Forex Glossary

In Forex, education is everything; being a well-versed trader in the forex glossary is a key to understand what’s going on in the market. Here, you will see the top 100 forex terms and its definition. From Pips to leverage, from bulls to bears, everything you need to know in the Foreign exchange market.

Top 100 Forex Definitions

Accumulative Swing Index (ASI)

A variation of the Swing Index, developed by Welles Wilder, the Accumulative Swing Index is a tool used to gain a better understanding of the long-term picture. This indicator is used to gauge the breakout capacity of a financial market.

American Session

The trading session for the Americas starts at 13:00 GMT and goes until 21:00 GMT. It includes the United States, but also countries such as Canada, Mexico, Brazil, Colombia, and Venezuela. Traders like to trade the EUR/USD, the GBP/USD, and the USD/JPY in the session. Overall, any pair which includes the US Dollar.

Analyst

An analyst job involves researching micro and macro economic conditions to make recommendations to an individual investor, trader or an investment firm. They also give their recommendations as to which is the best course of action at a particular time, such as for trading currencies.

Asian Session

It is the trading hours from 00:00 to 9:00 GMT. It opens in Oakland, New Zealand and includes countries such as Australia, Japan, China, Singapore, and India. The Asian Session is seen as a Yen lover and small swings journey. New Zealand and Australian dollars are popular too.

Ask

Ask sometimes called “offer price” is the opposite of Bid. It is used to reflect the amount a trader quotes when buying a financial instrument from a seller. It is the amount for that the seller of a financial instrument will agree to part with the instrument. Ask is the price a trader will pay to buy a base currency indicated on the left side of the currency pair. For instance, if the EUR/USD is quoted as 1.1966/68 it implies you will buy 1 euro at US$1.1968.

Base Currency

It is the first currency in a currency pair and the unit you buy to go long. The pair usually shows how much is the base currency worth against the second currency. If the EUR/USD spot price is 1.1300, then one EUR can be changed for 1.1300 USD. In the same way, one dollar would worth 0.8900 euros.

Bears

Not only in Forex but the whole investment market, bears are traders who decide to sell a pair, because they are expecting the price to decline. In the same way, they may be willing to hold their short positions.

Bear Trap

A bear trap is, as the suffix suggests, a false indication of a reversal in a price trend that is rising and can be quite deceptive to a trader with a bearish mentality. It can lure traders to base their positions on anticipating movements in the price that do not happen.

Bid

A bid is a price at which a financial instrument can be sold right in the market. It will be the amount you will get when selling a currency pair. It represents the amount at which a trader will sell the base currency, which is on the left of the currency pair. If you place a buy limit order it becomes a bid, before any other trader sells and fills your order at this certain price. For instance, if the EUR/USD is quoted as 1.1966/68 it implies you will sell 1 euro at US$1.1966.

Bid/Ask Spread

In business, it is the charge of the transaction when you are opening and closing prices. But theoretically, Bid/Ask spread is the variation between the ask and bid prices offering; which is the pips between the selling and buying prices.

Broker

A Forex Broker is a firm that serves as an intermediary between sellers and buyers. It develops marketplaces where traders can exchange currencies and other assets. An official body should regulate them. Brokers can also be individuals who execute orders.

Bulls

As the opposite to bears, bulls are investors that expect the price to go up and decide to buy the unit, and they may be keeping their long positions open.

Bull Trap

A bull trap often comes after a positive trading period. It is a trap because the bullish signals lead traders into entering the market. They feel the downward trend has ended. But, they soon find out that it’s not the case and they have gotten trapped in a long position that didn’t favor them.

Buy dips

The action of buying dip referrals to identify a certain amount of pips in a pullback and then purchase the asset at its lows. It usually happens in an intra-day trend, but actually can happen in any timeframe, just the size of the move varies.

Cable

A nickname for the GBP/USD pair. When a trader wants to buy or sell the British Pound against the US Dollar, the market usually says that the investor wants to trade the Cable. The nickname comes after the GBP rate was initially transmitted to the US by a transatlantic cable around the early 1800s. At that time, GBP was the dominant currency.

Carry Trade

It is where the Forex market started as a business. The strategy talks about the art of trading interest rate differentials. You earn money going long in a currency that pays more interest rate than its counterpart in the cross. Let’s say that the Federal Reserve has a refi rate of 2.0%, while the European Central Bank has a fund rate of 1.0%. Well if you buy the dollar against the euro, you will earn more money because the differentials between rates will push the USD higher against the EUR. It is because the dollar pays more to investors than the euro.

Central Bank

It is an official organism that regulates the monetary policy in a country or region. Central banks have the mandate to maintain currency stability and to promote the economy with financial measures like printing money, increasing or cutting interest rates or buying bonds. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan are samples of central banks.

Chart Pattern

Chart patterns are repeating visual representations on charts of how the price moves in the financial market. They provide data regarding the behavior of the market in the past and the future. Chart patterns work as trading signals and indicators of future price changes.

Choppy

It is the kind of price movements which change of direction quickly in a range. Short-lived moves with no follow-through. It is suitable for scalping in certain conditions.

Commodity

A commodity refers to a natural resource, either unprocessed or raw material that can be sold or bought to be used to make something that can be consumed. Commodities are considered physical assets vital in the production, and they have monetary utility. Some of the commodities include silver, gold, crude oil, platinum, and iron ore.

Consolidation

A period of sideways that usually follows a break to the upside or downside. It serves as a resting time for the price before attacking new highs or lows.

Correlation

Correlation in trading refers to the relationship that is there between assets. When comparing two assets, if there is a positive correlation, then the other security will move in a similar direction as the first security. On the other hand, negative correlation means that the Securities will move in a different direction.

Credit Rating

Credit rating is a metric that investors will look at to establish the debt issuer’s ability to repay their loan. Usually, in Forex trading, they are mostly referred to bonds or sovereign debt that a government issues in financing public services and projects. Credit ratings can affect currency pairs because most investors are listening for development and announcements from rating agencies.

Currency Futures

A currency future is also known as foreign exchange future, or FX future is a contract specifying the price at which a currency can be sold or bought or on a specific future date for an exchange. This contract fixes a price at which a currency will be exchanged with another at a preset future date. It helps investors in hedging against risks.

Currency Pair

Currency pairs are formed when two currencies are compared against one another. The pair, in the form of a ‘base’ and a ‘quote’ currency, makes up one entity.

Day Trader

An investor who make four or more trades within five days and usually close those trades in the same session. It requires capital minimums and involves high risks.

Day Trading

Day trading is one of the short-term trading styles that are quite popular amongst traders. In day trading, one takes only one trade in a day and closes out as the day gets over. Most traders, at the start of the day, pick a side, act on their skills and biases, and either make a gain or a loss.

Directional Movement Index

DMI is a market analysis indicator that guides traders in spotting the course of a particular trading instrument. Crafted in 1978 by J. Welles Wilder, this index works by associating the lows and highs that occurred previously.

Divergence

It is a market condition in technical analysis. The situation talks about price and momentum that are moving in opposite directions. For example, when the price is rising while momentum is falling. Both positive or negative divergencies signal significant shifts in price direction. Positive divergence happens when the price reaches a new low, but the momentum indicator is starting to go upward. A negative divergence occurs when the price of a pair jumps to a new high, but momentum fails to follow the price and start falling. Friday is a good day for divergences.

Dovish

Dovish is a policy or data view suggesting an easing of monetary policy or lowering of interest rates. Dovish policies aim to enhance economic growth by increasing employment and spending, thus helping the economy. However, it increases inflation risks, and lower rates discourage saving, and investors tend to move the capital to high-risk assets.

Downtrend

A price involved in an extended move to the downside. Technically, it is a price action that makes consisting lower lows and lower highs.

Drawdown

Drawdown refers to the difference between the peak of a currency and the new low once the currency price dips. It is a peak to trough decline over a given period for a currency, asset, trading account, investment, or fund. It is essential when one is determining the historical risks in various investments or monitoring trading performance.

ECB

ECB (European Central Bank) is the central bank for European Union countries that use the Euro. The ECB oversees the monetary policy in the Eurozone, which is an economic and geographic region of 19 nations. Its role is in maintaining price stability in the region and preserving the Euro’s buying power.

Economic Calendar

Economic calendar refers to scheduled dates of releasing important news or events which could affect the currency exchange rates movement as well as the whole financial market. These events or news releases have a significant impact on the volatility of currencies and the financial market. Usually, fiscal and monetary policy announcements will affect forex markets, and for traders, the economic calendar helps them know when something will happen.

Economic Indicator

Reports are the most important catalysts in the Forex market according to fundamental analysts. An economic indicator is a government inform which shows the performance of a specific economic field. Gross Domestic Product, Consumer Price Index, or Retail Sales are critical samples of that. Economic indicators usually affect the price of the currency of the given country.

Entry Order

An entry order represents an order to sell or buy at a time when the prevailing market price meets the specified price in your order.

European Session

The trading hours in the old continent are from 8:00 GMT to 16:00 GMT and includes countries such as England, Spain, Germany, France, and Russia. Europeans love trading euros and pounds. Of course, the EUR/USD is the most popular pair in the session, but the EUR/GBP is also well traded.

Exotic Pairs

Exotic pairs include currency pairs that are not among the Top 10 most traded currencies. The currencies are extremely volatile and thus are a reserve for seasoned forex traders. They include Turkish lira, Czech Koruna, and Mexican peso.

Exposure

Whenever a trader or a company undertakes a financial transaction that is denominated in a foreign currency, the fluctuating forex rates pose a risk. This risk is termed exposure to the market.

False Breakout

False breakout refers to a situation when there is a temporary movement in price below or above the resistance or critical support levels and then later retreating to the side where it started. For a breakout trader entering a trade after the price breaks, they can easily be trapped after reversal of the price leading to triggering odd stop-loss orders.

Federal Reserve

Federal Reserve refers to the US central bank established in 1913 to offer the nation a flexible, safer, and a stable financial and monetary system. It is responsible for monetary policy, financial system stability, regulation of financial institutions, and bank regulation. It also provides financial services to US financial institutions, the government, and official foreign institutions.

Forex Prime Time

The busiest hours to trade are known as the Forex prime time. It is the time with the highest volume in trading and the smallest spreads in the market. Prime time happens as it is when most traders are connected to buy or sell currencies. It goes from London, and New York are opened at the same time, which is from the American opening at 13:00 GMT until the London close at 16:00 GMT.

FED

FED is the Federal Reserve Bank, which is the US central bank. The FED is a group of entities comprising 12 regional central banks in various cities in the US. It promotes moderate long-term rates, high rates of employment, sustainable economic growth and preserving the purchasing power of the US dollar.

Fisher Effect

The Fisher Effect is a theory of economics that delineates the relationship between inflation and two different interest rate types, nominal and real. It is attributable to Irving Fisher and has been used by economists and traders for a better understanding of economic factors.

Fundamental Analysis

Fundamental analysis is a form of analysis that looks at the market through the lens of socio-economic and political factors that affect the rates of currencies. The value of currencies, like any other instrument, is determined by simple demand and supply for it.

Gross Domestic Product

GDP denotes the comprehensive value in terms of cash or market price of the services and completed goods manufactured inside a country’s physical borders during a particular span.

Hammer

Hammer is a price pattern belonging to candlestick charting occurring when an asset trades at a lower value compared to its opening worth but manages to regain its price within the span and closes nearer to the opening value.

Hawkish

It is a nickname for somebody who is optimistic regarding an economic topic such as jobs report, the economy of a country, or a favorable resolution in a discussion. Also, Hawkish is a person who believes that higher interest rates are needed to control rapid inflation or unsustainable economic growth.

Hedging

Hedging refers to taking a position or a combination of positions to minimize risk on one’s primary position. It is a trading strategy that an investor employs to reduce risks associated with market volatility. An investor will take two independent positions that counterbalance each other, thus reducing the chances of losses if there are price fluctuations.

Heikin Ashi

Heikin-Ashi method is an easy and seamless way to read candlestick patterns. It removes all unwanted data hindrances and focuses on the reversals and core trends.

High-Frequency Trading (HFT)

HFT refers to the process of employing computer-based programs that run complex algorithms to enhance trade speed. Regularly high-frequency trading will use arbitrage, market making, and momentum trading strategies through prediction or detection of changes in direction and depth of order flow.

Indicative Quote

Indicative quote is the price offered by dealers or brokers on a particular debt instrument, which is not backed by a guarantee that a trader is ready to accept the said rate for selling or buying.

Inflation

Inflation refers to the increase in the general prices of goods and services in a given period in time, which reduces the buying power of money. As the prices of goods increase, the purchasing power of every unit of the currency tends to decline. For instance, if five US dollars could buy three bars of chocolate in 2015 and now can only buy one, then it means there has been inflation. Usually, inflation results from the imbalance between the growth of the cash supply and the economic expansion rate.

Initial Margin (IM)

The purchase price percentage in the derivatives market that a trader should cover using collateral or cash for a margin account is termed as an initial margin.

Intervention

In the Forex market, an intervention is an action taken by central banks to affect the value of currencies directly. It happens when the bank enters the market and sell or buy vast amounts of the given money. It can also happen as a coordinated central bank action, and it is when several banks act at the same time. Like the move that six banks did in 2011.

Leading Indicator

It is a set of statistics that together are considered to anticipate future economic activity. The most important leading indicators include: Gross Domestic Product (GDP), Unemployment report, Consumer Price Index, Producer Price Index, Retail Sales, PMI reports, Consumer Confidence, and Durable Good Orders.

Leverage

Leverage, which is sometimes referred to as “margin” is the fractional or percentage increase that a trader can trade from the available capital. It enables traders to trade bigger lots by getting more cash from your broker. Leverage varies from broker to broker and flexibility. For instance, if leverage is 1:100, it means you can easily trade up to 100 times more than your capital.

Limit Orders

It is a restrictive order that set the price and duration the trader want to execute. So, it guarantees the price, but not the execution as the broker should find somebody who wants to buy or sell the unit at the same price. As an example, when the trader set a limit order for the EUR/USD at 1.1305, the broker will only execute the order at the exact price, no matter if the price goes to 1,1304 from the downside, or 1.1306 coming from the upside. Experts recommend always to place limit orders to defend your positions.

Liquidity

Liquidity in forex denotes the trading capability of a particular currency pair when faced with a demand. It is indicative of the active state of the market and determined by the number of active traders and the total traded volume.

Long

In trading, Long refers to a position a trader can take which if the market price of an asset increases, they will be able to make a profit. In trading, a trader will “take a long position” or “go long,” and in forex trading, since buying and selling currency pairs taking a long position means that the trader will buy the base currency and sell the quote currency. For instance, if a trade goes long GBP/USD, they will buy Great Britain Pounds and sell US dollars.

Long Term Trading

Long term trading refers to a type of trading where a transaction is held for an extended span, while a trader assesses the various influencing factors related to a currency pair.

Major Pairs

Major pairs are those currency pairs comprising the USD as the base or counter currency as well as one of EUR, CHF, GBP, CAD, NZD, AUD or JPY. For starters, major pairs are preferable because they provide low transaction costs and adequate liquidity, thus avoiding massive slippage. Some of the major pairs include GBP/USD, EUR/USD, and USD/CHF.

Margin Call

It is the worse nightmare for a trader. It happens once the investor loses all the funds of his account. So, the broker should request him for additional money or collateral to maintain a position or even his account. Also, when a position moves against the trader and it put in danger his account.

Market Maker

A market maker is a dealer that buys and sells a particular asset in large amounts for purposes of facilitating liquidity. It refers to a financial intermediary that is ready to buy and sell assets through continuous quoting of Ask and Bid prices that are open to traders on the trading platform.

Market Order

It is buying or selling order a trader places to be executed at the current spot price. It will guarantee the execution but not the price. The trader will get into the market, but he could also have a bad surprise as the order can be filled in a negative rate for the investor. Experts don’t recommend opening positions with market orders.

Momentum

The momentum indicator is a Forex leading indicator which attempts to measure the rate of change in a pair. it can also be applied in other markets such as stocks, futures or cryptocurrencies among others.

Money Management

Money management in Forex denotes the rules used by traders for increasing their trading capital through reducing the risks and improving the profits.

Mechanical Trading

Mechanical trading systems are part of Forex trading strategies used to generate trade signals, which a trader follows irrespective of the market events. Discretion is not required in arriving at the trading choices.

Non-Farm Payrolls

Non-Farm Payrolls (NFP) is part of the US Bureau of Labour Statistics’ Employment Situation report that shows the number of people employed in the US in construction, goods, and manufacturing companies. It is an economic indicator that is related to US employment.

Open Order

Open orders are orders that await their execution in the market due to certain unfulfilled conditions.

Order Flow

Order flow refers to anticipating price movements based on the number of orders in the markets.

Pip

A pip is the smallest measure of a pair. It usually is represented as the fourth number in a pair. For example, in the EUR/USD you have the price 1.1302, a pip is number 2. When the unit moves up to 1.1310, the pair just moved eight pips to the upside. To the downside, when a pair moves from 1.1310 to 1.1309, it moves one pip down.

Pivot Point

The pivot point, also called just pivots, refers to technical tools that traders use to identify the price movement and understand market sentiment. They are used to establish resistance and support levels by examining an asset’s lows, highs, and closing values. They are applied in identifying trend reversals, trading ranges as well as market sentiment.

Position

A position is the quantity of currency or commodity that a trader has. This can be either short or long and can be a profitable trading style, which traders would do good to know about.

Profit

It is the money you actually make. Theoretically, it represents the difference between the cost price and the sale price, when the sale price is greater than the cost price. It can happen either in long or short positions.

Pullback

In a trend, a pullback is a movement where the price gets a retracement before continuing in the previous direction. It happens either in bullish or dovish trends, and it shows a healthy trend.

Quantitative Easing (QE)

Quantitative easing refers to a situation whereby the central bank uses unconventional policies to stimulate the economy when conventional policies seem not to work. It is informally called “printing cash,” but instead of actual printing banknotes, the central bank creates money electronically or “keystrokes money”. by issuing and buying bonds and other assets from the market. The measures increase the price of bonds while at the same time, driving down the yield.

Quote

Quote currency is the secondary currency in a currency pair. It is the foreign currency in a direct quote and domestic currency in an indirect quote.

Rally

When you hear somebody talking about a rally, it is saying that a continuing upside movement is happening with healthy and robust conditions. It can also be an improvement in price after a period of decline, but most of the time, it represents a long and healthy run to the north.

Range

A range occurs when the price action moves in determined highs and lows that are capping extensions from those levels in a prolonged extension of time in the giving timeframe.

Rate

It is actually the spot price that is shown in a chart or trading platform. Also, it can be the price of any currency in terms of another when you are dealing with it.

Recession

Recession refers to the contraction in economic activity, with the GDP rate declining in two or more sequential quarters. When talking about a recession, the primary variable looked at is the GDP rate, which is a measure of the entire economy’s economic activity. If GDP continues to decline, then that is an indication of recession, which will necessitate looking at other macroeconomic indicators to support the claim.

Resistance

A resistance level is a price that acts as a ceiling and tends to cap gains in a pair. It also identifies selling zones where traders are waiting for the price to open positions that would send the cross down. It is the opposite of support.

Risk

One of the most critical factors in Forex. In investments, risk management is everything as it will protect your portfolio. Risk is the exposure you have to uncertain and adverse changes. However, the risk is useful in investments as it provides you with opportunities associated with volatility.

Risk-to-Reward Ratio

The risk-to-reward ratio is a calculation that shows traders what they are risking and what are the potential rewards of the risks taken. Traders can use this ratio to manage their accounts and make wise trading decisions.

Safe Haven Currencies

Haven currencies are currencies whose risk of losing value is minimal. The financial instruments are expected to increase or retain their value even when there is a lot of global uncertainty in the economy or geopolitics. Some of the currencies considered safe-haven include the US dollar (USD), Swiss franc (CHF), and Japanese Yen (JPY).

Short

Short is the opposite of going long and it means that the trader will take a position and make profits if the asset price drops. In context, it is “taking a short position” or “going short” or selling. In Forex trading since it involves trading currency pairs “taking a short position” means the trader will sell the base currency and buy the quote currency. In financial market short means, that you’re borrowing an asset from your broker, that you think will decline in price and then sell it immediately. After the price declines, you buy back an asset cheaper to repay your debt and leave some extra money in your pocket.

Short Squeeze

A short squeeze occurs typically when there is a lot of demand relative to the supply of specific financial security. In forex trading, a short squeeze will occur following a sharp move resulting in a reversal. In essence, what happens is that because of excess demand, the prices increase rapidly, leaving traders in short positions trying to close their positions by buying.

Slippage

It is the difference between the price asked and the price obtained in a market order. It usually happens due to changing market conditions. Slippage is reduced in limit orders, but it can occur with frequency in market orders.

Spread

In trading, the spread is the difference that exists between the asking and bidding price of a given currency pair. This difference is also known as bid-ask-spread. The spread refers to the transaction cost for every transaction carried out by the broker.

Stop Loss

It is your lifeguard as stop losses provide you with an exit in case your strategy was wrong, and the market is going against you. Stop-loss is an order placed to sell when a determined price is reached. The price is usually set in a level that would be achieved if your strategy is wrong.

Support

Contrary to resistance, a support is a price level that works as a floor and fights more declines in the pair. It is identified as a buying zone where traders are waiting for the price to open positions and send the cross up.

Take Profit

A take profit order is an order that will trigger the execution of a trade immediately a certain profit level is reached. Take profit orders are essential when traders want to lock in profits as they will close their positions automatically after the price reaches a set limit. Despite stopping more profit advances, a take profit order guarantees specific profits as set by the trader.

Trading Robot

In forex, a trading robot is a computer-based program that depends on predefined forex trading indicators to help traders determine whether they should buy or sell a particular currency pair at a specific time. A trading robot is designed to eliminate the psychological trading element that can be detrimental by executing trades automatically.

Trading Styles

There are four trading styles, which include day-trading, scalping, position trading, and swing trading. The four mentioned strategies are dependent on trading time.

Trend

A trend is a price movement that continuously goes in the same direction, either up or down. When it is an uptrend, it will be higher highs and higher lows; while in a downtrend, it will be lower lows and lower highs.

Uptick

The surge in the price of a security for a particular span when compared to its preceding rate is called an uptick. Also named plus tick, the phenomenon happens when the price rise is registered in connection with the earlier trade.

Uptrend

Also called as the trend, it is a price movement that has higher highs and higher lows continually in an extended period of time.

Volatility

It is the blood of the Forex market. It wouldn’t be a Forex market with no volatility. Volatility is a statistical measure of dispersion in a pair which moves up and down. Usually, the higher the volatility, the more opportunities a trader will have, but the riskier the inversion will be.

Volume

Volume denotes the total numbers traded in a specific currency pair or the market for a given span. It is also called the turnover, denoting the currency amount in transactions between buyers and sellers.

Wedge

The converging trendlines depicted on a price chart form a pattern called the wedge. It has two trendlines moving in one direction, together forming a channel in between that narrows down up to the point when one of them breaks.