FX Market Terms

 
Spot Foreign Exchange: Often referred to as the "interbank" market. Refers to currencies traded between two
counterparties, often major banks. Spot Foreign Exchange is generally traded on margin and is the primary market
that this website is focused on. Generally more liquid and widely traded than currency futures, particularly
by institutions and professional money managers.
Ask: Price at which broker/dealer is willing to sell. Same as "Offer".
Bid: Price at which broker/dealer is willing to buy.
Spread: difference between ask and bid prices for a currency pair.
Market Order: An order to buy at the current Ask price.
Offer: Price at which broker/dealer is willing to sell. Same as "Ask".
Pip: The smallest price increment in a currency. Often referred to as "ticks" in the futures markets. For example,
in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.
Premium (also "Interest" or "Cost of Carry"): The cost, often quoted in terms of dollars or pips per day, of
holding an open position.
Stop: An order to buy at the market only when the market moves up to a specific price, or to sell at the market
only when the market moves down to a specific price.
Limit: An order to buy at a specified price when the market moves down to that price, or to sell at a specified
price when the market moves up to that price.
Cost of Carry (also "Interest" or "Premium"): The cost, often quoted in terms of dollars or pips per day, of
holding an open position.
Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured
from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000,
then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown
of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account
was never in a loss position from inception.
Leverage: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin
required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value")
is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage
($100,000/$2,000).
Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which
positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at
a smaller bid/ask spread.
Margin: The amount of funds required in a clients account in order to open a position or to maintain an open
position. For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.
Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position.
Sometimes a "margin call" means that the position which does not have sufficient funds on deposit will simply be
closed out by the broker. This procedure allows the client to avoid further losses or a debit account balance.
Currency Futures: Futures contracts traded on an exchange. Always quoted in terms of the currency value
with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange.
 
© All rights reserved. Rada Forex. 2010.