Currency Trading Article | Understanding Some of the Forex Phrases and TerminologiesMore Than Articles

Understanding Some of the Forex Phrases and Terminologies

One of the keys involved in trading on the Forex market is to be well-versed in the phrases and jargon (terminologies) used in the currency exchange market. Again, as part of the education process that you should be engaged in when you are a beginner in currency trading, being aware of the market's terminologies and their meanings is necessitated if you have any hope of succeeding as a currency investor/trader. The following is a brief list of some of the more common phrases and terminologies that you will regularly hear.

Bid and Ask - basically translates to the purchase price and the selling price as they each relate to the base (or domestic) currency.

Cross Currency - quoting a currency without the USD being one of the currencies quoted in the equation.

Currency - monetary units of payment inclusive of coins and paper that a government issues and circulates as the generally accepted medium for goods and services.

Currency Forward - a contractual agreement in the Forex market that secures a price on a currency that an investment entity can purchase or sell at a specified future date.

Currency Futures - a futures contract that is transferable and specifies a price wherein a specified currency can be purchased or sold at a pre-agreed upon future date.

Direct Quote - a pair of currencies where the domestic monetary unit is referred to as the base currency.

Earning the Points - describes the situation that exists when the asking price of a currency forward is less than the spot bid price. The trader normally profits from this.

Exchange Rate - the price of the domestic currency expressed in the currency of another country.

Foreign Exchange Risk - The situation that results when an investment's risk factors change resulting from a change in the current exchange rates, or 2. Risks that the investor will incur when they close out a long or short position in a foreign currency at a loss due to adverse changes in the movements of the currency's current exchange rate. Also referred to as currency risk or exchange-rate risk.

Forex (FX) - foreign exchange - the market in which currencies are exchanged

Forward Discount - a situation that exists when the domestic spot exchange rate trades at a higher rate than the related futures position for a prescribed maturity period.

Going Long - buying a currency pair

Going Short - selling a currency pair

Hedge - the act of making investments to deter or reduce risk of adverse price movements in the exchange rates of currencies.

Leverage - Using borrowed capital or other financial instruments (e.g. margin) to increase the potential gain or return on an investment or 2. The act of financing a business entity's assets using a non-specified amount of debt. If the debt factor of a company is significantly higher than its equity, they are said to be highly leveraged.

Losing the Points - describes the situation when a bank's buying value in the forwards market is lower than the selling price in the spot market. Also considered the opposite of 'earning the points.'

Naked Risk - a position (in securities exchanges) that is not hedged from market risk

Pips - another terminology for 'points'

Speculators - an individual engaging in the trading of bonds, commodities, currencies, derivatives, or equities involving a higher-than-average risk in order to achieve a higher-than-average return on the investment.

Spreads - (generally speaking) the difference between the bid and ask price

About the Author

Justin Stewart has used software to automatically trade the forex market allowing him to earn a living without lifting a finger, even while he sleeps. You can use the same forex software to get the same results.

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