Glossary and Definition of Terms

Ask

Price at which broker/dealer is willing to sell.  Same as "Offer".

Bid

Price at which broker/dealer is willing to buy.

Bid/Ask Spread (or "Spread")

The distance, usually in pips, between the Bid and Ask price.  A tighter spread is better for the trader.   

Cost of Carry (also "Interest" or "Premium")

The cost, often quoted in terms of dollars or pips per day, of holding an open position.

Currency Futures

Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME").  Always quoted in terms of the currency value with respect to the US Dollar.  Parameters of the futures contract are standardized by the exchange. 

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.

EBS

"Electronic Brokerage System", the electronic system on which major banks trade with each other.  This is considered to be the most definitive indicator of prices at which currencies are "really" trading, at least for EUR/USD and USD/JPY.

Forex

Short for "Foreign Exchange". Refers generally to the Foreign Exchange trading industry and/or to the currencies themselves.

Fundamental Analysis

Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.

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).

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.

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.

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. 

Roll over

Is the changing of futures when they expire to the new contract. 

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. 

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.

Technical Analysis

Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors. 

Tick

The smallest price increment in a futures or CFD price.  Often referred to as a "pip" in the currency markets.  For example, in Down Jones Industrials, a move from 8845 to 8846 is one tick. In S&P 500, a move from 902.50 to 902.51 is one tick.

CURRENCY PAIRS