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Foreign Exchange Terms
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Liquidity
A measure of how easily a currency or security can be bought or sold in the market without affecting its price. For example, the EUR/USD pair is very liquid due to its high trade volume.
Fundamental Analysis
A method of measuring a currency's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. Example: Analysing the GDP growth rate of a country to predict its currency strength.
CFD
Contract For Difference. A financial instrument that allows traders to speculate on price movements without owning the underlying asset. Example: A forex CFD may allow speculation on the EUR/USD without holding actual currencies.
Volatility
The measure of how much the price of a currency fluctuates over a specific time. High volatility indicates large price swings. Example: News events can increase forex pair volatility, causing rapid price movements.
Central Bank
An institution that manages a state's currency, money supply, and interest rates. Example: The Federal Reserve in the U.S. may affect the USD's value through its policy decisions.
ECN
Electronic Communication Network. A computer system that facilitates trading of financial products outside stock exchanges. For forex, ECNs connect brokers and traders directly. Example: A trader uses an ECN to get better spreads.
Bid
The price at which a forex trader is willing to buy a currency pair. For example, if the bid price for EUR/USD is 1.1050, a trader is willing to buy euros at this price.
Ask
The price at which a forex trader is willing to sell a currency pair. For example, if the ask price for EUR/USD is 1.1052, a trader is willing to sell euros at this price.
FX
Foreign Exchange. Refers to the market where currencies are traded. For example, exchanging US dollars for euros.
Swap
A fee paid or earned for holding a currency position overnight, determined by the differential between the interest rates of the two currencies in the pair. Example: A trader might pay a swap fee if holding AUD/USD with AUD having a lower interest rate than USD.
Lot
A standardized quantity of currency. A standard lot represents 100,000 units of the base currency. For example, trading one lot of EUR/USD means trading 100,000 euros.
Long Position
To 'go long' means to buy a currency pair with the expectation that its value will rise. Example: A trader goes long on USD/JPY at 110.00, hoping to sell it at a higher price later.
CPI
Consumer Price Index. A statistical measure that examines the weighted average of prices of a basket of consumer goods and services. Example: A rising CPI indicates inflation, which might influence a central bank to raise interest rates.
Hawkish
Denotes a monetary policy attitude that suggests preference for higher interest rates to combat inflation and cool economic growth. Example: A hawkish stance by the Federal Reserve is often bullish for USD.
Cross Rate
The exchange rate between two currencies that are not the official currencies of the country where the exchange rate quote is given. Example: In the US, the EUR/JPY rate would be considered a cross rate.
TP
Take Profit. An order to sell or buy a currency when it reaches a certain price to ensure the trader a profit. Example: Placing a TP at 1.1200 on a long EUR/USD trade to realize gains when attained.
Scalping
A trading strategy that attempts to make many profits on small price changes. Traders who implement this strategy place anywhere from 10 to a few hundred trades in a single day. Example: Buying EUR/USD at 1.1050 and selling at 1.1051, repeatedly during the day.
GDP
Gross Domestic Product. The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. Example: A higher GDP indicates a strong economy, potentially strengthening the currency.
Appreciation
When a currency increases in value against another currency. Example: If EUR/USD moves from 1.10 to 1.15, the euro appreciates against the US dollar.
Interest Rate
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Example: Forex traders often monitor changes in central bank interest rates, as they can have a significant impact on currency valuation.
Short Position
To 'go short' means to sell a currency pair with the expectation that its value will fall and you can buy it back at a lower price later. Example: A trader goes short on GBP/USD at 1.3000, hoping to repurchase it cheaper.
Spread
The difference between the bid price and the ask price in the forex market. For example, if the EUR/USD bid price is 1.1050 and the ask price is 1.1052, the spread is 2 pips.
Leverage
The use of borrowed capital to increase the potential return of an investment. In forex, leverage might allow a trader to trade 100. For example, a 100:1 leverage ratio means 100.
Resistance Level
A price level at which a currency pair tends to stop rising and may bounce off or reverse direction. Example: The 1.3000 level has acted as resistance for the GBP/USD pair in the past.
Bear Market
A market where prices are falling, encouraging selling. For example, if the USD is losing value against the EUR, it might be considered in a bear market.
Bull Market
A market where prices are rising, encouraging buying. For example, if the USD is gaining value against the JPY, it might be considered in a bull market.
Economic Indicator
Statistics that indicate the current economic growth and stability of a country, which affects its currency's value. Example: Unemployment rates are an economic indicator that can influence a country's currency strength.
Risk Management
The process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Example: Proper risk management in forex might include setting stop-loss orders and managing leverage.
Dovish
Refers to an economic outlook which generally supports lower interest rates. Central banks with a dovish view are less likely to raise interest rates. Example: A dovish statement by the ECB may lead to weakness in the euro.
Rollover
The process of extending the settlement date of an open position by rolling it over to the next available settlement date. Example: Holding an open forex position overnight may involve a rollover charge or credit.
Technical Analysis
A methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Example: Using a chart pattern like 'Head and Shoulders' to predict forex price movements.
Support Level
A price level at which a currency pair has difficulty falling below, potentially resulting in a bounce or reversal to the upside. Example: The 0.9500 level has been strong support for the USD/CHF pair.
Margin
The amount of money needed in your account to maintain an open position in the forex market. For example, with a 1% margin, you can control 1,000.
SL
Stop Loss. An order placed with a broker to buy or sell once the currency reaches a certain price. Example: Setting an SL at 1.1000 on EUR/USD secures the trader from heavy losses if the price drops below this point.
Day Trading
The act of buying and selling currencies within the same trading day, before the markets close. Example: A forex day trader might buy GBP/USD at market open and sell it before the close, not holding positions overnight.
Currency Pair
The quotation of the relative value of one currency unit against the unit of another currency in the foreign exchange market. Example: EUR/USD is a currency pair where the euro is the base and the US dollar is the quote currency.
Depreciation
When a currency decreases in value against another currency. Example: If EUR/USD moves from 1.15 to 1.10, the euro depreciates against the US dollar.
PIP
Point In Percentage. The smallest price move that a given exchange rate can make, usually one basis point or 0.0001. For example, if the EUR/USD pair moves from 1.1050 to 1.1051, that's one pip.
Base Currency
The first currency listed in a forex pair which is used as the reference point for the trade. Example: In the EUR/USD pair, the euro is the base currency.
Quote Currency
The second currency listed in a forex pair. It represents how much of this currency is required to get one unit of the base currency. Example: In the EUR/USD pair, the US dollar is the quote currency.
Counter Currency
Another term for the quote currency in a foreign exchange transaction. It indicates which currency an investor will be selling or receiving. Example: In the USD/CAD currency pair, the Canadian dollar is the counter currency.
Fibonacci Retracement
A tool used to identify potential support or resistance levels, based on the Fibonacci sequence. Example: A trader might expect EUR/USD to find support at a 61.8% Fibonacci retracement level.
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