Arbitrage — Profiting from differences in the price of a single asset such as a currency pair that is traded on more than one market. For arbitrage opportunities to exist, the currency pair must be traded simultaneously on two different markets, and at different prices.
One very common form of arbitrage is hedging, which is a practice of buying a security on one market e. Arbitrage is also used in sports, in trading exchange traded funds and also in trading credit default swaps.
Usually pending orders are used for such requests by traders to brokers. At Limit — An order by a trader to a broker to fill a long trade at a price that is below the current market price, or to fill a short trade at a price that is above market price.
At Best — An order by a trader or broker to fill a trade using the best prices possible in the shortest time possible. Asset — An item having commercial or exchange value. The commercial value of a resource is not fixed, but changes from time to time as a result of several factors influencing the supply and demand of the resource. It is this change in the perceived value of the resource that confers on it economic and commercial importance.
Financial markets provide a standardized template on which assets can be exchanged for a value bestowed on it by the concurrence of traders and the intermediaries brokers in such transactions. Ask — The price at which a currency pair or security is offered for sale.
The Ask is the quoted price at which an investor or trader can buy a currency pair, or the price at which a dealer will sell a currency pair to a trader. In a price quote, there are two prices that are listed, and it is the price listed on the right hand side of a price quote that constitutes the Ask. The Ask Price is always higher than the bid price. Such investors would include banks, major corporations, hedge funds and other financial institutions. The definition for the Forex market is the exposure of a trading entity to fluctuations in the exchange rates of two currencies.
Aggregate risk is a key indicator that a trading entity must employ in order to gauge the maximum allowable exposure to a a trade before engaging in that trade. Once this has been derived, limits on the position can be set. Aggressor — The aggressor is usually the party that initiates the deal in a transaction.
In the financial markets, the aggressors are usually the ones responsible for order flows in a particular direction. This role is taken on by the institutional investors in the Forex market, and that is why in times of increased volatility especially during news trades , it is not unusual to see large spikes following the release of a news item.
In this instance, the institutional investors aggressive push prices by their large demand and hope to gain on this price change by offloading the positions on the non-aggressive section of the market. Absolute Rate — Absolute rate is a combination of a percentage of an interest rate swap that is fixed, as well as the percentage that is flexible or floating. Interest rate swaps are used by companies to hedge against sudden and undesirable fluctuations in interest rates.
Base Currency — In terms of foreign exchange trading, currencies are quoted in pairs. This is because you cannot trade one currency on its own. A currency is always traded in exchange for another. The first currency in the pair is the base currency.
The base currency is the currency against which exchange rates are generally quoted in a currency pair. In expressing the exchange rate, the rate is quoted as the value of the other currency in relation to 1 unit of the basic currency. Buy — An opening of a long and a closure of a short positions. Traders generally buy when there is the expectation that the price of the asset or that the exchange rate of the currency pair will increase.
A Buy order in Forex is an instant market order to purchase the asset at the market current price. Bull — A market participant counting on an increase in the value of the market in general or an asset specifically.
A bull is also a market operator, a trader or an investor who speculates for a rise in prices of tradable instruments. The bulls will therefore buy an asset based on their sentiment or on their market expectations. When there are more bulls in the market place than there are sellers bears , then the market price of the asset will appreciate. Broker — An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread.
Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries. Breakout — A breakout is a situation when the momentum of the price action is so strong that it moves beyond key levels of support downside breakout and resistance upside breakout.
Breakouts usually occur as a result of high impact news releases or some other factors that cause traders in the market to generally place orders in one direction.
Bid — The price at which a dealer is prepared to purchase a currency from an investor or trader, or the price at which an investor or trader can sell a currency pair to a dealer. In a price quote, there are two prices that are listed, and it is the price listed on the left hand side of a price quote that constitutes the Bid.
The Bid Price is always lower than the ask price. Bear — A market participant counting on the market price decrease; a market operator, a trader or an investor who speculates on the fall in value of an asset. The bears will therefore sell an asset based on their sentiment of market expectations.
When there are more bears in the market place than there are buyers bulls , then the market price of the asset will depreciate. It is commonly used in describing the rate of change of interest rates. So if a central bank increases interest rate from 4. Bank Rate — The rate at which a central bank is prepared to lend money to its domestic banking system. It is also known as the discount rate, or interest rate on the economic news calendar. Central banks function as a lender of last resort.
Commercial banks invest funds deposited with them by customers either in the form of loans given out to individuals and businesses, or in other investment vehicles, but are required to keep reserve funds to handle settlement of transactions. Occasionally, commercial banks may run out of such reserve funds.
They can therefore obtain stop-gap loans from the central bank, repayable at a certain interest rate. This is what is known as the bank rate. Balance — The financial result of all completed transactions of a trading account. The true balance of the trading account can only be known when all unrealized profits or losses, as well as the initial margin used balance are included into the unused balance after all positions have been closed.
Currency Pair — A conversion operation object based on the change of one currency rate against another. Currency pairings are done because it is the rate of exchange of one currency to another currency that is measured in the Forex market. A currency cannot be traded against itself, and that is why currencies are paired so that they reflect the rate of exchange of one currency against another. In a currency pair, the first listed currency is the base currency while the currency listed on the right is known as the counter currency.
Currency — Money issued by a government. Currency has evolved over centuries from grains to other times that were considered stores of value, to gold and silver, and then graduated to the use of minted coins and paper money.
It is a form of money used as a unit of exchange within a country. Money is known as currency because once the issuing agency the central bank has decided on the amount of money that is in circulation at any given time, the existing amount of money in a system flows from one person to another based on the exchange of goods or services for it, and this is likened to a river current that flows from one point to the other.
In other words, the cross rate is the exchange rate between two cross currencies. Another definition has it as the quoted exchange rate of two currencies in a country in which neither currency is the official currency. Counterpart — A participant in a financial transaction. A counterparty is a market participant that takes the opposing side of a transaction to that of a trader in the market. In the Forex market, market makers usually function as a counterparty in a Forex transaction.
Consolidation — This refers to a period of time in the market when prices are restricted to a tight trading range. Consolidation occurs when the majority of traders sit on the sidelines, leading to very low trading volumes.
Commodities — These are trad-able financial instruments whose contracts are based on materials of value that are either extracted from the ground hard commodities such as gold, natural gas, oil , or are based on agricultural products corn, coffee, cocoa, wheat.
A commission is different from the spread, which is usually the difference between the price that a broker is ready to pay for an asset and the price that the broker is ready to buy back the asset from a trader. A commission is a fee charged for enabling a transaction to occur.
In the Forex market, commissions are only charged in an ECN environment to cover the cost of maintaining the FIX protocol on which the electronic communication network works. As such, all price quotes obtained from that exchange are the same that are given to all participants in that market. Central Bank — A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.
Devaluation — The depreciation of the national currency, or in other words, the rate decline in relation to foreign currencies and gold. For example, in Britain in September raising interest rates in the situation of stagnation in the economy were the reason for the devaluation of the pound.
On September 16 the pound lost 2. Direct Quote — This is a quote that expresses the exchange rate in terms of how much of the domestic currency or the currency under reference can purchase one unit of another currency. Depth of Market — This is a measure of the size and number of the open positions on the buy and sell side for an asset at various prices.
This information is a measure of market liquidity and is also the basis of the data shown in the order book, accessible to traders using Level II trading platforms.
Another definition describes depth of market as the number of units of the asset that can be purchased without significantly affecting the price of the asset.
In other words, a very large order has to be made before the price of the asset shifts significantly. Dealing Desk — This is the department in a market maker brokerage firm that is responsible for the execution of trade orders in the Forex market. Dealing desks act as intermediaries between the trader and the liquidity providers, matching buyers with sellers and fulfilling sell orders with buy orders.
Dealing desks can also be found in banks and finance houses. Day Trading — Refers to a style or type of trading where trade positions are opened and closed during the same day.
Day trading requires that the trader analyze the market using short term charts e. A popular day trading technique is trading the price spike that follows high market impact news releases, in which the trader aims to capture market movement resulting from the price spike following the news release.
Diversification — The acquisition of a wide range of securities in order to reduce risks: The history of the Kimberly Clark company is one of successful diversification. The company worked in a pulp and paper industry sector.More...