RDS Trader Forex and Contracts for Difference Glossary

Forex, Futures and Contracts for Difference Glossary

Base currency:
The first currency quoted in a pair; the second currency in the pair is the quote currency.

Example:
In the USD/CAD currency pair, the U.S. Dollar (USD) would be the base currency and the Candian Dollar (CAD) would be the quote currency. If the current price of the USDCAD was 0.9872, that price would convert every 1 USD you want to exchange to 0.9872 CAD

Basis:
The difference between the spot price and the futures price.

Basis point:
One hundredth of a percentage point.

Bearish:
A bearish investor believes that a particular asset or the market as a whole will decline in value.

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

Bullish:
Bullish refers to an optimistic outlook, while bearish means a pessimistic outlook.

Buy Dips:
A phrase used to maintain a bullish posture entering long positions with price drops down to a specific area. Traders will continue to "Buy Dips" as long as prices hold above the specified support boundary.

Buy Entry Limit:
An order to buy at a price below the current market price.

Buy Entry Stop:
An order to buy at a price above the current market price.

Cable:
Another term used for the British Pound.

Central Bank:
The principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency; setting monetary policy, interest rates, and exchange rate policy; and regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Charting:
The graphing of market variables in an attempt to determine trends and project future values. Also called technical analysis.

Close Price:
The term used to describe the finishing price of a specified time frame, otherwise known as the settlement price.

Closed position:
See liquidated.

Commissions:
The cost that a broker will charge a client for buying/selling a financial product. FX Solutions offers 'commission free dealing' because we make money off the bid-offer spread.

Commodity:
Any bulk good traded on an exchange or in the cash market.

Example:
Grain, oats, gold, oil, beef, silver, and natural gas

Contracts for Difference:
A contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time.

Contrarian or Counter Trend Trader:
This trader favors going against the trend of the market (short in uptrends or long in downtrends). These traders play the Rubber Band stretch and pullback rhythms of market price action. This method can be profitable but occasionally the rubber band snaps and it could get ugly trying to pick bottoms or tops in a trading range.

Conversion:
The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Cover:
The act of completing a transaction in order to remove any obligations.

Cross rates:
An exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency.

Currency:
A country's unit of exchange issued by its government or central bank whose value is the basis for trade.

Currency (exchange rate) risk:
The risk of incurring losses resulting from an adverse change in exchange rates.

Derivative:
A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index.

Devaluation:
A deliberate downward adjustment to a country's official exchange rate relative to other currencies. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.

Example:
There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners, and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit.

Dividend:
A share of a company's earnings paid to each shareholder. Typically, dividends are paid bi-annually and are determined by the company's board of directors. Dividends are paid to all holders of long CFD positions, but usually at a rate of 90% of their value. Short sellers using CFDs will always have to pay the full 100% of the dividend.

Double Bottom:
This is when lows of 2 or more bars/candles are hitting a lower boundary and can't seem to go lower.

Double Top:
This is when highs of 2 or more bars/candles are hitting an upper boundary high and can't seem to go higher.

Downtrend:
This is when highs are getting lower and lows are getting lower.

Drawdown:
The peak-to-trough decline during a specific record period of an investment or fund. It is usually quoted as the percentage between the peak-to-trough.

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.

Entry Limit Order:
An order initiating an open position to sell as the market rises, or buy as the market falls. The client believes the market will reverse direction at the level of the order.

Entry Order:
An order used to enter a trade once a specific security hits a pre-determined price level.

Entry Stop Order:
An order initiating an open position to sell as the market falls, or buy as the market rises. The client believes that prices will continue to move in the same direction as the previous momentum after hitting the order level.

Exchange rate:
The price of one country's currency expressed in another country's

FIFO - First In First Out:
When you enter the market i.e. buying 1 contract and at a later time you buy another contract (now long 2), upon selling 1 of the 2 contracts you must exit the first trade you entered long according to the time stamp. Taking it a step further, if you have varying amounts only i.e. buy 1 contract and later you buy 2 more (long 3), you can exit either the 1 or the 2 contract long regradless of the order in which they were entered.

Fill:
The price at which an order is executed.

Fixed exchange rate:
A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies. In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

Flat:
This is when the amount of buys you executed/filled are equal to the amount of sells you executed/filled.

Foreign exchange (Forex):
The simultaneous buying of one currency and selling of another in an over-the-counter market.

G-7:
The seven leading industrial countries, being the United States, Germany, Japan, France, Britain, Canada, and Italy.

G-10:
G7 plus Belgium, Netherlands and Sweden, a group associated with the IMF discussions. Switzerland is sometimes involved.

G-20:
A group composed of the finance ministers and central bankers of the following 20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that "promote international financial stability".

Gearing:
See Leverage

Germany 30:
An index of 30 top German stocks.

Good till Canceled Order (GTC):
An order to buy or sell an asset that is good until you execute or cancel it.

Hedging:
A strategy designed to reduce investment risk. Its purpose is to reduce the volatility of a portfolio by investing in alternative instruments that offset the risk in the primary portfolio.

High Price:
The term used to describe the highest price achieved in a specified time frame.

Illiquid:
A market that doesn't have much volume, usually characterised by wide bid-offer spreads. Illiquid markets are therefore expensive to trade.

Initial margin:
The amount of cash deposit that is needed to trade a given position.

Inside Bar/Candle:
This is when highs are getting lower and lows are getting higher.

Leverage:
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Lightening Up on a Position:
This is a slang term used when a trader is covering a portion of their position to lock in a profit or minimize a loss but maintaining a portion of the position in original direction.

Limit Orders:
An order to buy or sell a predetermined quantity of a security at a specificed price or better. A limit order placed on a buy position is an order to sell. A limit order placed on a sell position is an order to buy. All limit orders remain in effect until the position is liquidated or cancelled by the client.

Liquidated:
Any transaction that offsets or closes out a long or short position.

Liquidity:
The ability of a market to accept large transactions. 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 tighter bid/ask spread.

London Inter-Bank Offer Rate or LIBOR:
The standard for the interest rate that banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank deposit market, and applies to very large loans borrowed from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Long Position:
Having bought, but not yet sold. A long position is entered with the aim of profiting from an increase in price.

Low Price:
The term used to describe the lowest price achieved in a specified time frame.

Maintenance Margin:
The dollar amount required to be kept available throughout the life of contract or position; percentage of the dollar amount of securities that must always be kept as margin.

Margin:
Funds that customers must deposit as collateral to cover any potential losses from adverse movements in prices. With margined products only a percentage of the nominal value has to be depostited in cash.

Margin Call:
When one or more of the securities you have bought (with borrowed money) decreased in value past a certain point.

Market Maker:
A dealer that supplies prices, and is prepared to buy and sell at those bid and ask prices.

Market Order:
An order to buy or sell a currency pair, indice or commodity immediately at the best available current price.

Market-on-Close (MOC) Order:
A market order to be executed as near to the end of the exchange day as possible. Also known as an "at-the-close order."

Momentum Side or Trend Trader :
This trader favors going with the direction of the market (long in uptrends or short in downtrends). This method can be profitable but the trend always ends and it could leave you at times long at the tops and short at the bottoms if you dont pay attention to stand-out highs or stand-out lows in a trading range.

Contrarian or Counter Trend Trader:
This trader favors going against the trend of the market (short in uptrends or long in downtrends). These traders play the Rubber Band stretch and pullback rhythms of market price action. This method can be profitable but occasionally the rubber band snaps and it could get ugly trying to pick bottoms or tops in a trading range.

Noise (aka Market Noise):
Price and volume fluctuations in the market that can confuse one's interpretation of market direction.

OCO (One Cancels the Other):
When either order is executed, closing the position, the other is automatically canceled.

Offer or Ask:
Indicates a willingness to sell at a given price.

Open Position:
A currency pair or CFD contract that has been bought or sold and that has not yet been offset or settled through delivery.

Open Price:
The term used to describe the starting price in a specified time frame.

Opening Range:
Markets, especially busy ones, never really open at one price; rather they are given an opening range (usually the first 2 minutes) where opening orders are filled.

Outside Bar/Candle:
This is when highs are getting higher and lows are getting lower. If prices finish on top half of bar/candle (bullish hook), prices look to continue in upward direction. If prices finish on bottom half of bar/candle (bearish hook), prices look to continue in downward direction.

Overbought:
A technical analysis term describing a situation where a security has risen to such a price, usually on high volume, that an oscillator has reached its upper bound. Technicians will suggest that a security that is overbought is at levels not technically justified; as a result it will be sold off and its price will decrease.

Oversold:
A term used to describe a market or a stock that has declined so rapidly and has generated such excessively bearish sentiment that a near-term rally is highly likely.

Parity:
This is a term used to describe when a currency pair is equal in pice. If the EURUSD was trading 1.0000, when converting 1 EUR to U.S. Dollars we would get 1 U.S. Dollar in return. The spending power of each currency is at equilibrium.

Pending Order:
This is an order that has not been executed but sits in your book of existing orders and waits for price to fill the order otherwise know as "working" and/or "unable".

Pip (tick):
The smallest denomination that a currency can make.

Example:
The smallest move the USD/CAD currency pair can make is $0.0001, or one basis point.

Position:
The amount of a security either owned (which constitutes a long position) or borrowed (which constitutes a short position) by an individual trader. In other words, a trade an investor currently holds open.

Premium (cost of carry):
Direct costs paid by an investor to maintain a security position. For example, an individual purchasing securities on margin must pay interest expenses on borrowed funds. Likewise, an investor selling stock short is responsible for making dividend payments to the buyer.

Pullback:
This is when market prices have risen or fallen to a specific point on a trading range.

Quote currency:
The first currency quoted in a pair; the senond currency in the pair is the quote currency.

Range:
High - Low = Range .

Resistance:
An effective upper bound on prices achieved because of many willing sellers at that price level.

Retracement:
This is when market prices have risen or fallen to a specific percentage of the range .

Revaluation:
A calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency.

Reverse a Position:
This is a term used to cover or close the original direction of a position and enter a position in the opposite direction of lesser, equal or great value as the signal comes to "Reverse a Position".

Rollover:
Rollover or overnight finance charges are applied to CFD and Forex positions that are held open at 17:00 Eastern Time (US). If the trader is "short" on the position, it will be credited finance. Similarly, if the trader is �long� on the position, it will be debited a financing charge.

Scale-Into a Position:
This is a term used to enter trades in a specified direction (long or short) but at various price points. For example: lets say that you want to get short between 1.3725 - 1.3745. You can trade 3 contracts so you enter a short position at 1.3725, 1.3735 and again at 1.3745

Scale-Out of a Position:
This is a term used to exit trades in a specified direction (long or short) but at various price points. For example: lets say that you want to cover a long position of 3 contracts and you want to do it between 1.3725 - 1.3745. You can try and sell 1 contract at 1.3725, 1.3735 and again at 1.3745 to flattening out your position

Scratch:
This is when you have bought and sold at the same price for zero gain/loss.

Sell Entry Limit:
An order to sell at a price above the current market.

Sell Entry Stop:
An order to sell at a price below the current market.

Sell Rally's:
A phrase used to maintain a bearish posture entering short positions with price rises up to a specific area. Traders will continue to "Sell Rally's" as long as prices hold below the specified resistance boundary.

Settlement Price:
The term used to describe the finishing price of a specified time frame, otherwise known as the "close".

Short Position:
A net investment position in a security in which the security has been borrowed and sold but not yet replaced. Essentially, it is a short sale that has not been covered. Eventually, the position must be bought back to close out the transaction. This technique is used when an investor believes the security price will drop.

Slippage:
The difference between estimated transaction costs and the amount actually paid.

Spot Market:
A commodities market in which goods are sold for cash and delivered immediately.

Spot Price:
The current price at which a particular commodity can be bought or sold at a specified time and place.

Spread:
The difference between the bid and offer (ask) price of a currency, used to measure market liquidity. Narrower spreads usually signify high liquidity.

Stand-Out High or Stand-Out Low:
On a chart you will visibly begin to see that prices hit a high price and fell back sharply (stand-out high or resistance) or hit a low price and turned back up sharply (stand-out low or support). As we reach a stand-out high a trader should think of covering their long positions and consider going short. As we reach a stand-out low a trader should think of covering their short positions and consider going long.

Stop-Loss Orders:
A predetermined price at which a position will be closed to protect against further loss. This is sometimes called a "stop-market order". All stop-loss orders remain in effect until the position is liquidated or cancelled by the client.

Support:
An effective lower bound on prices supported because of many willing buyers at that price level.

Swaps:
A foreign exchange swap is a trade that combines both a spot and a forward transaction into one deal, or two forward trades with different maturity dates.

Technical analysis:
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity.

Tick (Pip):
The smallest denomination that a currency can make.

Example:
The smallest move the USD/CAD currency pair can make is $0.0001, or one basis point.

Trading Range:
The spread between the high and low prices traded during a period of time.

Trailing Stop:
This type of method is typically used while in a profitable trade that you can set to continue trailing the market by a specified number of pips (ticks). Lets say that you have 20 pips profit into an existing open short position. You want to lock in 10 pips of profit minimum. You can set the buy stop to cover your short if prices move up 10 pips but if prices continue to drop another 10 pips and you are now up 30, the stop will drop and now lock you in at 20 pips profit. If you have 40 pips the stop will drop to lock in 30 pips etc. This allows you to maximize the benefit of the drop in prices until prices stop you out and close the position.

Unable:
This is an order that has not been executed but sits in your book of existing orders and waits for price to fill the order otherwise know as "pending" and/or "working".

Uptick:
A new price quote that is higher than the preceding quote for the same currency, index or commodity.

Uptrend:
This is when highs are getting higher and lows are getting higher.

Volatility:
A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.

Working Order:
This is an order that has not been executed but sits in your book of existing orders and waits for price to fill the order otherwise know as "pending" and/or "unable".