Trading Glossary

What is spread

Ask (offer) price

The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Ask. The Ask price is also known as the Offer.

In FX trading, the Ask represents the price at which a trader can buy the base currency, shown to the right in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs.

Base currency

The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215. In the FX market, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Bearish / Bear market

Negative for price direction; favoring a declining market. For example, “We are bearish EUR/USD” means that we think the Euro will weaken against the dollar.

Bears

Traders who expect prices to decline and may be holding short positions.

Bid price

The price at which the market is prepared to buy a product. Prices are quoted two-way as Bid/Ask.

In FX trading, the Bid represents the price at which a trader can sell the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Bid price is 1.4527, meaning you can sell one US Dollar for 1.4527 Swiss francs.

Bid/ask spread

The difference between the Bid and the Ask (Offer) price. This is what you ‘pay’ your broker for facilitating your trade. Its part of your trading costs.

Bollinger bands

A tool used by technical analysts. A band plotted two standard deviations on either side of a simple moving average, which often indicates support and resistance levels.

Broker

An individual or firm that acts as an intermediary, bringing buyers and sellers together for a fee or commission. In contrast, a ‘dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

Bullish / Bull market

Favoring a strengthening market and rising prices. For example, “We are bullish EUR/USD” means that we think the Euro will strengthen against the dollar.

Bulls

Traders who expect prices to rise and who may be holding long positions.

Buy

Taking a long position on a product.

Cable

The GBP/USD pair. ”Cable” earned its nickname because the rate was originally transmitted to the US via a transatlantic cable beginning in the mid 1800’s when the GBP was the currency of international trade.

Counter currency

The second listed currency in a currency pair.

Cross (e.g. Yen cross)

A pair of currencies that does not include the US Dollar.

Currency pair

The two currencies that make up a foreign exchange rate, for example EUR/USD.

Day trading

Making an open and close trade in the same product in one day.

Divergence

In technical analysis, a situation where price and momentum move in opposite directions, such as prices rising while momentum is falling. Divergence is considered either positive (bullish) or negative (bearish); both kinds of divergence signal major shifts in price direction. Positive/bullish divergence occurs when the price of a security makes a new low while the momentum indicator starts to climb upward. Negative/bearish divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead moves lower. Divergences frequently occur in extended price moves and frequently resolve with the price reversing direction to follow the momentum indicator.

Divergence of MAs

A technical observation that describes moving averages of different periods moving away from each other, which generally forecasts a price trend.

Downtrend

Price action consisting of lower-lows and lower-highs.

Gap / Gapping

A quick market move in which prices skip several levels without any trades occurring. Gaps usually follow economic data or news announcements.

Going long

The purchase of a stock, commodity or currency for investment or speculation – with the expectation of the price increasing.

Going short

The selling of a currency or product not owned by the seller – with the expectation of the price decreasing.

Hedge

A position or combination of positions that reduces the risk of your primary position.

Initial margin requirement

The initial deposit of collateral required to enter into a position.

Interbank rates

The Foreign Exchange rates which large international banks quote to each other

Leading indicators

Statistics that are considered to predict future economic activity

Leverage

Also known as margin, this is the percentage or fractional increase you can trade from the amount of capital you have available. It allows traders to trade notional values far higher than the capital they have. For example: leverage of 100:1 means you can trade a notional value 100 times greater than the capital in your trading account.*

Limits / Limit order

An order that seeks to buy at lower levels than the current market or sell at higher levels than the current market. A limit order sets restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below the current market, e.g. 116.50.

Liquid market

A market which has sufficient numbers of buyers and sellers for the price to move in a smooth manner.

Lot

In forex, a micro lot equals 1/100th of a lot or 1,000 units of the base currency.A micro lot usually is the smallest position size that you can trade with. If one micro lot of the EUR/USD is being traded, each pip would be worth $0.1, as opposed to $10 for a standard lot. The following are the quantities typically used in the forex market:

  • A standard lot = 100,000 units of base currency
  • mini lot = 10,000 units of base currency
  • A micro lot = 1,000 units of base currency
  • A nano lot = 100 units of base currency

Margin

The required collateral that an investor must deposit to hold a position.

Margin call

A request from a broker or dealer for additional funds or other collateral on a position that has moved against the customer

Market maker

A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial product.

Market order

An order to buy or sell at the current price.

Market risk

Exposure to changes in market prices.

Offer (also known as the Ask price)

The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Offer. The Offer price is also known as the Ask. The Ask represents the price at which a trader can buy the base currency, which is shown to the right in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs.

 

One cancels the other order (OCO)

A designation for two orders whereby if one part of the two orders is executed, then the other is automatically cancelled.

Open order

An order that will be executed when a market moves to its designated price. Normally associated with Good ’til Cancelled Orders.

Open position

An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

Order

An instruction to execute a trade.

Pips

The smallest unit of price for any foreign currency, pips refer to digits added to or subtracted from the fourth decimal place, i.e. 0.0001.

Pullback

The tendency of a trending market to retrace a portion of the gains before continuing in the same direction.

Quote

An indicative market price, normally used for information purposes only.

Rally

A recovery in price after a period of decline.

Range

When a price is trading between a defined high and low, moving within these two boundaries without breaking out from them.

Realized profit / loss

The amount of money you have made or lost when a position has been closed.

Resistance level

A price that might act as a ceiling. The opposite of support.

Retail investor

An individual investor who trades with money from personal wealth, rather than on behalf of an institution.

Risk

Exposure to uncertain change, most often used with a negative connotation of adverse change.

Risk management

The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

Running profit / loss

An indicator of the status of your open positions; that is, unrealized money that you would gain or lose should you close all your open positions at that point in time.

Sell

Taking a short position in expectation that the market is going to go down.

 

Short position

An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Sidelines, sit on hands

Traders staying out of the markets due to directionless, choppy, unclear market conditions are said to be ‘on the sidelines’ or ‘sitting on their hands’.

Simple Moving Average (SMA)

A simple average of a pre-defined number of price bars. For example, a 50 period daily chart SMA is the average closing price of the previous 50 daily closing bars. Any time interval can be applied.

 

Slippage

The difference between the price that was requested and the price obtained typically due to changing market conditions.

Spread

The difference between the bid and offer prices. The difference between ASK and BID is called spread. It represents brokerage service costs and replaces transactions fees. Spread is traditionally denoted in pips. You should be aware of the spread before you place a trade. Higher spreads mean higher transaction costs and vice versa. Some brokers have high spreads and I personally found this to be true of XM who used to be my broker in the past. I have since moved to Hotforex, NoaFx and EToro and the spreads are much better with these brokers.

Stop loss hunting

When a market seems to be reaching for a certain level that is believed to be heavy with stops. If stops are triggered, then the price will often jump through the level as a flood of stop-loss orders are triggered.

Stop order

A stop order is an order to buy or sell once a pre-defined price is reached. When the price is reached, the stop order becomes a market order and is executed at the best available price. It is important to remember that stop orders can be affected by market gaps and slippage, and will not necessarily be executed at the stop level if the market does not trade at this price. A stop order will be filled at the next available price once the stop level has been reached. Placing contingent orders may not necessarily limit your losses.

Stop entry order

This is an order placed to buy above the current price, or to sell below the current price. These orders are useful if you believe the market is heading in one direction and you have a target entry price.

Stop loss order

This is an order placed to sell below the current price (to close a long position), or to buy above the current price (to close a short position). Stop loss orders are an important risk management tool. By setting stop loss orders against open positions you can limit your potential downside should the market move against you. Remember that stop orders do not guarantee your execution price – a stop order is triggered once the stop level is reached, and will be executed at the next available price.

Support

A price that acts as a floor for past or future price movements.

Support levels

A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.

T/P

Stands for “take profit.” Refers to limit orders that look to sell above the level that was bought, or buy back below the level that was sold.

Technical analysis

The process by which charts of past price patterns are studied for clues as to the direction of future price movements.

Trade size

The number of units of product in a contract or lot.

Unrealized gain/loss

The theoretical gain or loss on open positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains/Losses become Profits/Losses when the position is closed.

Volatility

Referring to active markets that often present trade opportunities.

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