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A R T H A - F X

Education


Education

Introduction to Forex

Obtaining a strong foundation in trading basic education is essential, and for those seeking the best online stock trading education, there are various resources available to enhance their knowledge and skills. Education for trading encompasses a wide range of topics, including fundamental analysis, technical analysis, risk management, and trading strategies.

Understanding Currency Pairs

Each pair consists of a base currency and a secondary currency. The prices and charts of currency pairs primarily reflect the base currency. For instance, if you come across the statement that the EUR/USD is strengthening, it implies that the Euro (EUR) is gaining strength against the US Dollar (USD). By examining the EUR/USD chart, you'll observe an upward trend, indicating the Euro's strength relative to the US Dollar.

Majors

1. Major Currency Pairs: These pairs involve the world's most dominant currencies, such as the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD). Major currency pairs exhibit high liquidity and tight spreads, making them popular among traders.

Currency Pairs

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • USD/CAD
  • AUD/USD
  • NZD/USD

2. Rosses: Cross currency pairs, also known as minor currency pairs, do not include the US Dollar. They consist of two major currencies, such as EUR/GBP (Euro against British Pound) or AUD/JPY (Australian Dollar against Japanese Yen). Crosses provide traders with alternative trading opportunities and are often influenced by the respective economies' performance.

3. Exotic Currency Pairs: Exotic pairs involve one major currency and one currency from an emerging or smaller economy, like USD/ZAR (US Dollar against South African Rand) or EUR/TRY (Euro against Turkish Lira). Exotic currency pairs tend to have lower liquidity, wider spreads, and higher volatility, making them more challenging to trade.

Bid And ask/Spread ??

In the world of Forex trading, understanding bid and ask prices, also known as the spread, is crucial. When looking at a currency table, you will notice quotes that refer to currency pairs, with the prices always referencing the base currency in the pair. The bid price represents the selling price of the base currency, while the ask price represents the buying price of the base currency.

For example, if you want to buy 1 Euro, you would do so at the ask price. Conversely, if you want to sell 1 Euro, you would do so at the bid price. These prices are typically expressed in terms of the secondary currency in the pair, such as US Dollars.

When opening a trade, whether buying or selling, it is referred to as taking a position in the market. A long position indicates buying a currency, while a short position indicates selling a currency. When a currency is moving up, it is considered bullish, and when it is dropping, it is considered bearish.

Spreads

The spread, on the other hand, is the difference between the bid and ask price. It represents the commission charged by the broker for their services and is measured in pips. A pip is the smallest movement in the price of a currency and is typically calculated as the fourth digit after the decimal point.

In addition to bid and ask prices, it is important to understand lot sizes in Forex trading. In the past, currencies were traded in specific amounts known as lots. The standard lot size is 100,000 units, but there are also mini-lots of 10,000 units and micro-lots of 1,000 units.

Lots No. of Units
Standard 100000
Mini 10000
Micro 1000
Nano 100

Margin and Leverage: Are important concepts in Forex trading that can significantly impact your trades.

Margin refers to the amount required to open and hold a trading position using leverage. It is usually expressed as a percentage of the position size and is determined by the broker's margin requirements.

Leverage, on the other hand, enables traders to open larger positions with a smaller amount of capital. It allows traders to potentially increase their profits, but also increases their risk of loss.

Rollover or Swap: Rollover or Swap is the interest rate differential between two currencies that is charged or credited when a trade is held overnight. This can affect the profitability of trades and should be considered when making trading decisions.

Glossary

A | B | C | D | E | F | G | H | I | L | M | O | P | Q | R | S | T | U | V | W | Y

A

Appreciation – Appreciation refers to the strengthening of a currency's price due to increased demand in the market.

Arbitrage – Arbitrage involves simultaneously buying or selling an instrument in one market and taking an opposite position in a related market, in order to exploit small price differences between the markets.

Around – In dealer jargon, "around" is used when the forward premium/discount is close to parity. For example, "two-two around" means a two-point difference on either side of the current spot price.

Ask Rate – The ask rate is the price at which a financial instrument is offered for sale, also known as the offer price or ask price.

Asset Allocation – Asset allocation is an investment strategy that involves dividing funds among different markets to achieve diversification for risk management and/or expected returns according to an investor's objectives.

B

B Back Office – The back office refers to the departments and processes involved in the settlement of financial transactions.

Balance of Trade – The balance of trade is the value of a country's exports minus its imports.

Base Currency – The base currency is the currency in which an investor or issuer maintains their book of accounts. In foreign exchange markets, the US Dollar is typically considered the base currency for quotes, meaning that exchange rates are expressed as a unit of $1 USD per the other currency in the pair. Exceptions to this rule include the British Pound, Euro, and Australian Dollar.

Bear Market – A bear market is characterized by declining prices in a financial market.

Bid / Ask Spread – The bid/ask spread is the difference between the bid price (the price at which a trader is willing to buy) and the ask price. It is a commonly used measure of market liquidity.

Bid Rate – The bid rate is the rate at which a trader is willing to buy a currency.

Big Figure – In dealer terminology, the big figure refers to the first few digits of an exchange rate. These digits usually remain constant during normal market fluctuations and are often omitted in quotes, especially during periods of high market activity. For example, a USD/Yen rate of 107.30/107.35 might be quoted as "30/35".

Book – In a professional trading environment, a book refers to a summary of a trader's or desk's total positions.

Bretton Woods Agreement of 1944 – The Bretton Woods Agreement of 1944 was an international agreement that established fixed foreign exchange rates for major currencies, allowed for central bank intervention in currency markets, and pegged the price of gold at $35 per ounce. The agreement remained in effect until 1971, when President Nixon ended the fixed exchange rate system.

Broker – A broker is an individual or firm that acts as an intermediary, bringing together buyers and sellers for a fee or commission. Unlike a dealer, a broker does not take a position in the transaction but facilitates the trade between parties.

Bull Market – A bull market is characterized by rising prices in a financial market.

Bundesbank – The Bundesbank is the central bank of Germany.

C

Cable – Trader jargon referring to the exchange rate between the British Pound (Sterling) and the US Dollar. The term originated from the mid-1800s when the exchange rate was transmitted via a transatlantic cable.

Candlestick Chart – A type of chart used in technical analysis that displays the trading range, opening price, and closing price of a financial instrument. If the closing price is higher than the opening price, the chart area is typically shaded. If the opening price is higher, the area is left blank.

Central Bank – A government or quasi-governmental institution responsible for managing a country's monetary policy. Examples include the Federal Reserve in the United States and the Bundesbank in Germany.

Chartist – An individual who utilizes charts, graphs, and historical data to identify patterns and predict future price movements in financial markets. Also known as a technical trader.

Choice Market – A market where there is no spread, meaning all trades occur at the same price.

Clearing – The process of settling a trade by ensuring that the necessary funds and securities are exchanged between the buyer and seller.

Collateral – An asset or property pledged by a borrower to a lender as security for a loan or as a guarantee of performance.

Commission – A fee charged by a broker for executing a trade on behalf of a client.

Confirmation – A document exchanged between parties involved in a financial transaction, which outlines the terms and conditions of the agreement.

Contagion – The spread of a financial crisis or instability from one market to another. For example, the Asian Contagion in 1997 began with political instability in Indonesia and spread to other Asian countries and Latin America.

Contract – The standardized unit of trading for a particular financial instrument.

Counterparty – One of the participants in a financial transaction, such as a buyer or seller.

Country Risk – The risk associated with engaging in cross-border transactions, including factors such as legal, political, and economic conditions.

Cross Rate – The exchange rate between two currencies that are not the official currencies of the country in which the rate is quoted. For example, a GBP/JPY quote in the United States would be considered a cross rate.

Currency – Any form of money issued by a government or central bank that is used as legal tender and as a medium of exchange.

Currency Risk – The potential for adverse changes in exchange rates that can impact the value of investments or transactions denominated in a particular currency.

D

Day Trading – The practice of opening and closing positions within the same trading day, with the aim of profiting from short-term price fluctuations.

Dealer – An individual who acts as a principal in a financial transaction, taking one side of the trade in the hope of earning a profit. In contrast, a broker acts as an intermediary, bringing buyers and sellers together for a fee.

Deficit – A negative balance in trade or payments, indicating that a country's imports exceed its exports or its spending exceeds its income.

Delivery – An FX (foreign exchange) trade where both parties physically exchange the currencies being traded.

Depreciation – A decrease in the value of a currency relative to other currencies, typically due to market forces.

Derivative – A financial contract whose value is derived from the price movements of an underlying asset, such as a stock, bond, commodity, or currency. Options are a common type of derivative instrument.

Devaluation – The intentional reduction in the value of a currency by a government or central bank, usually through an official announcement.

E

Economic Indicator – An economic indicator is a piece of data or statistic released by the government that provides information about the current state of the economy. These indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, and more. They are used by economists, analysts, and investors to gauge the health and stability of an economy.

End Of Day Order (EOD) – An End Of Day (EOD) order is a type of order placed by a trader to buy or sell a security at a specified price. This order remains open until the end of the trading day, typically 5PM ET. If the specified price is not met by the end of the day, the order is canceled.

EURO – The EURO is the currency of the European Monetary Union (EMU). It is the official currency used by the member countries of the Eurozone, which includes 19 out of the 27 European Union (EU) member states. The EURO replaced the European Currency Unit (ECU) and was introduced in 1999 as an electronic currency for banking transactions. Euro banknotes and coins were introduced in 2002.

European Central Bank (ECB) – The European Central Bank (ECB) is the central bank for the Eurozone, which consists of 19 European Union (EU) member states that have adopted the EURO as their currency. The ECB is responsible for formulating and implementing monetary policy, maintaining price stability, and supervising the banking system within the Eurozone.

European Monetary Union (EMU) – The European Monetary Union (EMU) is an economic and monetary union established by the European Union (EU). Its primary goal is to create a single currency, the EURO, and a unified monetary policy for the participating member countries. The EMU aims to promote economic integration and stability among its member states by coordinating their monetary policies and eliminating currency exchange rate fluctuations.

F

Federal Deposit Insurance Corporation (FDIC) – The Federal Deposit Insurance Corporation (FDIC) is a regulatory agency in the United States that provides deposit insurance to depositors in US banks. The FDIC was created to promote public confidence in the banking system and protect depositors against losses in case of bank failures. It insures deposits up to a certain limit per depositor per insured bank.

Federal Reserve (Fed) – The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. It is responsible for conducting monetary policy, regulating and supervising banks, and maintaining the stability and integrity of the US financial system. The Federal Reserve's main objectives are to promote maximum employment, stable prices, and moderate long-term interest rates.

Flat/square – In trading, the term "flat" or "square" is used to describe a position that has been completely closed or offset. For example, if a trader buys $500,000 worth of a currency and then sells the same amount, the trader's position is considered flat or square because there is no longer any exposure to that currency.

Foreign Exchange (Forex, FX) – Foreign Exchange, commonly referred to as Forex or FX, is the decentralized global market where currencies are traded. It involves the simultaneous buying of one currency and selling of another.

Forward – In the context of foreign exchange trading, a forward contract is an agreement between two parties to exchange a specified amount of one currency for another currency at a predetermined exchange rate on a future date. The forward rate is determined by the interest rate differential between the two currencies involved. Forward contracts are commonly used by businesses and investors to hedge against currency exchange rate fluctuations.

Forward points – Forward points are the pips added to or subtracted from the current spot exchange rate to calculate the forward exchange rate. They represent the interest rate differential between the two currencies involved in a forward contract. Forward points are used to adjust the exchange rate to account for the time value of money in the forward contract.

Fundamental analysis – Fundamental analysis is a method of analyzing financial markets by examining economic and political factors that may affect the supply and demand of securities, currencies, or commodities. It involves studying economic indicators, company financial statements, government policies, and other factors to determine the intrinsic value of an asset and make predictions about its future price movements.

Futures Contract – A futures contract is a standardized agreement to buy or sell a specific asset (such as commodities, currencies, or financial instruments) at a predetermined price and date in the future. Unlike forward contracts, futures contracts are traded on exchanges and have standardized terms and conditions. They are used for hedging, speculation, and arbitrage purposes by market participants.

G

Good ‘Til Cancelled Order (GTC) – A Good 'Til Cancelled (GTC) order is an order to buy or sell a security at a specified price that remains open until it is filled or canceled by the client. GTC orders are valid until the client manually cancels them or until they are executed. They are commonly used by investors who want to enter or exit a position at a specific price but are not concerned about the timing of the execution.

H

Hedge – A risk management strategy that involves taking positions or combinations of positions to offset potential losses in another position. By hedging, traders aim to reduce their overall risk exposure.

I

Inflation – Inflation erodes the purchasing power of money, as it requires more currency to buy the same amount of goods or services.

Initial margin – The initial deposit of collateral that traders are required to make when entering into a position. This deposit serves as a guarantee for future performance and helps protect against potential losses.

Interbank rates – The foreign exchange rates at which large international banks quote each other. These rates are used as a benchmark for pricing various financial instruments and are crucial for global currency trading.

L

Leading Indicators – Economic statistics or data that are used to forecast or predict future economic activity. Leading indicators are often used by analysts and policymakers to gauge the direction and strength of an economy.

LIBOR – The London Inter-Bank Offered Rate, which is the average interest rate at which major London banks borrow from each other. LIBOR serves as a benchmark for short-term interest rates globally and is widely used in financial transactions.

Limit order – An order placed with restrictions on the maximum price to be paid or the minimum price to be received. For example, a limit order to buy USD at a price below the current market rate would only execute if the price falls to the specified level./p>

Liquidation – The process of closing out an existing position by executing an offsetting transaction. Liquidation can refer to selling a long position or buying back a short position.

Liquidity – The degree to which a market or asset can be bought or sold without significantly impacting its price stability. High liquidity means there are enough buyers and sellers to facilitate smooth transactions with minimal price impact.

Long position – A position in which an investor or trader owns an asset with the expectation that its value will increase over time. A long position allows the holder to profit from rising market prices.

M

Margin – The amount of equity or collateral that traders must deposit to enter into or maintain a position. Margin requirements help ensure that traders have sufficient funds to cover potential losses and protect against default.

Margin call – A demand from a broker or exchange for additional funds to be deposited into a trading account to meet margin requirements. A margin call is typically triggered when the account's equity falls below a certain threshold.

Marked-to-Market – The process of valuing open positions based on current market prices. Marking-to-market allows traders to see the unrealized gains or losses on their positions and helps determine margin requirements.

Market Maker – A financial institution or individual that provides liquidity to a market by quoting both bid and ask prices for financial instruments. Market makers are ready to buy or sell at any time and help ensure smooth trading.

Market Risk – The risk of losses resulting from changes in market prices. Market risk affects the value of financial instruments and can arise from various factors such as economic conditions, geopolitical events, or market volatility.

Maturity – The date at which a financial instrument or contract expires or becomes due for settlement. Maturity is an important factor to consider when trading or investing, as it determines the duration of the position.

O

Offer – The rate at which a dealer or market participant is willing to sell a currency or financial instrument. The offer price is also known as the ask price and is typically higher than the bid price.

Offsetting transaction – A trade that serves to cancel or offset some or all of the market risk of an open position. By entering into an offsetting transaction, traders can reduce their exposure to price fluctuations and potentially lock in profits or limit losses.

One Cancels the Other Order (OCO) – A type of order that consists of two parts, where the execution of one part automatically cancels the other. For example, if a trader places an OCO order to buy at a certain price and sell at a certain price, when one of the orders is executed, the other order is immediately canceled.

Open order – An order that remains active until it is either executed or canceled. Open orders are often associated with "Good 'til Cancelled Orders" and are used when traders want to enter a position at a specific price that is not currently available in the market.

Open position – A trading position that has been entered into but has not yet been closed out through an offsetting transaction. Open positions represent the exposure to market risk and can be either long (buy) or short (sell).

Overnight – A trade or position that remains open from one business day to the next. Overnight positions are subject to overnight financing charges or interest rates, depending on the terms of the trading account or the financial instrument being traded.

Over the Counter (OTC) – A term used to describe any transaction or trade that is conducted directly between two parties, without the involvement of an exchange. OTC transactions are typically negotiated privately and can include various financial instruments such as currencies, derivatives, and bonds.

P

Pips – Pips are the smallest incremental movements in the exchange rate of a currency pair, typically the fourth decimal place. They are also known as points in some contexts.

Political Risk – Political risk refers to the potential impact of political changes or policies on an investor's market position. This includes factors such as changes in government regulations, trade policies, or political instability that can affect the value of investments.

Position – In trading, a position refers to the net total holdings of a particular currency that an investor or trader has. It represents the amount of currency a trader owns or owes.

Premium – In the currency markets, premium refers to the amount by which the forward or futures price exceeds the spot price. It represents the cost of holding a position in the future and is influenced by factors like interest rates and time to maturity.

Price Transparency – Price transparency refers to a market environment where all participants have equal access to the same quotes and pricing information. It ensures fairness and equal opportunities for all market participants.

Q

Quote – A quote in the financial markets refers to an indicative market price of a financial instrument, such as a currency pair. Quotes are used for informational purposes and may not necessarily represent the actual transaction price.

R

Rate – Rate refers to the price of one currency in terms of another currency. It is commonly used in foreign exchange trading to determine the exchange rate between two currencies for dealing purposes.

Resistance – Resistance is a term used in technical analysis to describe a specific price level at which the analysis suggests that people will sell a particular financial instrument. It is considered a price level where selling pressure may outweigh buying pressure.

Revaluation – Revaluation refers to an increase in the exchange rate of a currency as a result of central bank intervention. It is the opposite of devaluation, which refers to a decrease in the exchange rate.

Risk – Risk in trading and finance refers to exposure to uncertain changes that can result in adverse outcomes.

S

Settlement – The process by which a trade is entered into the books and records of the counterparts to a transaction. It involves the finalization and confirmation of the trade details, including the exchange of funds and assets between the parties involved.

Short Position – An investment position that benefits from a decline in the market price of a security or financial instrument. Traders take short positions to profit from a market downturn.

Spot Price – The current market price at which an asset or security can be bought or sold for immediate delivery. In the foreign exchange market, spot transactions are settled within two business days.

Spread – The difference between the bid (selling) and offer (buying) prices of a financial instrument. It represents the transaction cost or the profit margin for the market maker.

Sterling – Slang for the British Pound, the currency of the United Kingdom.

Stop Loss Order – An order placed by an investor to automatically sell a security when its price reaches a specified level. It is used to limit potential losses in case the market moves against the investor's position.

Support Levels – Price levels in technical analysis that act as a floor for an asset's price. They indicate a level at which buying pressure is expected to outweigh selling pressure, causing the price to reverse.

Swap – A financial derivative contract in which two parties agree to exchange cash flows based on predetermined terms. In a currency swap, the parties exchange the principal and interest payments of two different currencies.

T

Technical Analysis – A method of analyzing financial markets that relies on historical price data, volume, and other market statistics to forecast future price movements.

Tomorrow Next (Tom/Next) – A type of currency trading transaction where a position is simultaneously closed and reopened for the next business day. It allows investors to avoid physical delivery of the currency and roll over their positions to the next trading day.

Transaction Cost – The cost incurred when buying or selling a financial instrument, including commissions, fees, and spreads. Transaction costs can have a significant impact on an investor's overall return.

Transaction Date – The date on which a financial transaction takes place. It is the date when both parties agree to enter into the transaction and is used to determine the value date and settlement date.

Turnover – The total value of all executed transactions in a given time period. In the foreign exchange market, turnover refers to the total value of currency trades during a specific period, often measured in trillions of dollars.

Two-Way Price – A quote provided by a market maker that includes both the bid (selling) and offer (buying) prices for a financial instrument. It represents the prices at which the market maker is willing to buy or sell the instrument.

U

Uptick – A price quote that is higher than the preceding quote. It indicates an upward movement in the price of a security or financial instrument.

Uptick Rule – A regulation in the U.S. that restricts short selling by allowing it only after an uptick or a price increase. The rule is intended to prevent market manipulation and excessive downward pressure on stock prices.

US Prime Rate – U.S. banks lend to their most creditworthy corporate customers. It serves as a benchmark for various loans and financial products.

V

Value Date – The date on which the parties involved in a financial transaction agree to settle their obligations. In spot currency transactions, the value date is typically two business days after the transaction date.

Variation Margin – Additional funds that a broker may require from a client to cover potential losses due to unfavorable price movements. It is a form of margin that helps ensure the client has sufficient funds to maintain their positions.

Volatility (Vol) – A statistical measure of the price fluctuations or variability of a financial instrument over time. High volatility indicates large price swings, while low volatility suggests relatively stable prices. Volatility is an important factor in risk assessment and option pricing.

W

Whipsaw – In the context of financial trading, "whipsaw" refers to a condition in which a highly volatile market experiences a rapid and sharp price movement followed by an equally sharp reversal [2]. This term is often used by traders to describe a market that exhibits unpredictable and erratic price fluctuations, making it challenging for investors to make accurate predictions. It symbolizes the back-and-forth nature of the market, similar to the motion of a handsaw used to cut a log.

Y

Yard – In financial slang, "yard" is a term used to represent a billion. It is derived from the word "milliard," which is used in some European countries to denote one billion. The term "yard" originated in the United States and is primarily used in the finance industry to express large sums of money, especially in the context of trading, investment, and finance.

A | B | C | D | E | F | G | H | I | L | M | O | P | Q | R | S | T | U | V | W | Y

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Risk Warning : Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. There is a possibility that you may sustain a loss of some or all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.