallest change can be seen in the last decimal.
Closing a position to make a profit.
The second currency of a currency pair is called the Quote currency. In EUR/USD for example, USD is the quote currency.
A market governed by legislative rules and regulations which are in place to protect investors.
The price level which a stock or currency finds difficult to break above and as a result may begin declining instead.
Tools and strategies traders use to limit financial risk as much as possible.
In forex, the rollover rate is the interest rate that traders pay or earn when they hold (rollover) a position open overnight.
Refers to the total amount of funds involved in opening and closing a position.
This is when a trader executes an order at a price which is very different to the price they expected the trade to be executed at. This usually happens during periods of high volatility, when traders use market orders and stop loss orders.
A currency that is sensitive to political and economic events and thus fluctuates greatly and is generally unstable.
A trader who takes big risks when trading, choosing to trade instruments with a higher risk in the hope that they will return higher profits.
A sudden upward or downward movement in price that happens in a short time period.
The difference between the Ask and Bid price of a currency pair.
An order placed to buy or sell a security/currency when a certain price is reached. These orders are placed to limit loss on a position.
An order placed to close a position once it hits a specific price.
Traders use technical analysis to forecast prices by examining market/historical data through the use of charts and trading indicators.
This refers to the level of uncertainty surrounding the price fluctuations of a certain security/currency pair.
Yield is the return on an investment and is usually expressed as a percentage.