Basics

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B

BALANCE OF TRADE

The value of a country’s exports minus its imports.

BAR CHART

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.

BARRIER LEVEL

A certain price of great importance included in the structure of a Barrier Option. If a Barrier Level price is reached, the terms of a specific Barrier Option call for a series of events to occur.

BARRIER OPTION

Any number of different option structures (such as knock-in, knock-out, no touch, double-no-touch-DNT) that attaches great importance to a specific price trading. In a no-touch barrier, a large defined payout is awarded to the buyer of the option by the seller if the strike price is not ‘touched’ before expiry. This creates an incentive for the option seller to drive prices through the strike level and creates an incentive for the option buyer to defend the strike level.

BASE CURRENCY

The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF (U.S. Dollar/Swiss Franc) rate equals 1.6215, then one USD is worth CHF 1.6215. In the forex market, the US dollar is normally considered the base currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro and the Australian dollar.

BASE RATE

The lending rate of the central bank of a given country.

BASING

A chart pattern used in technical analysis that shows when demand and supply of a product are almost equal. It results in a narrow trading range and the merging of support and resistance levels.

BASIS POINT

A unit of measurement used to describe the minimum change in the price of a product.

BEARISH/BEAR MARKET

Negative for price direction; favoring a declining market. For example, “We are bearish EUR/USD” means that we think the euro will weaken against the dollar.

BEARS

Traders who expect prices to decline and may be holding short positions.

BID/ASK SPREAD

The difference between the bid and the ask (offer) price.

BROKER

An individual or firm that acts as an intermediary, bringing buyers and sellers together for a fee or commission. In contrast, a dealer commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

BUCK

Market slang for one million units of a dollar-based currency pair, or for the US dollar in general.

BULLISH/BULL MARKET

Favoring a strengthening market and rising prices. For example, “We are bullish EUR/USD” means that we think the euro will strengthen against the dollar.

BULLS

Traders who expect prices to rise and who may be holding long positions.

BUNDESBANK

Germany’s central bank.

BUY

Taking a long position on a product.

C

CFDS*

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.

CURRENCY

Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

CURRENCY PAIR

The two currencies that make up a foreign exchange rate. For example EUR/USD (Euro/U.S. Dollar).

CURRENCY RISK

The probability of an adverse change in exchange rates.

CURRENCY SYMBOLS

A three-letter symbol that represents a specific currency. For example, USD (U.S. Dollar).

CURRENT ACCOUNT

The sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). 

I

INFLATION

An economic condition whereby prices for consumer goods rise, eroding purchasing power.

INTEREST

Adjustments in cash to reflect the effect of owing or receiving the notional amount of equity of a CFD position.

The last time you may trade a particular product.

L

LEADING INDICATORS

Statistics that are considered to predict future economic activity.

LEVEL

A price zone or particular price that is significant from a technical standpoint or based on reported orders/option interest.

LEVERAGE

Also known as margin, this is the percentage or fractional increase you can trade from the amount of capital you have available. It allows traders to trade notional values far higher than the capital they have. For example, leverage of 100:1 means you can trade a notional value 100 times greater than the capital in your trading account.*

P

PORTFOLIO

A collection of investments owned by an entity.

POSITION

The net total holdings of a given product.

PROFIT

The difference between the cost price and the sale price, when the sale price is higher than the cost price.

R

REVALUATION

When a pegged currency is allowed to strengthen or rise as a result of official actions; the opposite of a devaluation.

RIGHTS ISSUE

A form of corporate action where shareholders are given rights to purchase more stock. Normally issued by companies in an attempt to raise capital.

RISK

Exposure to uncertain change, most often used with a negative connotation of adverse change.

RISK MANAGEMENT

The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

S

SELL

Taking a short position in expectation that the market is going to go down.

STOCK EXCHANGE

A market on which securities are traded.

STOCK INDEX

The combined price of a group of stocks – expressed against a base number – to allow assessment of how the group of companies is performing relative to the past.

STOP ENTRY ORDER

This is an order placed to buy above the current price, or to sell below the current price. These orders are useful if you believe the market is heading in one direction and you have a target entry price.

STOP-LOSS HUNTING

When a market seems to be reaching for a certain level that is believed to be heavy with stops. If stops are triggered, then the price will often jump through the level as a flood of stop-loss orders are triggered.

STOP LOSS ORDER

This is an order placed to sell below the current price (to close a long position), or to buy above the current price (to close a short position). Stop loss orders are an important risk management tool. By setting stop loss orders against open positions you can limit your potential downside should the market move against you. Remember that stop orders do not guarantee your execution price – a stop order is triggered once the stop level is reached, and will be executed at the next available price.

STOP ORDER

A stop order is an order to buy or sell once a pre-defined price is reached. When the price is reached, the stop order becomes a market order and is executed at the best available price. It is important to remember that stop orders can be affected by market gaps and slippage, and will not necessarily be executed at the stop level if the market does not trade at this price. A stop order will be filled at the next available price once the stop level has been reached. Placing contingent orders may not necessarily limit your losses.

SWAP

A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.

T

TRADING BID

A pair is acting strong and/or moving higher; bids keep entering the market and pushing prices up.

TRADING HALT

A postponement to trading that is not a suspension from trading.

TRADING HEAVY

A market that feels like it wants to move lower, usually associated with an offered market that will not rally despite buying attempts.

TRADING OFFERED

A pair is acting weak and/or moving lower, and offers to sell keep coming into the market.

TRADING RANGE

The range between the highest and lowest price of a stock usually expressed with reference to a period of time. For example: 52-week trading range.

TRAILING STOP

A trailing stop allows a trade to continue to gain in value when the market price moves in a favorable direction, but automatically closes the trade if the market price suddenly moves in an unfavorable direction by a specified distance. Placing contingent orders may not necessarily limit your losses.

TRANSACTION COST

The cost of buying or selling a financial product.

TRANSACTION DATE

The date on which a trade occurs.

TREND

Price movement that produces a net change in value. An uptrend is identified by higher highs and higher lows. A downtrend is identified by lower highs and lower lows.

TURNOVER

The total money value or volume of all executed transactions in a given time period.