FOREX Terminology

Common FOREX terms

Appreciation: When a currency’s value increases.

Ask Rate: The rate or price at which a seller of a currency is willing to sell it. Also, the rate or price at which a buyer is able to buy it.

Base Currency: The currency by which other currencies are quoted in a pair. Commonly, the U.S. dollar is used as the "Base Currency."

Bear Market: A market in which prices are declining.

Bid/Ask Spread: The difference between the Bid and offer (Ask) price.

Big Figure: A term used by dealers and brokers, which refers to the first few digits of an exchange rate.

Broker: An individual or firm that makes it possible for traders to buy and sell currencies in the FOREX market. (Also see "Dealer" below.)

Bull Market: A market in which prices are rising.

Clearing: The process of settling a trade.

Commission: A fee that is charged by a broker or dealer. But in FOREX there are no commissions. There are no clearing fees, exchange fees, government fees, or brokerage fees. Brokers get paid for their services through the bid-ask spread. This is one of many factors that makes FOREX so attractive.

Confirmation: A document that states the terms of a transaction.

Contract: The standard unit of trading.

Cross Rate: The exchange rate between any two currencies that are not of the country in which the currency pair is quoted. For example, in the U.S., a GBP/JPY quote would be considered a Cross Rate. The same quote would not be a Cross Rate in either the U.K. or Japan.

Currency: A unit of exchange. Any form of money that has been issued by a government-central bank is a currency. Currencies are used as a medium of exchange—as a basis for trades. We use currencies (money) to buy and sell goods and services.

Day Trading: Trades that are opened and closed on the same day.

Dealer: An individual or firm that takes one side of a position hoping to make a profit by closing out the position in a following trade with a different trader. As with brokers, they provide a service for traders to buy and sell currencies in the FOREX market.

Depreciation: When the value of a currency declines.

Foreign Exchange: (Also “Forex“, "FX”, “Spot FX”, and just “Spot.”) A market in which traders simultaneously buy one currency and sell another. For example, a trader may buy US dollars and sell the Euro (USD/EUR).

Forward: The predetermined and agreed upon exchange rate for the settling of a transaction at some agreed future date.

Fundamental Analysis: The analysis of economic and political information used to determine future market movements.

Inflation: An economic condition in which the prices of goods and services rise, which then decreases the purchasing power of consumers.

Initial Margin: The deposit given to a broker or dealer; it is the collateral required to enter into a position as a guarantee on future performance.

Limit Order: An order that sets restrictions on the amount of profit and loss a particular transaction (trade) can make.

Liquidity: The ability of a market to accept large transactions without it impacting the stability of market prices in general. When a market has high liquidity it means that there is plenty of money in the market to cover virtually any trader's position. The high liquidity of the FOREX market is one more reason FOREX is so attractive.

Long Position: A position that increases in value in value if market prices increase.

Margin Call: When a broker or dealer requests additional collateral to guarantee performance on a position that has moved against the investor (trader).

Market Maker: A dealer who quotes both bid and ask prices, hence makes a two-sided market for any financial instrument.

Maturity: The date on which a financial instrument is expired or a transaction is settled.

Offer: The rate (price) at which a dealer is willing to sell.

Open Position: A deal (transaction) that has not yet been settled with an actual payment.

Overnight Trading: Trades in which positions remain open until the next day (overnight).

Pips/Points: One unit of price change in the bid/ask price of a currency. It is the last digit in a rate; the fourth decimal place in an exchange rate. This is a very important term to know because currency trading in the FOREX market is measured in Pips/Points.

Position: The netted total holdings of a given currency.

Quote: An indicative market price, normally used for information purposes only and not for deals.

Rate: The price of one currency in terms of another.

Risk: The amount of exposure to the risk of loss.

Roll-Over: When the settlement of a transaction is pushed forward to another date.

Short Position: A position that increases in value if the market prices decrease. In other words, when a trader takes a short position he or she is betting that the value of a currency will decline.

Spread: The difference between the bid and offer (Ask) price of a currency pair.

Stop Loss Order: An order in which an open position is automatically liquidated (closed) at a specific price. Stop Loss Orders minimize potential losses if the market moves in the opposite direction to the investor’s position.

Swap: The sale and purchase of a certain amount of a currency at a forward exchange rate.

Technical Analysis: An analysis of historical market trends in an effort to forecast future market movements.

Transaction Cost: The cost of making a financial transaction—buying or selling.