Financial terms, definitions and explanations associated with trading and the markets. Trading terms glossary brought to you by Capital Sands. We’ve put our 10 years of experience in trading to good use, defining and explaining a comprehensive list of trading vocabulary.
Q1: What does Forex Mean?
A: Foreign Exchange (Forex) refers to the foreign exchange market. It is the over-the-counter market in which the foreign currencies of the world are traded. It is considered the largest and most liquid market in the world. The foreign exchange market – also known as Forex or the FX market – is the world’s most traded market, with turnover of $5.1 trillion per day.
Q2: How moves Forex Market?
A: There are many reasons for movement in the value of Currency pairs. Sometimes Forex market can move due to the news related to some major economic reforms, political situations and economic events. Another reason could be any cash inflows by big institutions etc.
these are the Fundamental factors on the other hand, Technical Analysis, based on historical price levels also affects the movement of the prices.
Q3: What are the Stocks?
A: Stocks are securities that represent an ownership share in a company. For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time.
Q4: What is Leverage?
A: Leverage is a financial support which is provided by the broker to the trader to increase the ability of trading in market. Leverage will increase your trading capacity. Choosing adequate leverage is also important.
Q5: What is Bid Price?
A: The bid price represents the maximum price that a buyer is willing to pay for a share of stock or other security.
Q6: What is Ask Price?
A: The ask price represents the minimum price that a seller is willing to take for a share of stock or other security.
Q7: What is spread?
A: The difference between the Bid (Sell) price and the Ask (Buy) price.
Q8: What is a Pip?
A: Percentage in point (pip) is a unit of change in an exchange rate of a currency pair.
Q9: What is a Lot in Forex?
A: Forex is commonly traded in specific amounts called lots, or basically the number of currency units you will buy or sell.
Standard lot is 100,000 units of currency,
Mini lot is 10,000 units of currency,
Micro lot is 1,000 units of currency,
Nano lot is 100 units of currency.
Q10: What is a Stop Loss Order?
A: A stop loss order is an 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 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Q11: What is a Limit Order?
A: A limit order is 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 117.00/05, then a limit order to buy USD would be at a price below 117.05.
Q12: How Are Currency Prices Determined?
A: Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it impossible for any one entity to “drive” the market for any length of time.
Q13: What Is The Difference Between An “intraday” And “overnight Position”?
A: Intraday positions are all positions which are opened and closed anytime during normal trading. Overnight positions are positions that are still on at the end of normal trading hours, which are usually rolled over by your Forex broker (based on the currencies interest rate differentials) to the next day’s price.
Q14: What Does It Mean Have A ‘long’ Or ‘short’ Position?
A: In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every Forex position requires an investor to go long in one currency and short the other.
Q15: What is Margin in forex trading?
A: Margin trading in the forex market is the process of making a good faith deposit with a broker in order to open and maintain positions in one or more currencies.
Q16: Is Forex Trading Expensive?
A: No. Most online Forex brokers allow customers to execute margin trades at up to 100:1 leverage. This means that investors can execute trades of $100,000 with an initial margin requirement of $1000. However, it is important to remember that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally great. A more pragmatic margin trade for someone new to the Forex markets would be 20:1 but ultimately depends on the investor’s appetite for risk.
Q17: When Is The Forex Market Open For Trading?
A: A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur – day or night.
Q18: Who Are The Participants In The Forex Market?
A: The Forex market is called an ‘Interbank’ market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.
Q19: Where Is The Central Location Of The Forex Market?
A: Forex Trading is not centralized on an exchange, as with the stock and futures markets. The Forex market is considered an Over the Counter (OTC) or ‘Interbank’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
Q20: How Can I Trade A Currency I Don’t Already Have?
A: If you want to trade a currency you don’t already have, there are many ways to do so. There are several different kinds of contracts you can harness to invest in currencies you don’t own. For example, you could trade the euro without owning it by buying or selling options that involve the currency. Call and put options on EUR/USD would provide methods to trade the common currency’s exchange rate with the U.S. dollar.
Q21: What is the average daily volumes in foreign exchange?
A: The average daily volumes in the foreign exchange market are USD 5 Trillion.
Q22: When does a country’s currency strengthens?
A: When any country is enjoying strong economic growth their currency also strengthens.
Q23: Which is the most traded currency pairs?
A: EUR/USD ; USD/JPY ; GBP/USD ; USD/CHF ; AUD/USD ; NZD/USD ; USD/CAD
Q24: What type of Forex Trading strategy should be used?
A: All currency traders make decisions using both technical factors and economic fundamentals. All the technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumour. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.
Q25: How often are Trades made?
A: The number of trades depend on the market condition where market condition dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day. Most importantly, since most Forex Brokers do not charge commission, traders can take positions as often as necessary without worrying about excessive transaction costs.
Q26: How should we maintain long positions?
A: Approximately 80% of all Forex trades last seven days or less, while more than 40% last fewer than two days. General rule says that a position is kept open until one of the following events occurs –
- Realization of sufficient profits from a position.
- Specified stop-loss is triggered.
- Another position that has a better potential appears and you need these funds.
Q27: What is hedging in forex trading ?
A: A forex hedge is a transaction implemented to protect an existing or anticipated position from an unwanted move in exchange rates. … Alternatively, a trader or investor who is short a foreign currency pair can protect against upside risk using a forex hedge.
Q28: What is Scalping in forex Trading?
A: Scalping in the forex market involves trading currencies based on a set of real-time analysis. The purpose of scalping is to make a profit by buying or selling currencies and holding the position for a very short time and closing it for a small profit.
Q29: What is ECN trading?
A: An ECN broker stands for Electronic Communication Network (ECN). This type of broker provides its traders with direct access to other market participants via interbank trading prices. This network allows buyers and sellers in the exchange to find a counterparty of their trading positions.
Q30: What is cryptocurrency?
A: Cryptocurrency is an internet-based medium of exchange which uses cryptographic functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.
Q31: What is a Safe Haven?
A: A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
Q32: What are safe haven assets?
A: Safe havens are financial assets that investors turn to to protect themselves or even profit from periods of market turmoil. The most common safe haven assets are U.S. government securities, the U.S. dollar, gold, defensive stocks and cash.
Q33: What is base currency in forex?
A: The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.
Q34: How many forex pairs are there?
A: As of current date, there are approximately 180 legal currencies circulating throughout the world. So it is theoretically possible to exchange a single currency with 179 different currencies. Most international Forex brokers would offer you to trade in between 40–70 currency pairs.
Q35: Can you trade Forex part time?
A: As you are most probably aware, trading can be done at any time of the day, so doing it part time is very possible. A part time forex trader can have a very lucrative side income if they are prepared and organized.
Q36: What is bullish market and bearish market?
A: A bull market is a market that is on the rise and is economically sound, while a bear market is a market that is receding, where most stocks are declining in value.
Q37: What is the Exchange rate?
A: An exchange rate is the price of a country’s currency in terms of another currency. In other words, it represents how many units of a foreign currency a consumer can buy with one unit of their home currency.
Q38: What is long position in forex trading?
A: In Forex trading, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price.
Q39: What is Short position in Forex trading?
A: A short position is one in which the trader sells a currency in anticipation that it will depreciate.
Q40: What does support mean in trading?
A: support level is the level at which buyers tend to purchase or enter into a stock. It refers to the stock share price that a company rarely goes below. Support levels in stocks can be created by limit orders or simply the market action of traders and investors.
Q41: What is resistance in forex trading?
A: Resistance is a price level where rising prices stop, change direction, and begin to fall. Resistance is often viewed as a “ceiling” keeping prices from rising higher. If price breaks support or resistance, the price often continues to the next level of support or resistance.
Q42: Define Candlestick chart?
A: 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.
Q43: What is CFD?
A: A Contract for Difference (or CFD) is a type of derivative that gives exposure to the change in value of an underlying asset (such as an index or equity). It allows traders to leverage their capital (by trading notional amounts far higher than the money in their account) and provides all the benefits of trading securities, without actually owning the product. In practical terms, if you buy a CFD at $10 then sell it at $11, you will receive the $1 difference. Conversely, if you went short on the trade and sold at $10 before buying back at $11, you would pay the $1 difference.
Q44: What is Commission in forex?
A: A fee that is charged for buying or selling a product.
Q45: XAG/USD what denotes?
A: Symbol for Silver Index.
Q46: XAU/USD what denotes?
A: Symbol for Gold Index.
Q47: What is Volatility?
A: Referring to active markets that often present trade opportunities.
Q48: What is Swap?
A: An overnight payment for holding a position in Forex. Since you are not physically receiving the currency you buy nor delivering the currency you sell, the broker should pay or charge an interest rate difference between the pair’s two currencies. Swaps can be negative or positive.
Q49: Full Form
A: #BOC: Bank of Canada, the central bank of Canada.
#BOE: Bank of England, the central bank of UK.
#BOJ: Bank of Japan, the central bank of Japan.
#ECB: European Central Bank, the central bank for the countries using the euro.
#FEB: Federal Reserve Bank, the central bank of United States.
#RBA: Reserve Bank of Australia, the central bank of Australia.
#RBNZ: Reserve Bank of New Zealand, the central bank of New Zealand.
Q50: Definition of Bar chart?
A: A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar; the opening price, which is marked with a horizontal line to the left of the bar; and the closing price, which is marked with a horizontal line to the right of the bar.
Q51: Definition of Line Chart?
A: A price chart that uses only the closing price for each period. A line connects all closing prices on the chart. Extra information such as open, high and low prices are sacrificed for simplicity.
Q52: Who is Analyst ?
A: A financial professional who has expertise in evaluating investments and puts together buy, sell and hold recommendations for clients.
Q53: What is Bollinger Bands?
A: A tool used by technical analysts. A band plotted two standard deviations on either side of a simple moving average, which often indicates support and resistance levels.
Q54: What is Economic Indicator?
A: A government-issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.
Q55: Who is Introducing Broker(IB)?
A: A person or corporate entity which introduces accounts to a broker in return for a fee.
Q56: What is Overnight position?
A: A trade that remains open until the next business day.
Q57: Define Middle Average Convergence Divergence (MACD) indicator?
A: This indicator is a tool that’s used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.
Q58: Define Commodity Channel Index(CCI) indicator?
A: An indicator shows the current changes of price depending on its middle index for a particular period of time.
Q59: Define Relative Strength Index(RSI) indicator?
A: The relative strength index is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.
Q60: What is Pivot Point in forex trading?
A: A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames.
Q61: What is Margin call in forex?
A: A margin call is what happens when a trader no longer has any usable/free margin. In other words, the account needs more funding.
Q62: What mean of Quote?
A: An indicative market price, normally used for information purposes only.
Q63: What is Equity?
A: It is the total amount of money in your trading account, including your profit and losses. For instance, if you deposited USD 10,000 into your account and you also made a profit of USD 3,000, your equity amounts to USD 13,000.
Q64: What is Free Margin?
A: It is the amount of money in your trading account with which you can open new trading positions.
Free margin = Equity – Used Margin.
This means that if your equity is USD 13,000 and your open positions require USD 2,000 margin (used margin), you are left with USD 11, 000 (free margin) available to open new positions.
Q65: Definition of Liquidity?
A: Liquidity is used in finance to describe how easily an asset can be bought or sold in the market without affecting its price – it can also be known as market liquidity. When there is a high demand for an asset, there is high liquidity, as it will be easier to find a buyer (or seller) for that asset.
Q66: What is Meta Trader?
A: MetaTrader is an electronic trading platform which is popular among traders around the world.
Q67: Definition of Moving Average(MA)?
A: A moving average (MA) is a common indicator in technical analysis, used to examine price movements of assets while lessening the impact of random price spikes.
Q66: What is the Non-farm payroll data?
A: Non-farm payrolls are a monthly statistic representing how many people are employed in the US, in manufacturing, construction and goods companies. They can also be known as non-farms, or NFP.
Q67: WTI Definition?
A: WTI stands for West Texas Intermediate (occasionally called Texas Light Sweet), an oil benchmark that is central to commodities trading. It is one of the three major oil benchmarks used in trading, the others being Brent crude and Dubai/Oman.
Q68: Who is Broker?
A: A broker is an independent person or a company that organizes and executes financial transactions on behalf of another party. They can do this across a number of different asset classes, including stocks, forex, real estate and insurance. A broker will normally charge a commission for the order to be executed.
Q69: What is CPI?
A: CPI stands for consumer price index, an average of several consumer goods and services that are used to give an indication of inflation.
Q70: Definition of Fibonacci retracement ?
A: A Fibonacci retracement is a key technical analysis tool that uses percentages and horizontal lines, drawn onto price charts, to identify possible areas of support and resistance. Identifying these areas is useful to traders since it can help them decide when to open and close a position, or when to apply stops and limits to their trades.
Q71: Describe OPEC?
A: OPEC is the Organization of the Petroleum Exporting Countries. It was founded in 1960 by Saudi Arabia, Venezuela, Iraq, Iran and Kuwait. The other countries that have joined OPEC since are Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and the Republic of the Congo – bringing OPEC’s membership to 14, as of January 2019.
Q72: SEC Definition?
A: The SEC stands for the US Securities and Exchange Commission. It is a government agency set up to regulate markets and protect investors in the United States, as well as overseeing any mergers and acquisitions.