Trading Glossary

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A

• Account

  A recorded description of transactions of currency, goods and services.

• Agent

  A business or person hired as an intermediary to carry out transactions on behalf of another.

• Aggregate Demand

  The total demand for final goods and services in an economy at any given time, it consists of government spending, private/consumer, and business investment.

• All or None

  It refers to both the buy and sell orders of a broker, that need to be filled completely at a predetermined price or not at all.

• American Option

  An option that can be exercised any time before and including its maturity date. The majority of exchange-traded options are American.

• Anonymous Trading

  Visible bids and offers are visible on the market but do not reveal the identity of the bidder and seller. Anonymous trades allow the high profile investors to execute transactions without the scrutiny and speculation of the market.

• Appreciation

  Due to market demand, it is an increase in the value of a currency.

• Arbitrage

  When a price differential arises, creating an opportunity to profit through buying and selling of securities, currency, or commodities. Arbitrage is a “riskless” opportunity to gain, as there is no uncertainty involved. In regards to the foreign exchange market, arbitrage arises when a profit can be made through differentials in exchange rates. However, arbitrage opportunities are rare in the foreign exchange market.

• Asian Option

  An option whose reward relies on the average price of the asset over a certain time as opposed to at maturity. Compared to American options, these tend to cost less.

• Ask Rate

  The lowest possible price that shares will be sold for, such as the bid/ask spread in the foreign exchange market.

• Ask Size

  The amount of shares a vendor is willing to sell at his/her ask rate.

• Asset Allocation

  The diversification of one’s assets into different sectors to optimize growth potential and minimize risk. These can include real estate, stocks, bonds, and forex.

• Asset Swap

  The exchange of tangible assets for intangible assets to alter the cash flow traits of an institution’s assets.

• Attorney in Fact

  Someone who is given the right or authority to act on behalf of another to execute business transactions and enforce documents.

• Attorney in Fact

  Someone who is given the right or authority to act on behalf of another to execute business transactions and enforce documents.

• Authorized Dealer

  A financial institution( or bank) authorized to deal in foreign exchange.

• Automatic Exercise

  A procedure that protects an option holder. The Option Clearing Corporation will exercise an “in the money” option automatically for the owner without their instruction.

• Away From the Market

  When either the bid on an order is lower, or the asking price is higher than the current market price.

• Back Office

  It’s the administrative section of financial service companies. They carry out and confirm financial transactions including accounting, settlements, clearances, regulatory compliance and record maintenance.

• Balance of Payments

  Also known as the balance of international payments, is the record of all the economic transactions made by one country(and its residents) with other countries over a period. These transactions include trade balance, foreign investments, and investments by foreigners.

• Balance of Trade

  The net flow of goods between two countries, or the exports minus the imports.

• Balance/Account Balance

  The net value of an account.

• Bank for International Settlements

  The BIS is an international financial organization promoting the cooperation of central banks. Essentially, the BIS, located in Basel, is a central bank for all other central banks. It watched and collects data on international banking activity and publishes rules concerning international bank regulation.

• Base Currency

  First, it is the first currency in a forex. Second, it is the currency used by banks as the basis for comparing. In forex markets, the US Dollar is normally considered the ‘base’ currency for quotes. Sometimes, the British Pound, the Euro ,and the Australian Dollar can be used. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros and simultaneously sold dollars.

• Basis

  The difference between the cash price and the possible future price.

• Basis Point

  A measure of a bond’s yield to 1/100th. For example, a 1% change in yield is equivalent to 100 basis points and 0.01% is equal to one basis point.

• Bear

  An investor believes that prices or the market will decline and thereby acts accordingly.

• Bear Market

  A market that exhibits a declining trend, which encourages selling.

• Bid

  The price an investor says they are willing to pay for a particular asset.

• Bid/Ask Spread

  The difference between the ask and the bid price.

• Big Figure

  The first number to the left of the decimal point in an exchange rate quote. Dealers usually omit them, because they rarely change.

• Bonds

  A bond is debt investment used to raise capital, which is issued for periods greater than one year. Bondholders are loaning money (investing in debt) to an entity and governments; eventually, they will be paid with a specific 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, notes, and bills, municipal bonds, and corporate bonds.

• Book

  A recording of the total positions held by a trader or desk.

• Bretton Woods Accord (1944)

  After the Great Depression and the WWII, 44 Allied nations met to provide stability in the world economy by establishing a fixed exchange rate and requiring central bank intervention to maintain the fixed exchange rates. This accord successfully fixed the exchange rates of major currencies to the US dollar and set the price of gold to {currency}35. The system ended in 1971.

• Broker

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

• Bull

  An investor who believes markets or prices will rise.

• Bull Market

  A market where prices are rising or are expected to rise.

• Bundesbank

  Germany’s Central Bank.

• Buy a bounce

  A strategy to buy if the price bounces from a certain level.

• Buy break

  A recommendation to buy an asset if it breaks a certain level.

• Buy stops above

  A recommendation to enter the market when the exchange rate breaks through a specific level.

• Cable

  Term used to describe the exchange rate between the US dollar and the British Pound.

• Candlestick Chart

  Chart depicting the daily high, low, opening and closing price, similar to that of a bar chart. If the close is lower than the open than the body of the candlestick is filled in, and if the open is lower than the close the body is left empty.

• Capital Markets

  Markets in which capital (stocks, bonds, etc.) are traded. Usually for medium or long term investing.

• Carry Trade

  An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest rate differential.

• Central Bank

  A banking organization, usually independent of government, responsible for implementing a country’s monetary policy and for printing money.

• Chartist

  Refers to a technical analyst or one who analyses charts/graphs and data to uncover potential trends.

• Clearing

  Refers to the settlements/confirmations of trades.

• Close a Position (Position Squaring)

  Refers to getting rid of a position, either by buying back a short position or selling a long position.

• Commission

  A fee charged by broker or 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 the price.

• Contagion

  Like the name denotes, the term is used to describe the spread of economic crises from one country’s market to other countries within close geographic proximity. This term was first used following the Asian Financial Crisis in 1997, which began in and soon spread to other East Asian economies.

• Contract (Unit or Lot)

  The standard trading unit on certain exchanges. A standard unit in the forex market is {currency}100,000.

• Convertible Currency

  Currencies that can be exchanged for other currencies or gold.

• Cost of Carry

  The costs that develop as a result of an investment, like when an investor borrows money.

• 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) involved that the counterparty will not be able to meet the terms outlined in the contract.

• Country Risk

  The risk that a government might default on its financial commitments. This causes harms to the financial sector, as well as those in other countries.

• Cover on a Bounce

  A suggestion 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

  Credit checking refers to the process of verifying that counterparty has enough credit. Before making a financial transaction, you must check whether the counterparty has enough available credit to honor the transaction.

• Credit Netting

  Usually, large banks and trading institutions make agreements to avoid having to recheck credit continually.

• Cross Rate

  The exchange rate between two countries’ currencies. The pair quoted do not include the domestic currency.

• Currency

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

• Currency (Exchange Rate) Risk

  The risk that there will be drastic changes or fluctuations in exchange rates in which may result in a major loss.

• Currency Pair

  Currencies are quoted in pairs, such as EUR/USD. The first currency is known as the base currency, while the second is called the counter or quote currency.

• Day Trading

  The ability to enter and close out trades within the same day or trading session.

• Dealer

  The person whose job it is to place the order to buy or sell. Unlike an agent, a dealer ownership of the asset, and exposing themselves to some risk.

• Deficit

  An amount of money which falls short fo the required amount, a loss over profits, or spending more than your income.

• Delivery

  A word used to describe the exchange by buyer and seller of a traded currency.

• Deposit

  The process of borrowing and lending money.

• Depreciation

  A word used to describe the exchange by buyer and seller of a traded currency.

• Derivative

  In finance, a derivative is a contract between two or more parties that derives its value from an entity. Derivatives are traded and usually are used to hedge portfolio risk.

• Devaluation

  It is the devaluation of a country’s currency. Devaluation typically occurs from government policy in hopes to improve the balance of trade; because exports become cheaper for the rest of the world and imports more expensive to domestic consumers.

• Dirty Float (Managed Float)

  A dirty float or managed float exchange rate system is when exchange rates fluctuate daily. Central banks try to influence and manage their country’s rates by buying and selling currencies.

• Economic Exposure

  The risk that a country’s economy may suffer due to changes in the exchange rate.

• Efficient Markets

  Markets where assets are traded in which the price is determined by all the current and relevant information, therefore it is impossible to have undervalued assets.

• End of the Day (Mark to Market)

  Mark to Market (MTM) is the measure of changing accounts over time. For an End of the Day MTM, a trader can record his transactions at the end of each trading day at the closing rate (value.)

• Estimated Annual Income

  The expected yearly earnings.

• Euro

  The new monetary unit of the eurozone. The currency is used by 19 of the 28 member states of the European Union.

• European Monetary Union

  The EMU is an umbrella term for policies to establish a single currency (the euro) for the entire EU.

• FCM

  See Futures Commission Merchant.

• Federal Deposit Insurance Corporation

  A regulatory agency of the 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 US {currency}100,000 per banking institution.

• Federal Reserve/Fed

  The central bank of the United States, responsible for monetary policy.

• 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 remain at the same rate throughout the period.

• Flat/Square

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

• Floating Rate Interest

  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 investment.

• Foreign Exchange (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 of the delivery. 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 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.

• 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 effect the future direction of financial markets.

• Future Rate Agreements (FRAs)

  FRAs are agreements that are made that allow for borrowing and lending at a constant interest rate for a specified period in the future.

• Futures (Financial Futures)

  Future contracts that both buy or sell financial instruments, currencies or commodities at a predetermined price and a specific date in the future.

• Futures Commission Merchant

  Futures Commission Merchant is an individual (or organization) that engages in futures and options transactions.

• GTC (Good-till-Cancelled)

  An order was given by an investor to either buy or sell a stock at a fixed price that is considered “good.” Until the investor cancels it.

• Hedge/Hedging

  A hedge is an investment to reduce possible future adverse losses and gains in one’s portfolio. Hedging typically involves selling the good forward or taking a position in a related security.

• High/Low

  The daily high and low traded price.

• Inflation

  The decreasing purchasing power caused by the increase in prices and wages over time. It is calculated by consumer price index or a GDP deflator.

• Initial Margin

  The percentage of the price of a security that an investor need to make in an initial deposit.

• Interbank Rate

  The rate of interest charged on loans by major banks (Deutsche, Citibank, Bank of Tokyo) trade in foreign exchange.

• Interest-Rate Swap Points

  The interest rate can be determined through the difference in the bid and offer price of an exchange rate.

• Interest-Rate Swaps

  The process in which banks or companies trade debts/loans fixed rates for floating rates (or vice versa) in another country.

• ISDA (International Swaps and Derivatives Association)

  The organization that defines the terms and conditions for trade in derivatives.

• Leading Indicators

  An indication that the economy will follow a new particular pattern or trend. Statistics such as unemployment rates, CPI, Federal Funds Rate, retail sales, personal income, discount rate and the prime rate are used to predict an economic trend.

• LIBOR

  London Interbank Offer Rate or LIBOR, and is the average rate at which major international banks lend to one another. It is widely used as the benchmark for short-term interest rates around the world.

• LIFFE

  London International Financial Futures Exchange is a futures exchange based in London, made up of the three largest future exchanges in the UK.

• Limit Order

  An order with restrictions to buy or sell a stock. So that the maximum price to be paid or the minimum price to be received.

• Liquid Assets

  Those short dated assets that can easily be turned into money.

• Liquidation

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

• Liquidity

  The availability of liquid assets to a market or a high volume of activity in a market.

• Long (Position)

  The ownership of securities, commodities or currencies, which one does not intend on selling because the prices may rise.

• Margin

  It is a collateral that a trader needs to deposit to cover some of the credit risk involved with the transaction of the counterparty.

• Margin Call

  A decision made by a broker or dealer to raise the margin requirement of an account.

• Market Maker

  A dealer in securities who is willing to buy and sell at specific prices. The buy and sell prices are listed to attract customers.

• Market Order

  An order to buy or sell a stock at the best available price.

• Market Risk

  The inevitable risk associated with investing in the market that cannot be avoided.

• Maturity

  The final payment date of a loan, at which the principal and interested must be redeemed or repaid.

• Mine and Yours

  A slang term used when a trader wants to buy (mine) and sell (yours).

• Money Market

  The money market is made up of the financial institutions and dealers in money or credit who wish to be involved in short-term borrowing or lending.

• Net Worth

  Sometimes referred to net or wealth, it is the values of assets minus the liabilities. For public companies, this is known as shareholder equity.

• Off-Balance Sheet

  Incognito Leverage or off-balance sheet (OBS) is when a debt, asset or financing activity does not appear on the company’s balance sheet.

• Offer

  The rate or price a seller is willing to sell at.

• Offsetting Transaction

  A transaction that completely counterbalances the portfolio by canceling the risks of another asset.

• One Cancels Other Order (O.C.O. Order)

  An order that cancels another part of the same order.

• Open Order

  A valid open order that is executed only when the amount of a share or currency reaches a predetermined price.

• Open/Open Position

  An order that has not been completed yet and is still valid. An open position puts a trader at risk if the market prices rise or fall.

• Options

  These are contracts that give the buyer the right, but not obligation, to buy or sell commodities, securities or currencies at a prearranged and date price. Options are used to avoid against adverse price movements.

• Over-the-Counter Market

  Over-the-counter(OTC) or off-exchange market is when trading is done between two parties without the regulation of a stock exchange, like the United States’ NASDAQ. In an OTC exchange, the price may not be published for the public.

• Overnight

  An action that stays open until the start of the next business day.

• Pegging

  It is when a country tries stabilizing their exchange rate(currency) to another country’s currency. Most countries that peg their currencies do so against the US dollar or the Euro.

• Pip (Points)

  The tiniest quantity an exchange rate can move; generally, it is .0001.

• Political Business Cycle

  An economic/political theory that states that a business cycle occurs from the manipulation of political tactics before and after elections. To gain voter support, incumbent politicians will implement reforms to effect the economy prior to elections.

• Political Risk

  It is a risk that will negatively impact an investor because of changes in political policies.

• Position

  The amount of currency possessed or owed by an investor.

• Premium

  The additional amount added to the price of a currency.

• Price Transparency

  The amount of access to information every investor/trader has regarding bids and offers and respective prices.

• Quote

  To state an offer price of a security or commodity.

• Rate

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

• Realized and Unrealized Gains

  Unrealized gain is a valuable profit that has not been cashed in yet. While a gain becomes realized once the money has been cashed in of the unrealized gain.

• Regulation

  Because the Forex market is decentralized and operates with no central exchange, there are several governmental and independent supervisory bodies around the world to regulate the market. These regulatory bodies act as watchdogs and provide financial licenses to organizations that are of good standing.

• Repurchase Agreement (REPO)

  A repurchase agreement or REPO agreements are short-term contractual arrangements between dealers and government securities. In other words, they are money market instruments where the trader sells a security (government security) and buys it back only after a short period, typically overnight.

• Resistance

  It is the level(maximum) that prices, stocks, and market will probably not surpass. When it reaches this point, investors expect prices to fall. In the case of forex, it is the point at which currency can no longer rise.

• Revaluation Rates

  The daily rates that traders use to evaluate of the gains and losses in their accounts in the market.

• Risk Capital

  To maintain an investor’s standard of living, there is a certain minimum capital that an investor does not need.

• Risk Management

  How a trader analyzes and examines the market in order to avoid substantial risks to their portfolio.

• Risks

  The inevitable uncertainty associated with getting involved in investing. In the case of finance and forex, it is the variance of possible outcomes or the possibility of losing some of an investment. The higher the risk of an investment, the higher the likely returns.

• Rollover

  It is when someone reinvests funds from a security, at its expiration date, into the same security. The rollover process is calculated by the interest rate differential between the two currencies.

• Settlement

  The finalization of a contract in which the goods, securities or currencies are paid for or delivered.

• Short

  Traders sell a borrowed security, commodity or currency when prices are expected to fall.

• Short Position

  It is a directional investment trading where the investor sells securities, commodities or currencies at a prearranged price in the future.

• Spot Market

  An instantaneous market in which commodities, securities or currencies are immediately delivered.

• Spot Price

  The current market price.

• Spread

  A market maker offers a spread which is the difference between the bid and offer price.

• Sterling

  The British currency, also known as the Pound.

• Stop Order (Stop-Loss Order)

  An order to buy or sell security that ensures a higher likelihood of achieving the specific, prearranged price and avoid excessive loss.

• Support

  When the prices reach a certain level because of a sufficient demand; thereby, turning a downtrend up.

• Swap

  When a trader exchanges one currency for another. Swaps are strategically used to guess future interest rate movements. Traders calculate if a swap should be made using the interest differentials between the two currencies.

• Swap Spread

  The difference between the negotiated and fixed price of the swap.

• Technical Analysis

  A trading technique employed to try forecast the future movements of a security, commodity or currency. This is based by examining charts and historical performance on past price movements.

• Tick

  The minimum price activity.

• Ticker

  Usually a graph or chart that depicts the recent history of a currency.

• Trade Price Response

  Based on analysis of past trade experiences, advisors predict when the market and prices reach a certain critical level. If the market go above or below such a level, the trader will act accordingly and may change his/her course of action.

• Transaction Costs

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

• Transaction Date

  The date a trade occurs.

• Turnover

  The number or volume of shares traded over a specific time period. The bigger the turnover, the more commissions a broker will make.

• Two Way Price

  A quote that provides you with both sides of the price meaning the bid and offer for any security, currency or commodity.

• U.S. Prime Rate

  The interest rate that major commercial banks lend to credit-worthy clients.

• Uptick

  A small price quote increase that is higher than the original quote.

• Uptick Rule

  A trading regulation stating that a stock is only allowed to be short sold by an uptick. The price in the trade prior to the short trade has to be lower than the price of the present short trade.

• Value Date

  The payment date that is exchanged between two parties.

• Variance

  It is used to measure the volatility of a data set/data points from the mean. To calculate it, one must add the squares of the standard deviations from the mean and divide the number of data points.

• Variation Margin

  During a period of extreme market volatility, it is the decision of a broker to increase the minimum margin requirement of an account.

• Volatility

  The statistical measurement using the coefficient of variation (the standard deviation divided by the mean). It demonstrates the tendency of prices/variables to fluctuate over time.The higher the volatility, the riskier the security involved.

• Volume

  During a period, the amount of contracts or shares traded for a certain security or an exchange.

• Warrant

  A warrant is issued by a company. It is similar to an option, an individual has the right, but not obligation, to buy shares in a company at prearranged price and date.

• Whipsaw

  This term happens when prices in the market sharply switch from one direction to another. An example of a whipsaw would be if immediately after you bought a stock, the price drastically plummeted.

• Yard

  A name for a billion Japanese Yen.

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