Understanding Some of the Forex Phrases and Terminologies

By: Justin Stewart

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

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