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1 What is Forex? The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of April 2004, the Bank for International Settlements (BIS) reported that the forex market traded U.S. $1,900 billion per day.) One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly. 1 / 20

2 How to read Currency Quotes? Now let s take a look at how foreign currencies are quoted and priced. Currencies are designated by three-letter symbols. The standard symbols for some of the most commonly traded currencies are shown below. o EUR Euro o USD United States dollar o CAD Canadian dollar o GBP British pound o JPY Japanese yen o AUD Australian dollar o CHF Swiss franc Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price). The second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). For example, a EUR/USD spread of / means that you can sell one Euro for $ and buy one Euro for $ This spread could also be quoted as /78. At first glance, the bid and ask prices may seem backwards to you. That is because they are listed from the dealer s point of view, not from your point of view. The first part of the spread, or the bid, is what the dealer is willing to pay to buy the base currency. So this is the price you will get if you SELL the base currency. In the same way, the second part of the spread, or the ask, is what the dealer is willing to sell the base currency at, so this is the price you will get if you BUY the base currency. If the USD/CHF spread is listed as /1.2443, you can sell one US dollar for Swiss francs and buy one US dollar for Swiss francs. Remember that the forex market has no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer s integrity for a fair price. 2 / 20

3 Q: In this currency pair, which is the base currency: CAD/USD? A: The correct answer is the Canadian dollar, or CAD. Remember, the first currency in a currency pair is the base currency and the second currency is the quote currency. Q: Using this USD/JPY spread (110.45/55), how many Japanese yen would it take to buy one US dollar? A: It would take yen to purchase one US dollar. Q: Who determines the execution price the trader, the dealer or the exchange? A: The correct answer is the dealer. Remember that the forex markets we are discussing have no central exchange on which the contracts are traded, and you as the trader have no control over the execution price. The Forex Market Although the term forex market makes the human mind think of a tangible market in reality the forex market as it has developed today can be thought of as a virtual market due to its over the counter characteristics which are some of the reasons behind its booming popularity and its overall expansion worldwide. The forex market is an international market, a market that knows no geographical boundaries and no local working hours as with the use of the internet and the trading platform as a trader you are extended the opportunity to trade 24/5 as the nature of the forex market does not allow it to sleep. The forex market as mentioned in other pages of our index has one main difference to any other financial related market and that is its size which is a result of its nature. The daily turnover of the forex market expands beyond the 4 trillion Dollar mark on a day to basis as financial centers from across the globe act as trading points between a wide range of currency and commodity buyers and sellers which wish to exchange goods for bid and ask prices. The main reason of existence of the forex market is to accommodate international trades although with the current nature of forex today the majority of trades executed from forex brokers around the world are performed for speculative reasons. The Forex Market Main Features Geographical Dispersion Continuous Operations: 24/5 Variety of Factors Affecting Exchange Rates Low margins of Relative Profit The presence of leverage to enhance profit margins 3 / 20

4 Forex Market Trading Trading in the forex market has for the past decade deviated to the internet where the actual practice has become so popular due to the ease of trading through online trading terminals or online trading platforms as they are also well known. The real difference has occurred during the past 5 years as the worldwide web and the possibilities of the internet have expanded rapidly allowing the interbank foreign exchange to take new dimensions and year after year grow in total volume of trades executed reaching and exceeding the $3 billion mark of day to day trades. Execution of orders are now been enhanced with state of the art trading technology which is connected to a main server and allows multiple users to trade currencies, commodities and futures from any location worldwide provided they have a functioning funded account and that have access to the internet. All you need to do is download the forex terminal to your computer and issue an account. From that point on you can select to trade in the forex market with a non expiring forex trading demo account or with a real money trading account which will enjoy a forex bonus during first deposit, lucrative benefits and added benefits, flexible leverage reaching up to 1:500 with no minimum deposit requirements, no commissions, no hidden costs, no re-quotes and with the benefits of options for automated trading and personal coaching. Only Macro Events Affect the Forex Market The most actively traded currencies are only affected by macro events, such as changes in government or central bank policies, in contrast with stocks where individual company events can have a massive effect on price movements. This is cited as an advantage by FOREX traders who believe that this translates as less uncertainty in their trading as opposed to trading on the stock market where surprise announcements, such as a CEO quitting as in the case with Tesco in the UK, can have a sizeable effect on the price of the instrument. The high liquidity of the market also means that it is much more difficult for someone to enter the market and influence the price to their advantage. No Upward Bias It is common knowledge that the stock market in the US has always increased in value in the long term. However in the forex market currencies are traded in pairs, when the value of one currency is falling this automatically means that the value of another currency is rising. This is seen as an advantage as there is equal opportunity for profit from both long and short trades. 4 / 20

5 Forex Market Participants In difference to a stock market the forex market is realistically divided in to various levels of access which trade in the forex market for different reasons. Participants include banks, commercial companies, central banks, hedge funds, investment firms, money transfer companies and lead to retail foreign exchange brokers. Each of these groups trades forex at different volumes and therefore enjoys different spreads and can enjoy economies of scale much easier than a private trader or a retail trader. At the top basis banks deal with the forex market with bid and ask prices which are not available to anybody outside their immediate circle, these transactions account for the majority of bank oriented transactions accounting to 53% of all transactions in total which are transactions dealt for reasons of keeping currencies on hand for future sale at times when trading prices are lucrative or simply for reasons of keeping currencies on hand in order to be able to cater the day to day activities and pay employees that are employed at branches outside the headquarter mainland. Following on in the category of participants of the forex market are of commercial companies which trade currencies for reasons of both profit and efficient currency inventory management in order to be able to execute purchases from overseas without having to sustain losses when foreign currencies are not in their favor. The amounts of trades are relatively small compared to other categories of forex market trades. It is only reasonable to understand that in the same way private banks and banks trade forex, central banks play a key role in the forex market as they attempt to handle their money supply and their payments for various reasons ranging from making good management of the currency volumes on hand, based on what transactions are due every month, every semester or every trimester to third party governments or third party funds which have granted them assistance or loans for any reason. Even more for stabilization reasons of their primary currency in an attempt to control devaluation, inflation and the overall value of the currency. The above noted should not be taken for granted that banks or central banks always execute successful trades as similar to any retail trader they can reach the wrong speculations and sustain major losses. As explained previously the majority of trades executed in the forex market are speculative meaning that at the time of the transaction there was no basic need for the trade of currencies but the currency was traded for clearly speculative reasons which might be based on the traders speculation that a currency price will rise in the future or that the currency being exchanged will soon sustain a drop or even more because their will be a need for the currency in the future for private or commercial reasons. 5 / 20

6 The category of speculators as you can understand includes hedge funds too as the way hedge funds operate are very similar to the reasons a private trader executes transactions with the difference that they are faciiliated by one individual or one firm that controls various portfolios and uses themt o trade as one entity. Due to the large volume of trades hedge funds have a major power of the worldwide forex market as they have the luxury of trading in volume, trading with major leverage and even more trading borrowing large volumes of money due to their portfolio which appears as one wallet. Hedge funds have the power to influence the market in a very serious way as they have many factors in their favor primarily because of their large volume of trading and large volume of portfolio. These funds can be controlled by individual licensed brokers who have the ability and the experience to both gather customers and add up funds to what we call a hedge fund or from investment management firms that handle customer portfolios or pension funds and use them to enter the forex market as an offering to various services they might offer which offer customers a combines return on investment. Following up in the list of the vital participants of the forex market are money transfer companies which enable customers to send funds overseas under a certain fee. These companies usually maintain branches across the globe where customer can walk in submit their identification and send money to friends, associates or relatives under a transfer fee which is usually bigger than the normal fee banks charge due to the instant execution. These money transfer agencies are required to maintain the major currencies they accommodate money transfers in order to secure their business and keep inventory of most frequently used currencies when value of currencies are less expensive and will therefore help them maintain profits higher and transfer fees lower. A correct currency variety management will help the business manage its resources and make the most of its business which is why this category of business entities are active participants in the forex market through their management or their outsourced accountants. The last category of participants is the category in which both you as a trader, trading forex from your account belong. This category is commonly referred to as retail trading and it adds up from a number of forex brokers and banks which enhance customers to trade in the forex market with the use of a trading platform. Retail brokers are in their majority licensed from a security exchange commission of the particular jurisdiction in which they maintain headquarters and are subject to net capitalization rules which require bank guarantee that the firm has enough capital to operate and therefore is both committed to serving its customers that wish to participate in the forex market. The rule has arise after several non licensed entities were offering traders opportunities to trade in the forex market with lucrative spreads and lucrative leverage with no guarantees and with no consequences towards their unfair practices. As a result of the rule and the stricter policies many of the small and perhaps questionable brokers have now disappeared leaving the forex market access to companies which can guarantee their services. 6 / 20

7 Major players in the Forex market The Forex market is divided into different levels of access. This differs to the stock market where everyone has the access to the same prices. The different levels of the Forex market include the inter-bank market, Forex brokers, Foreign Exchange Brokers, smaller investment banks, large multi-national corporations, central banks large hedge funds and retail Forex-metal makers. Below is a description of what makes the major market players in the Forex industry so distinctive. The Inter-bank market is considered to hold the top players in the Forex industry. It consists of the largest investment banking firms. Spreads (difference between the bid/ask price) in the inter-bank market are usually unavailable and they are unknown to players outside the inter-bank market circle. By descending the levels of access, due to volume, the difference between the bid and ask prices widens from 0-1 pip to 1-2 pips for currencies such as the euro. A better spread can be demanded here. If a trader is able to guarantee large numbers of transactions for large amounts then they can command a lesser difference between the bid and ask price. Keep in mind that the levels of access that make up the Forex market are verified by the size of trades. Inter-bank market reports show that the players in this market mount to 53% of all transactions in the Forex industry. Despite the far lower quantity of traders in the market, the volume and trade size from the players make the inter-bank market one of the largest trading arenas. As mentioned above, the next most important markets are the smaller investment banks, the large multi-national corporations, the big hedge funds and some retail Forex-metal market makers. Central Banks have a big say in the valuation and trend of currencies. The slightest intervention could substantially alter the direction of a currency. Foreign Exchange Brokers offer currency exchange and international payments to private personage and firms that are usually delivered physically to a bank account. These are different to Forex Brokers because they do not put forward any trading activities. These companies are rather popular in the UK as a reported 14% of currency transfers and payments are made with Foreign Exchange Brokers. Their distinction in the UK financial market is due to the fact that they offer enhanced exchange rates and sometimes cheaper payments than a usual bank. As in any business or financial market, the Forex market carries some risks. However these risk factors should not put you off trading in the Forex market, you should use them to guide and aid you in becoming aware of them and being able to avoid them if possible. 7 / 20

8 Technical Issues Any trader who encounters a technical issue with their computer or platform is always at risk of losing out on a trade or being prevented from closing a trade at a vital moment. A system failure can lead to a substantial loss for Forex traders who use internet based or any other electronic system to execute trades. There is always the possibility of some part of the system crashing. The trader who is experiencing a system failure will be prohibited in entering new orders or executing existing ones. A system failure can be long term or short term. However long the duration is, the system failure is always a nightmare. The trader is also restricted from modifying or cancelling previously entered orders. The most devastating possible consequence for a system failure is losing the chance to open and close an order when you really need to. It is vital that you make sure your trading platform and operating system runs can provide you with a reliable basis for Forex trading. Leverage Leverage is referred to as a double- edged sword. There is the risk of gaining huge profits or there is the awful risk of losing funds. Fortunately, leverage in the Forex market allows a trader to hold a large position with a small amount of capital. Then again, such a benefit entails a disadvantage that s where the term the double edged sword comes into play. The price in the market can move in an unfavourable direction, this can disappointingly cause the high leverage to end up producing large losses in relation to the initial deposit. Sometimes a minor move in the market can even bother the position and the end result will be a large loss of capital, or possibly a loss of the entire account. Therefore leverage does entail risk and it is advised to be wary of the negative influence a high leverage can have. Market Movement Within the time that a trader places a trade and closes it, there will be fluctuations in the foreign exchange rate. This can easily affect the profit and the losses relating to the Forex trade as well as the price of it. There is also the unfortunate risk of possibly losing the entire investment. 8 / 20

9 Trade Protection It is common to notice many advertisements that state your investment is segregated for instance. Captions similar to these are broker companies to be cautious of as sometimes they are advertising false truths. Always take a careful look at the trader agreement you agree to when opening a trading account, you could be agreeing to paying additional losses. The funds that a trader deposits to trade Forex are uninsured and they sometimes do not receive a priority in bankruptcy. It goes the same for the dealers. If the dealer goes bankrupt, the customer funds that were deposited in a FDIC-insured bank account are not protected. The table below will cover the main differences between the Forex market, the stock market and the futures market. As a beginner trader you may notice the reason why investors prefer the Forex market over others. Forex market versus the Stock market Forex market Stock Market Liquidity >$3 trillion daily volume 200 billion daily volume Trading Hours 24/5 M-F: 8.30 EST EST Market conditions Profit in both rising & falling market Profit only from rising market Commission Free, tight spreads High commission & transaction fees Leverage Up to 500:1 2:1-4:1 Analyzing 85% of volume on major currencies- USD, EUR, GDP, etc Over 40,000 stocks to analyze The contrast between the Forex market and other markets is very clear; there is an extended explanation below to inform you in more detail, the benefits of the Forex market. 9 / 20

10 Forex Market Benefits explained The Forex market is accessible to all traders 24 hours a day and 5.5 days a week. This advantage enables traders to invest at any time they please without the concern that the market is about to close any time soon. The market opens when New Zealand begins operations on Sunday at 3.00pm EST. It then closes when San Francisco ends operations on Friday at 5.00pm EST. The Forex market is an endless cycle enabling traders to execute transactions in any time zone. The Forex market has offers a trading arena that has extremely high liquidity. It is the most liquid financial market in the world and because of this up to $3 trillion is traded on a daily basis. The extreme liquidity of the Forex market differs to other markets as it allows traders to open and close positions as they wish with ease. The Forex market is ensured with price stability and it prevents market manipulation from top market makers. All this information regarding the benefits of Forex does not necessarily indicate an easy form of trading and gaining money. An investor wishing to enter the Forex market requires more than just a simple understanding about these matters. A trader must thoroughly educate him/herself about the background, history, implements, technicality and process of Forex. A trader interested in Forex must ensure that he/she holds enough patience, determination, commitment, discipline and time for his/her trades. There are many factors to learn about trading with Forex before opening a live account and it is vital that a trader learns the factors inside out. 10 / 20

11 Forex Glossary A Appreciation A currency is said to `appreciate` when it strengthens in price in response to market demand. Arbitrage The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Around Dealer jargon used in quoting when the forward premium/discount is near parity. For example, two-two around would translate into 2 points to either side of the present spot. Ask Rate The rate at which a financial instrument is offered for sale (as in bid/ask spread). Asset Allocation Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor s objectives. B Back Office The departments and processes related to the settlement of financial transactions. Balance of Trade The value of a country s exports minus its imports. Base Currency In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts. In the FX markets, 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. Bear Market A market distinguished by declining prices. Bid / Ask Spread The difference between the bid and offer price, and the most widely used measure of market liquidity. Bid Rate The rate at which a trader is willing to buy a currency. 11 / 20

12 Big Figure Dealer expression referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be /107.35, but would be quoted verbally without the first three digits i.e. 30/35. Book In a professional trading environment, a book is the summary of a trader s or desk s total positions. Bretton Woods Agreement of 1944 An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies. Broker An individual or firm that acts as an intermediary, putting together buyers and sellers 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. Bull Market A market distinguished by rising prices Bundesbank Germany s Central Bank. C Cable Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800 s. Candlestick Chart A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded. Central Bank A government or quasi-governmental organization that manages a country s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank. Chartist An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader. Choice Market a market with no spread. All trades buys and sells occur at that one price 12 / 20

13 Clearing The process of settling a trade. Collateral Something given to secure a loan or as a guarantee of performance. Commission A transaction fee charged by a broker. Confirmation A document exchanged by counterparts to a transaction that states the terms of said transaction. Contagion The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the Asian Contagion. Contract The standard unit of trading. Counterparty One of the participants in a financial transaction. Country Risk Risk associated with a cross-border transaction, including but not limited to legal and political conditions. Cross Rate The exchange rate between any two currencies that are considered non-standard in the country where the currency pair is quoted. For example, in the US, a GBP/JPY quote would be considered a cross rate, whereas in UK or Japan it would be one of the primary currency pairs traded. Currency Any form of money issued by a government or central bank and used as legal tender and a basis for trade. Currency Risk The probability of an adverse change in exchange rates. D Day Trading Refers to positions which are opened and closed on the same trading day. Dealer An individual who acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. Deficit A negative balance of trade or payments. 13 / 20

14 Delivery An FX trade where both sides make and take actual delivery of the currencies traded. Depreciation A fall in the value of a currency due to market forces. Derivative A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument. Devaluation The deliberate downward adjustment of a currency s price, normally by official announcement. E Economic Indicator A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc. End Of Day Order (EOD) An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET. EURO The currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU). European Central Bank (ECB) the Central Bank for the new European Monetary Union. European Monetary Union (EMU) The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in On Janaury1, 1999 the transitional phase to introduce the Euro began. The Euro now exists as a banking currency and paper financial transactions and foreign exchange are made in Euros. This transition period will last for three years, at which time Euro notes an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, the national currencies of the member countries will cease to exist. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Spain and Portugal. F Federal Deposit Insurance Corporation (FDIC) The regulatory agency responsible for administering bank depository insurance in the US. Federal Reserve (Fed) The Central Bank for the United States. 14 / 20

15 Flat/square Dealer jargon used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position. Foreign Exchange (Forex, FX) the simultaneous buying of one currency and selling of another. Forward The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved. Forward points The pips added to or subtracted from the current exchange rate to calculate a forward price. Fundamental analysis Analysis of economic and political information with the objective of determining future movements in a financial market. Futures Contract An obligation to exchange a good or instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange. G Good Til Cancelled Order (GTC) An order to buy or sell at a specified price. This order remains open until filled or until the client cancels. H Hedge A position or combination of positions that reduces the risk of your primary position. I Inflation An economic condition whereby prices for consumer goods rise, eroding purchasing power. Initial margin The initial deposit of collateral required to enter into a position as a guarantee on future performance. Interbank rates The Foreign Exchange rates at which large international banks quote other large international banks. 15 / 20

16 L Leading Indicators Statistics that are considered to predict future economic activity. LIBOR The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank. Limit order An order with 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 /05, then a limit order to buy USD would be at a price below 102. (i.e ) Liquidation The closing of an existing position through the execution of an offsetting transaction. Liquidity The ability of a market to accept large transaction with minimal to no impact on price stability. Long position A position that appreciates in value if market prices increase. M Margin The required equity that an investor must deposit to collateralize a position. Margin call The required equity that an investor must deposit to collateralize a position. Marked-to-Market Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements. Market Maker A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument. Market Risk Exposure to changes in market prices. Maturity Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements. O Offer The rate at which a dealer is willing to sell a currency. 16 / 20

17 Offsetting transaction A trade with which serves to cancel or offset some or all of the market risk of an open position. One Cancels the Other Order (OCO) A designation for two orders whereby one part of the two orders is executed 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 A deal not yet reversed or settled with a physical payment. Overnight A trade that remains open until the next business day. Over the Counter (OTC) Used to describe any transaction that is not conducted over an exchange. P Pips Digits added to or subtracted from the fourth decimal place, i.e Also called Points. Political Risk Exposure to changes in governmental policy which will have an adverse effect on an investor s position. Position The netted total holdings of a given currency. Premium In the currency markets, describes the amount by which the forward or futures price exceed the spot price. Price Transparency Describes quotes to which every market participant has equal access. Q Quote An indicative market price, normally used for information purposes only. R Rate The price of one currency in terms of another, typically used for dealing purposes. Resistance A term used in technical analysis indicating a specific price level at which analysis concludes people will sell. 17 / 20

18 Revaluation An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation. 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. Roll-Over Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies. S Settlement The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another. Short Position An investment position that benefits from a decline in market price. Spot Price The current market price. Settlement of spot transactions usually occurs within two business days. Spread The difference between the bid and offer prices. Sterling Slang for British Pound Stop Loss Order Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor s position. As an example, if an investor is long USD at , they might wish to put in a stop loss order for , which would limit losses should the dollar depreciate, possibly below 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. Swap A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate. 18 / 20

19 T Technical Analysis An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc. Tomorrow Next (Tom/Next) Simultaneous buying and selling of a currency for delivery the following day. Transaction Cost The cost of buying or selling a financial instrument. Transaction Date The date on which a trade occurs. Turnover The total money value of all executed transactions in a given time period; volume. Two-Way Price When both a bid and offer rate is quoted for a FX transaction. U Uptick A new price quote at a price higher than the preceding quote. Uptick Rule In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed. US Prime Rate The interest rate at which US banks will lend to their prime corporate customers V Value Date The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date. Variation Margin Funds a broker must request from the client to have the required margin deposited. the term usually refers to additional Funds that must be deposited as a result of unfavorable price movements. Volatility (Vol) A statistical measure of a market s price movements over time. 19 / 20

20 W Whipsaw Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal. Y Yard Slang for a billion. Terms of Use All the information included in this manual named Introduction to Forex is released for informational reasons solely and is not to be used as a guide to real money trading. The information included in this guide is subject to International copyright and is not to be used online without the consent of the original authors. The above information has been compiled by using sources which include the below websites. 1. Wikipedia.org 2. Trading-point.com 3. Investopedia.com Risk Warning Please note that forex trading and other leveraged products may involve a significant level of risk and is not suitable for all investors. 20 / 20