Trading Terms Glossary

Learn about the most important trading terminology

Trading glossary of terms

Discover the most important trading terminology you need to know

Glossary

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

 

 

A

Algorithmic Trading

The use of computer algorithms and systems to trade on the market according to pre-set strategies that do not require direct human intervention.

Appreciation

An increase in the value of a currency. For example, if USD/JPY rises from 105.00 to 110.00, the USD has appreciated against the JPY.

Arbitrage

A strategy that involves taking advantage of the price discrepancy between two markets, typically by buying an instrument in one market at a lower price and simultaneously selling it in another market at a higher price. For example, suppose EUR/USD is trading at 1.2000 on one platform and 1.2005 on another. As an arbitrageur, you could buy on the first platform at a lower price and immediately sell on the other, making a profit of 0.0005.

Ascending Triangle

This is a bullish pattern characterised by a flat top and a rising bottom.

Ask Price

The price at which a seller is willing to sell a currency. In the above example, the ask price is 1.1103.

 

B

Bear Market

Conversely, a bear market refers to a condition where prices are falling or are expected to fall, usually by 20% or more from recent highs. In a bear market, investors often turn pessimistic about the state of the market, fearing further losses. These markets usually occur during economic recessions or downturns, when unemployment is rising, and inflation is potentially high.

Bid Price

The price a buyer is willing to pay for a currency. If the EUR/USD is quoted as 1.1100/1.1103, the bid price is 1.1100.

Bollinger Bands

A technical analysis tool defined by a set of lines plotted two standard deviations away from a simple moving average. The bands widen when volatility increases and narrow when volatility decreases.

Breakeven

This is the point at which, if the trade were closed at that moment, there would be a net $0 gain. No gains and also no losses.

Breakout

When the price of a currency moves above a resistance level or below a support level. For example, if USD/JPY moves above the 110.00 resistance level, that's a breakout.

Bull Market

This term refers to a market condition where prices are either already rising or are expected to rise. In a bull market, investors are optimistic and confident that good results will continue, which can become a self-fulfilling prophecy. Bull markets are often associated with strong economic performance and low unemployment.

Bump and Run

This pattern is identified by a formation that starts with the lead-in trendline slope being at an angle of about 30 degrees. Then the trendline angle increases to about 45 degrees as the market advances rapidly, forming the "bump". Then the trend suddenly reverses and accelerates downward, forming the "run".

Buy Limit

A pending order is used when a trader expects the price of a currency to fall before it rises. In this case, they set a Buy Limit order at a value below the current market price because they anticipate that the price will rebound and rise after reaching their predetermined level.

Buy Stop

A buy stop is a type of pending order that is used to buy a security only when the price reaches the specified stop price. It is used when a trader expects the price of a currency to rise past a certain point and then continue rising. The trader sets a buy-stop order at a level above the current market price, predicting that the upward trend will continue after that point.

 

C

Carry Trade

A strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return. For example, a trader might borrow in a low-interest-rate currency like the JPY to buy a high-interest-rate currency like the NZD.

Central Bank Intervention

Actions taken by a country's central bank to control the value of its currency. For example, if a central bank wants to weaken its currency to boost exports, it might sell its own currency in the forex market.

Commodity Pairs

Three forex pairs that are heavily correlated to commodities. These are USD/CAD, AUD/USD, and NZD/USD. If commodity prices go up, these pairs tend to rise; if commodity prices go down, these pairs tend to fall.

Consolidation

A period of indecision that ends when the price of the asset breaks through the existing support or resistance level. For example, if AUD/USD has been trading between 0.7500 and 0.7600 for a while, it's in consolidation.

Consumer Price Index (CPI)

A measure of inflation that evaluates the change in the cost of goods and services from the consumer's perspective. High CPI readings can lead to higher interest rates, which can strengthen a country's currency.

Continuation Patterns

These are technical chart patterns that signal that an existing trend is likely to continue.

Contract for Difference (CFD)

A contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller).

Correlation

A statistical measure that describes the association between random variables. In forex, correlation refers to the relationship between two currency pairs. If two pairs move in the same direction, they are said to have a positive correlation; if they move in opposite directions, the correlation is considered negative.

Cross Currency Pair (Cross Rate)

A currency pair that does not include the US dollar. Examples include EUR/GBP, GBP/JPY, and EUR/CHF.

Cup and Handle

This is a bullish chart pattern that is defined by a chart where a currency's price rises to a peak and subsequently declines, followed by a rise beyond the initial peak.

Currency Swap

A transaction in which two entities agree to exchange two fixed amounts of currency for a certain length of time and then reverse the exchange at a later date.

 

D

Day Trading

A style of trading in which positions are opened and closed within the same trading day. Day traders often use leverage and short-term trading strategies to capitalise on small price movements in highly liquid stocks or currencies. The targeted profit would be ideally 50-80 pips.

Depreciation

A decrease in the value of a currency. For example, if USD/JPY drops from 110.00 to 105.00, the USD has depreciated against the JPY.

Descending Triangle

This is a bearish pattern characterised by a flat bottom and a descending top.

Direct Quote

A foreign exchange rate is quoted as the domestic currency per unit of the foreign currency. For example, in the US, a direct quote for the Canadian dollar would be 0.75 USD/CAD.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio. For example, a trader might diversify their portfolio by trading multiple currency pairs instead of just one.

Double Bottom

This is a pattern observed when the price of a currency drops twice to the same level before rebounding.

Double Top

This pattern is formed after a sustained trend and signals that the currency is unlikely to climb any further.

Dovish

A policy stance that favours lower interest rates to stimulate economic growth. For example, if a central bank is talking about cutting interest rates or implementing quantitative easing, it's being dovish.

Drawdown

The decline in one’s trading account from a trade or a series of trades. It's important to manage drawdown with proper risk management.

 

E

Easing Cycle

A cycle in which a central bank lowers interest rates and increases the money supply to stimulate economic growth. An easing cycle is often positive for currency values due to the increased money supply.

Economic Calendar

A schedule of economic events that could impact currency prices. For example, central bank interest rate decisions, employment reports, and GDP data releases are all events on an economic calendar.

Economic Indicator

A statistic about economic activity. Economic indicators allow for analysis of economic performance and predictions of future performance. Examples include unemployment rates, the inflation rate, and GDP.

Elliott Wave

A form of technical analysis that forex traders use to analyse market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. The theory, developed by Ralph Nelson Elliott, proposes that markets move in a series of impulse and corrective waves.

Exchange Rate

The value of one currency for conversion to another. For example, if EUR/USD is trading at 1.1850, that's the exchange rate.

Exotic Currency Pair

A currency pair that includes a major currency and the currency of a developing economy. These pairs are less liquid, more volatile, and more susceptible to manipulation.

Expert Advisors (EAs)

These are software tools used in the MetaTrader trading platform that can automate trading strategies. They're often used in forex trading and are programmed to generate trading signals or to even automatically place trades according to pre-set rules.

Exponential Moving Average (EMA)

A type of moving average that places greater weight and significance on the most recent data points. Like all moving averages, this is used to help forecast future prices and help traders identify trends.

 

F

Fibonacci Expansion

Similar to Fibonacci projections, Fibonacci expansions are used to determine the end of a correction or a counter-trend bounce. Expansions are used in conjunction with price patterns and movements to identify where the price could go.

Fibonacci Extension

This refers to areas of support or resistance beyond the 100% Fibonacci retracement level. Extensions forecast potential areas where the price may hit, following a price swing and retracement.

Fibonacci Projection

A tool used in technical analysis to help predict potential price targets by measuring the distance from a peak to a trough and projecting this distance forward from a new peak or trough.

Fibonacci Retracement

A technical analysis tool used to identify potential support and resistance levels. For example, after GBP/USD makes a big move up, traders might use Fibonacci retracement to predict where it might pull back to.

Flag

This is a chart pattern used in technical analysis. It’s characterised by a sharp, straight price movement followed by a sideways or slightly downward drift.

Forward Contract

An agreement to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future or within a range of future dates.

Fundamental Analysis

Analysis based on economic indicators and political news. For example, a trader might look at GDP growth, inflation, and political stability to gauge a currency's strength.

 

G

Gaps

These are literally gaps left on the chart where no trading occurred. They are usually seen on the stock market after weekends and holidays, but they can also occur in the forex market after major news events.

Gross Domestic Product (GDP)

The total value of goods and services produced by a country. Higher GDP growth can strengthen a country's currency as it indicates a healthy economy.

 

H

Hawkish

A policy stance that favours higher interest rates to keep inflation in check. For example, if a central bank is talking about raising interest rates, it's being hawkish.

Head and Shoulders

This is a pattern that, when formed, signals the currency is likely to move against the previous trend.

Hedge

An investment to reduce the risk of adverse price movements in an asset. For example, if you have a long position in EUR/USD, you might hedge against potential losses by taking a short position in another pair that's highly correlated with EUR/USD, such as GBP/USD.

High-Frequency Trading (HFT)

A type of algorithmic trading characterised by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.

 

I

Ichimoku Cloud

This is a collection of technical indicators that show levels of support and resistance, the direction of the trend, and momentum. It is visually represented on a chart and includes five lines: Tenkan-sen, Kijun-sen, Senkou span A, Senkou span B, and Chikou span. The space between Senkou spans A and B forms the "cloud", which can give traders an idea of potential future support and resistance levels.

Indirect Quote

A foreign exchange rate quoted as the foreign currency per unit of the domestic currency. For example, in the US, an indirect quote for the Canadian dollar would be 1.33 CAD/USD.

Interest Rate Differential (IRD)

A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the foreign exchange market use IRDs when pricing forward exchange rates.

 

J

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K

KYC (Know Your Customer)

KYC (Know Your Customer) is a verification required to verify the identity of users.

 

L

Leverage

A tool that allows a trader to get much larger exposure to the market using a relatively small amount of capital. For example, with 1:10 leverage, you can control $10,000 with just $1,000.

Liquidity

The ability of a currency to be quickly converted into cash. Major currencies like EUR, USD, and JPY typically have high liquidity.

Long Position

If a trader goes 'long' on a currency pair, it means they are buying the base currency and simultaneously selling the quote currency. They are betting that the base currency will strengthen against the quote currency. If it does, they stand to make a profit. For example, if a trader believes that the USD will strengthen against the JPY, they will go long on the USD/JPY pair.

Loose Monetary Policy

Also known as easy monetary policy, it involves lowering interest rates and increasing the money supply in an economy, often to stimulate economic growth.

Lot

The number of currency units a trader will buy or sell in a forex trade. For example, one standard lot in forex is 100,000 units of the base currency.

 

M

Margin

The amount of money a trader needs to hold a position in the market. For example, with a 1% margin, you can trade $100,000 worth of currency with just $1,000.

Margin Call

A broker's demand for an investor to deposit additional money to cover potential losses. For example, if losses make your margin drop below the required level, your broker may make a margin call.

Moving Average (MA)

A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. For example, a 50-day moving average might be used to determine the overall trend direction.

Moving Average Convergence Divergence (MACD)

A trend-following momentum indicator that shows the relationship between two moving averages of a currency’s price. When the MACD crosses above the signal line, it gives a bullish (buy) signal, and when it crosses below, it gives a bearish (sell) signal.

 

N

Non-Farm Payrolls (NFP)

A key economic indicator that represents the total number of paid US workers, excluding farm employees, government employees, and employees of non-profit organisations. It can cause high volatility in the USD pairs.

 

O

Options Contract

A type of derivative that gives the holder the right, but not the obligation, to buy or sell a currency at a specific price on or before a certain date.

Order Flow

The flow of orders that influences the price changes in the market. Large buy or sell orders can significantly impact the price of a currency.

Overbought

A situation where an asset has been traded to a point where an unwarranted high price is realised. For example, if the RSI of GBP/USD is above 70, it's considered overbought, which might signal a potential reversal.

Oversold

Opposite of overbought; a situation where an asset has been traded to a point where an unwarranted low price is realised. For example, if the RSI of GBP/USD is below 30, it's considered oversold, which might signal a potential reversal.

 

P

Partial Profits

This refers to the practice of closing a portion of your trade to secure profit while letting the remaining part run to see if profits increase.

Pennant

This is a continuation pattern where a large movement in price is followed by a much smaller consolidation. The pennant looks like a small, symmetrical triangle that begins wide and converges as the pattern matures.

Pip

The smallest unit of price for any foreign currency, generally the fourth decimal place. If EUR/USD moves from 1.1850 to 1.1851, that's a one-pip move.

Pipette

One-tenth of a pip. Some brokers quote currency pairs beyond the standard "4 and 2" decimal places to "5 and 3" decimal places.

Pivot Point

A technical analysis indicator used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day.

Position Trading

A style of trading in which positions are held for a long period, typically weeks or months. For example, a position trader might buy USD/CAD, expecting it to increase over the next few months.

Price Action

The movement of a currency's price. Price action is often analysed in relation to changes in price patterns and trends.

Price Channel

A price channel is a chart pattern that displays the high, low, and middle lines of a security’s prices. Price channels can slope up (indicating bullish sentiment) or down (indicating bearish sentiment); they don’t have to simply go “sideways.”

 

Q

Quantitative Easing (QE)

A monetary policy where a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. This typically leads to currency depreciation.

Quote Currency

The second currency in a currency pair. For example, in the EUR/USD pair, the USD is the quote currency.

 

R

Range Trading

A trading strategy that identifies overbought and oversold conditions (ranges) and seeks to profit from the predictable movements within these ranges.

Relative Strength Index (RSI)

A momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions. Values of 70 or above indicate an asset may be overbought, while values of 30 or below indicate an asset may be oversold.

Resistance Level

A price level that a currency's price has difficulty rising above. For example, if USD/JPY has failed to rise above 110.00 several times, that's a resistance level.

Reversal

A change in the direction of a price trend. For example, if GBP/USD has been falling but then starts rising, that's a reversal.

Reversal Patterns

These are chart patterns that signal that a current trend may be about to change direction.

Risk Management

The process of identifying and mitigating trading risks. This might involve setting stop-loss orders to limit potential losses or diversifying investments to spread risk.

Risk-on/Risk-off

Risk-on is market sentiment where traders are willing to take on more risk, typically benefiting higher-yielding currencies. Risk-off is when traders are risk-averse, typically benefiting safe-haven currencies like the USD, JPY, and CHF.

Rollover Rate (Swap)

The interest that you earn or owe for holding a currency position overnight. Each currency has an overnight interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies but also two different interest rates.

ROI

ROI (Return on Investment) is a metric used to calculate the profitability of a trade or investment.

Rounding Bottom

This chart pattern is observed when a series of market movements cause the price of a currency to reach a bottom, slightly recover, and then fall to the bottom again.

Rounding Top

This is a chart pattern that can be observed in the event of a peak reversal following a strong upward trend.

 

S

Safe Haven

Assets or currencies that are considered relatively safe to invest in during times of economic turmoil or geopolitical tensions. USD, JPY, and CHF are considered safe-haven currencies.

Sell Limit

This is a pending order used when a trader expects the price of a currency to rise before it falls. The trader sets a Sell Limit order at a value above the current market price, predicting that the price will reverse and fall after reaching the predetermined level.

Sell Stop

This is a pending order that a trader uses when they expect the currency price to fall past a certain level and then continue falling. They set a sell-stop order at a value below the current market price, predicting that the downward trend will continue after reaching the predetermined level.

Short Position

A 'short' position is the opposite of a long position. When a trader goes 'short' on a currency pair, it means they are selling the base currency and simultaneously buying the quote currency. They are betting that the base currency will weaken against the quote currency. If it does, they can make a profit. For example, if a trader believes that the EUR will weaken against the USD, they will go short on the EUR/USD pair.

Slippage

When a trade is executed at a different price than expected. For example, if you place an order to buy EUR/USD at 1.1800 but it gets filled at 1.1802, that's slippage.

Spot Market

The market in which commodities or currencies are immediately delivered and paid for upon purchase. This is contrasted with the futures market, where such commodities are traded for future delivery.

Spread

The difference between the bid price and the ask price. In the above example, the spread is 0.0003.

Stochastic Oscillator

A momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The theory suggests that it's possible to predict a price reversal when the oscillator crosses above or below extreme values.

Stop-Loss Order

An order to sell a security once it reaches a certain price to limit loss. For example, if you bought EUR/USD at 1.1800, you might set a stop-loss at 1.1750 to protect against a major decline.

Supply and Demand

Basic economic principles where the price of an asset is dictated by the quantity of a product that producers want to sell (supply) and the amount that consumers are willing and able to buy (demand).

Support and Resistance

These are specific price levels or price areas on a trading chart that can signify the continuation or change of a trend.

Support Level

A price level where a currency's price has difficulty falling below. For example, if USD/JPY has bounced off 108.00 several times, that's a support level.

Swap

A rollover interest that is earned or paid for holding positions overnight. For example, if you hold a long position on a currency with a higher interest rate than the one, you're shorting, you'll earn a positive swap.

Swing Trading

A style of trading that attempts to capture gains in a market within a period of one day to a week. For example, a swing trader might try to profit from the ups and downs in the EUR/USD price over a period of several days. Targeted profit would be ideally 100 pips and above.

Symmetrical Triangle

This pattern is characterised by a set of trendlines converging together as time progresses.

 

T

Take-Profit Order

An order to sell a security once it reaches a certain price to lock in a profit. If you bought EUR/USD at 1.1800, you might set a take profit at 1.1900 to automatically close the trade if it reaches that level.

Technical Analysis

Analysis based on charts and statistical trends. For example, a trader might use support and resistance, moving averages and volume patterns to predict future price movements.

Tight Monetary Policy

A course of action undertaken by a central bank, such as raising interest rates to reduce the money supply to curb inflation.

Tightening Cycle

A cycle in which a central bank raises interest rates to curb inflation. A tightening cycle is often negative for currency values due to the decreased money supply.

Trading Platform

The software used to open, monitor, and close trades in the forex market. Examples include MetaTrader 4, MetaTrader 5, and cTrader.

Trend

The general direction in which the market is moving. For example, if GBP/USD has been increasing over the last few months, it's in an uptrend. Conversely, if GBP/USD has been decreasing over the last few months, it's in a downtrend.

Triple Bottom

This is a variation of the double bottom. It's a bullish reversal pattern.

Triple Top

This is a variation of the double top and is considered a reversal pattern.

 

U

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V

Volatility

The rate at which the price of an asset increases or decreases. High volatility means the price moves up and down quickly, which can be both risky and potentially profitable for traders.

Volatility Index (VIX)

A measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It's also known as the "fear gauge" because it tends to rise during periods of market turmoil.

 

W

Wedge

This is a price pattern marked by converging trend lines on a price chart. The two trend lines are drawn to connect the respective highs and lows of a price series over 10 to 50 periods.

 

X

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Y

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Z

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The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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