Glossary of FX trading Terms

There are hundreds of forex trading terms that you’ll hear throughout your trading career. The following list defines the most commonly used terms:

American Option – An option that may be exercised at any time prior to its expiration date.

Ask – The price at which a currency pair may be purchased. Also called the offer, ask price or ask rate.

Base Currency – The first currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the U.S. Dollar would be the Base Currency. Also called the primary currency.

Bearish – Defines a market where prices are declining. Also known as a Bear Market.

Bid – The price that a currency pair can be sold at. Also known as a bid price or bid rate.

Bid/Ask Spread – The difference in points between the bid and ask price. Also called the Bid/Offer Spread.

Bullish – Defines a market where prices are rising. Also known as a Bull Market.

Call – A call option gives the buyer the right, but not the obligation, to purchase a specific currency pair at a pre-agreed price.

Cross-rate – The exchange rate between two currencies, neither of which are the U.S. dollar.

Currency Pair – The two currencies comprising the FX rate. The USD/AUD represents a currency pair.

Dealer – A trading firm that is the other party in a FX transaction.

Euro – The official currency of these European countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. The Euro is also the official currency of Montenegro and Kosovo, Andorra, Monaco, San Marino, the Vatican, and these French territories: Martinique, Guadalupe, Reunion.

European Option – An option that can only be exercised on the date it expires.

Expiration The date on which an option must be exercised or offset.

Forward Transaction – An agreement for actual delivery and payment for currency to occur at a specific date in the future.

Interbank Market – Currency transactions that are negotiated between banks or between large financial organizations.

Leverage – A trader’s ability to control a large amount of currency with a relatively small amount of capital invested. Also called gearing.

Long – A position that is expected to appreciate in value as the market increases.

Limit – An order which is placed with some pre-condition, usually the maximum price the trader is willing to pay.

Margin – The amount of money required before anyone can open or maintain a position. Also called a Security Deposit.

Offer – The price at which a currency pair may be purchased. Also called the ask price or ask rate.

Open position – Any transaction which has not been closed out by an opposite transaction.

Pip – The smallest FX currency unit of price movement.

Premium – The priced paid by an option buyer. Does not include commissions.

Put – A Put option gives the buyer the right, but not the obligation, to sell a specific currency pair at a pre-agreed price. The opposite of a Put is a Call.

Quote Currency – The second currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the AUD would be the Quote Currency Also called the secondary or counter currency.

Rollover – The act of extending the settlement date for an open position until the next settlement date.

Resistance – A price level beyond which the currency finds it difficult to move.

Retail Customer – Any forex trader who is not a party to the Commodity Exchange Act. Included in this group are traders whose assets are below $10 million.

Settlement – The delivery of the currency upon the trade’s maturity date.

Short – The act of selling a currency that the trader believes will decline in value. The trader need not actually own the currency being sold. It can be borrowed from the /poker and repaid at a future date when the price is more advantageous.

Spot Market – A transaction where payment and delivery of currency is immediate.

Spread – The pip difference between the ask and bid price of a currency pair.

Stop Loss – A standing order which instructs the /poker to liquidate an open position if the price falls to a pre-specified level.

Strike Price – The exchange rate at which the buyer of a call or the seller of a put can exercise a trade. Also called the exercise price.

Support – The price level at which traders feel comfortable enough to buy.

Trend – The direction in which the market is heading. The three categories of trends are: major, intermediate and short-term. Trends move in one of three directions: up, down, sideways.

Turning point – The point where a market ceases being though of as being bullish or bearish and moves in the opposite direction.