Forex glossary

Basis: The difference between the spot price and the futures price.

Basis point: One hundredth of a percentage point.

Bid /Ask Spread: The difference between the bid and offer (ask) prices; also known as a two-way price. Cable: Trader term for the British Pound Sterling referring to the Sterling/US Dollar exchange rate. Term began due to the fact that the rate was originally transmitted via a transatlantic cable starting in the mid 1800's.

Central bank: The principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy and the regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Conversion: The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Cross rates: An exchange rate between two currencies. The cross rate is said to be non-standard in the country where the currency pair is quoted. For example, in the US , a GBP/CHF quote would be considered a cross rate, whereas in the UK or Switzerland it would be one of the primary currency pairs traded.

Currency: A country's unit of exchange issued by their government or central bank whose value is the basis for trade.

Currency (exchange rate) risk: The risk of incurring losses resulting from an adverse change in exchange rates.

Devaluation: Lowering of the value of a country's currency relative to the currencies of other nations. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.

Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.

End of day (mark to market): Mark-to-market values a trader's open position at the end of each working day using the closing market rates or revaluation rates. Generally the revaluation rates are market rates at 5pm EST time. Any profit or loss is booked and the trader will start the next day with the position valued at the prior day's closing rate.

Euro: The currency of the European Monetary Union (EMU), which replaced the European Currency Unit (ECU). The countries currently participating in the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Greece, Italy, and Spain.

Exchange rate: The price of one currency stated in terms of another currency. Example: $1 Canadian Dollar (CDN) = $0.7700 US Dollar (USD)

Fixed exchange rate: A country's decision to tie the value of its currency to another country's currency, gold (or another commodity) , or a basket of currencies . In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

Foreign exchange (Forex): The simultaneous buying of one currency and selling of another in an over-the-counter market.

G-7: The seven leading industrial countries, being the United States, Germany, Japan, France, Britain, Canada, and Italy.

G-10: G7 plus Belgium , Netherlands and Sweden , a group associated with the IMF discussions. Switzerland is sometimes involved.

SELL ON STOP -- A "sell on stop" order is one that is triggered only when the stock hits a specific price. At this point it then it becomes a market order. I often use this type of trade in situations where I do not want to enter the short position unless the stock breaks down from support.

SHORT SALE -- When you short a stock, you are temporarily borrowing the shares with the intention of returning them at a future date. Short sellers borrow shares, then sell them immediately in the open market in the hopes of repurchasing those same shares at a lower price in the future. If you short a stock, you will only make money if it declines in value.

SHORT-TERM TREND -- In this section of my weekly Swing Trader newsletter, I examine the market's most recent trading action in great detail by focusing on the hourly S&P chart. The key here is to determine the very short-term messages this chart is communicating.

SWING TRADING -- This term is typically used to imply a style where one takes a position for several days to a few weeks. A swing trade might be completed in less than a week, or if the stock consolidates it might take several weeks. While a swing trader will watch the market very closely, this style does not require the trader to be in front a computer screen while the market is open. A swing trader will typically aim for a 10-15% profit on all trades.

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.

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.

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