How to Manage a Risk

How to Manage a Risk

Risk Warning

Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. However, before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.

There is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency. Moreover, the leveraged nature of FX trading means that any market movement will have an effect on your deposited funds proportionally equal to the leverage factor. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'limit' orders.

There are also risks associated with utilizing an internet-based deal execution software application including, but not limited, to the failure of hardware and software and communications difficulties.

Risk Management

The Forex Market is the largest and most liquid financial market in the world. Since macroeconomic forces are one of the main drivers of the value of currencies in the global economy, currencies tend to have the most identifiable trend patterns. Therefore, the Forex market is a very attractive market for active traders, and presumably where they should be the most successful. However, success has been limited mainly for the following reasons:

Many traders come with false expectations of the profit potential, and lack the discipline required for trading. Short term trading is not an amateur's game and is not the way most people will achieve quick riches. Simply because Forex trading may seem exotic or less familiar then traditional markets (i.e. equities, futures, etc.), it does not mean that the rules of finance and simple logic are suspended. One cannot hope to make extraordinary gains without taking extraordinary risks, and that means suffering inconsistent trading performance that often leads to large losses. Trading currencies is not easy, and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process.

The most enticing aspect of trading Forex is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot ($10,000) of currency only requires $100 as a minimum margin deposit, it does not mean that a trader with $1,000 in his account should be easily able to trade 10 lots. One lot is $10,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves (get in with a position that is too big for their portfolio), and as a consequence, often end up forced to exit a position at the wrong time.

For example, if your account value is $10,000 and you place a trade for 1 lot, you are in effect, leveraging yourself 10 to 1, which is a very significant level of leverage. Most professional money managers will leverage no more then 3 or 4 times. Trading in small increments with protective stops on your positions will allow one the opportunity to be successful in Forex trading.

Utilizing Stop Loss Order

A stop-loss is an order linked to a specific position for the purpose of closing that position and preventing the position from accruing additional losses. A stop-loss order placed on a Buy (or Long) position is a stop-loss order to Sell and close that position. A stop-loss order placed on a Sell (or Short) position is a stop-loss order to Buy and close that position. A stop-loss order remains in effect until the position is liquidated or the client cancels the stop-loss order. As an example, if an investor is Long (Buy) USD at 120.27, they might wish to put in a stop-loss order to Sell at 119.49, which would limit the loss on the position to the difference between the two rates (120.27-119.49) should the dollar depreciate below 119.49. A stop-loss would not be executed and the position would remain open until the market trades at the stop-loss level. Stop-loss orders are an essential tool for controlling your risk in currency trading.

Fast Market Policy

The spot foreign exchange market, at times, exhibits extreme price volatility, a condition known as a "fast market". Fast market conditions may be caused by various factors including, but not limited to, news releases such as non-farm payroll numbers, order imbalances-significantly greater orders of one type (e.g., "buys") than another type (e.g., "sells").

During the extreme price volatility in fast markets, currency pair prices will "gap" and spreads widen. A price gap occurs when the price of a currency pair either jumps or plummets from its last bid/offer quote to a new quote, without ever trading at prices in between those quotes. As an example, the Euro/US Dollar currency pair may move from a bid/offer of 1.1891 – 1.1894 and begin trading at 1.1941 – 1.1944, without ever trading at the prices between those quotes.

The standard industry practice for currency dealers, including dealers on the interbank market, during fast market conditions and price gaps, is to set market levels and execute orders manually without the use of automated systems or services. The process during fast markets is typically:

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Initially, major money center banks and other online price providers halt all direct dealing and their pricing engines are suspended,
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Currency dealers analyze event and determine the correct price,
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Prices enter market 20-30 pips wide or more,
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Spreads in market narrow as more currency dealers enter the market.

In such an event, there may be a delay in trade execution, which may be significant, while rates are cross-referenced to ensure valid execution. Further, stops placed close to a market that has traded through the stop price are re-priced on the next best tradable price. Thereby, a specified rate order does not provide a fixed-price guarantee to the counterparty.

Gain Scope, like all currency dealers, is a "request for quote" dealer, and follows industry standards for fast market conditions. Gain Scope' clients that elect to trade during fast market conditions are responsible for losses incurred by their account because of such trading, as clients are responsible during normal trading conditions. These responsibilities are the same responsibilities that Gain Scope has with its interbank counterparties during normal and fast market conditions. Gain Scope will not be held liable for any losses due to fast or volatile markets, electronic disruption in service, service delays, incorrect information received from service vendors (i.e., quotations, news services) and/or customers (i.e., client profile data, updated data).

Forex Quotes - Something to Understanding

Forex Quotes - Something to Understanding


Reading a foreign exchange quote is simple if you remember two things:

1. The first currency listed is the base currency
2. The value of the base currency is always 1.

As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.

Majors not based on the US dollar

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.

In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.

Cross currencies

Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same.

Bids, asks and the spread

Just like other markets, forex quotes consist of two sides, the bid and the ask:

The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.

What's a pip?

Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.

For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.

Forex vs Equities and Futures

The Forex market is a continuous 24-hour endeavor form its open at 2pm Sunday afternoon New York time with the Sydney-Auckland market until its close at 5pm Friday in New York. FX trading follows the day around the world: Tokyo's open at 9pm follows Sydney, London begins at 2am and finally New York takes over at 8am. The seamless 24 hour nature of the FX market gives the trader the unique experience of reacting to news and worldwide developments instantaneously, participating in real time in the largest trading market in the world.

Unlike the equity market, there is no restriction on short selling. Profit potential exists in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means a trader has an equal potential to profit in a rising, or falling market.

The large Forex dealers usually do not charge commission or transaction fees to trade spot currencies exchange online or over the phone. In the equity market traders must pay a spread and a commission. The over-the counter structure of the forex market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers round-the-clock liquidity, traders receive tight, competitive spreads both intra-day and night. Equity traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after hours trading.

Forex allows greater leverage than the equities, futures or options market. Forex traders can choose up to 1:500 leverage. Leverage is a double-edged sword. Without proper risk management this high degree of leverage can lead to large losses as well as gains.

The spot Forex market is a $2.0 trillion daily market, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the $30 billion per day futures market it becomes clear that the futures markets provide only limited liquidity. The market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.

More Reasons to Like Forex

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market

How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. The stock market is very susceptible to large fund buying and selling, and it's not uncommon for a fund to run a particular issue for a few days. In spot currency trading, the liquidity of the Forex market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, governments, retail currency conversion houses and large net-worth individuals are just some of the participates in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the forex market.

8,000 stocks versus 4 major currency pairs

There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, you have 4 major markets, 24 hours a day 5.5 days a week. Concentrate on the majors and find your trade.

Forex Trading History

Forex Trading History

The Bretton Woods Agreement

In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, he had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.

The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.

But the gold exchange standard didn't lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result, money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, which would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.

After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as set up in Bretton Woods.

The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand which acted in the foreign exchange market. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.

In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.

The Euromarket

A major catalyst to the acceleration of foreign exchange trading was the rapid development of the euro-dollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia's oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.

London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.

How an FX Trade Works

How an FX Trade Works?

In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.

Quoting Conventions

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.

EUR/USD

In this example euro is the base currency and thus the "basis" for the buy/sell.

If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.

USD/JPY

In this example the US dollar is the base currency and thus the "basis" for the buy/sell.

If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

GBP/USD

In this example the GBP is the base currency and thus the "basis" for the buy/sell.

If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.

USD/CHF

In this example the USD is the base currency and thus the "basis" for the buy/sell.

If you think the US dollar is undervalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.

Buying/Selling

First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: Long = Buy = Ask.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = Sell = Bid.

Bid/Ask Spread

All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you the trader will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you the trader will buy.
The difference between the bid and the ask price is popularly know as the Spread.

Learn for Forex Basic

Forex Basic

Foreign Exchange
Foreign exchange (Forex or FX) is the largest financial market in the world with a daily turnover of over $2.0 trillion.

What is traded on the Foreign Exchange ?

The answer is money. Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are traded in pairs; for example the Euro dollar and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).

This kind of trading is often very confusing to people because they are not buying anything physical. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the country's economy.

Unlike other financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates 24 hours a day through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants. Our dealing desk is open 24-hours a day from Sunday 17:00 EST to Friday 17:00 EST.

Foreign Exchange Prices

Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.

Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the one exception is the USD/JPY quote in which each pip is equal to 0.01.

Forex Trading Glossary

Forex Trading Glossary. This is an free forex glossary to you:

A

Accrual - The portion of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of the deal.

Adjustment - Official action by change in internal economic policies to correct a payment imbalance or in the official currency rate or action by change in the internal economic policies to correct a payment imbalance or in the official currency rate.

Appreciation - Currency appreciates when in response to market demand it strengthens.

Arbitrage - The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.

Ask (Offer) Price - The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs.

At Best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better - An order to deal at a specific rate or better.

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 little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

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 rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, 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.

Bear Market - A market distinguished by declining prices.

Bid Price - The bid is the price at which the market is prepared to buy a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs.

Bid/Ask Spread - The difference between the bid and offer price.

Big Figure - The first two or three digits of a foreign exchange price or rate. Examples: If the USD/JPY bid/ask is 115.27/32, the big figure is 115. On a EUR/USD price of 1.2855/58 the big figure is 1.28. The big figure is often omitted in dealer quotes. The EUR/USD price of 1.2855/58 would be verbally quoted as “55/58″.

Book - In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions.

Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers 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.

Bretton Woods Agreement of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies.

British Retail Consortium (BRC) Shop Price Index – Measures the rate of inflation at various surveyed retailers. This index only looks at price changes in goods purchased in retail outlets.

Bull Market - A market distinguished by rising prices.

Bundesbank - Germany’s Central Bank.

C

Cable - Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s.

Canadian Ivey Purchasing Managers (CIPM) Index – A monthly gauge of Canadian business sentiment issued by the Richard Ivey Business School.

Candlestick Chart - A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

Carry Trade – Refers to the simultaneous selling of a currency with a low interest rate, while purchasing currencies with higher interest rates. Examples are the JPY crosses such as GBP/JPY and NZD/JPY.

Cash Market - The market in the actual financial instrument on which a futures or options contract is based.

Central Bank - A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank.

Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.

Cleared Funds - Funds that are freely available, sent in to settle a trade.

Closed Position - Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will ’square’ the postion.

Clearing - The process of settling a trade.

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the ‘Asian Contagion’.

Collateral - Something given to secure a loan or as a guarantee of performance.

Commission - A transaction fee charged by a broker.

Confirmation - A document exchanged by counterparts to a transaction that states the terms of said transaction.

Construction Spending – Measures the amount of spending towards new construction, released monthly by the U.S. Department of Commerce’s Census Bureau.

Contract - The standard unit of trading.

Counter Currency - The second listed Currency in a Currency Pair.

Counterparty - One of the participants in a financial transaction.

Country Risk - Risk associated with a cross-border transaction, including but not limited to legal and political conditions.

Cross Currency Pairs - A pair of currencies that does not include the U.S. dollar. For example: EUR/JPY or GBP/CHF.

Currency symbolsAUD - Australian DollarCAD - Canadian DollarEUR - EuroJPY - Japanese YenGBP - British PoundCHF - Swiss Franc

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

Currency Risk - the probability of an adverse change in exchange rates.

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). The balance of trade is typically is the key component to the current account.

D

Day Trader - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Dealer - An individual or firm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

Deficit - A negative balance of trade or payments.

Delivery - An FX trade where both sides make and take actual delivery of the currencies traded.

Department of Communities and Local Government (DCLG) UK House Prices – A monthly survey produced by the DCLG that uses a very large sample of all completed house sales to measure the price trends in the UK real estate market.

Depreciation - A fall in the value of a currency due to market forces.

Derivative - A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.

Devaluation - The deliberate downward adjustment of a currency’s price, normally by official announcement.

Discount Rate – Interest rate that an eligible depository institution is charged to borrow short-term funds directly from the Federal Reserve Bank.

E

Economic Indicator - A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

End Of Day Order (EOD) - An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET.

European Monetary Union (EMU) - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. On Janaury1, 1999 the transitional phase to introduce the Euro began. The Euro now exists as a banking currency and paper financial transactions and foreign exchange are made in Euros. This transition period will last for three years, at which time Euro notes an coins will enter circulation. On July 1,2002, only Euros will be legal tender for EMU participants, the national currencies of the member countries will cease to exist. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

EURO - the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU).

European Central Bank (ECB) - the Central Bank for the new European Monetary Union.

Eurozone Organization for Economic Co-operation and Development (OECD) Leading Indicator – A monthly index produced by the OECD. It measures overall economic health by combining ten leading indicators including: average weekly hours, new orders, consumer expectations, housing permits, stock prices, and interest rate spreads.

Eurozone Labor Cost Index – Measures the annualized rate of inflation in the compensation and benefits paid to civilian workers and is seen as a primary driver of overall inflation.

F

Factory Orders – The dollar level of new orders for both durable and nondurable goods. This report is more in depth than the durable goods report which is released earlier in the month.

Federal Reserve (Fed) - The Central Bank for the United States.

First In First Out (FIFO) - Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.

Flat/square - Dealer jargon used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position.

Foreign Exchange - (Forex, FX) - the simultaneous buying of one currency and selling of another.

Forward - The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

Forward Points - The pips added to or subtracted from the current exchange rate to calculate a forward price.

French Central Government Balance – The difference between the central government’s monthly income and spending.

Fundamental Analysis - Analysis of economic and political information with the objective of determining future movements in a financial market.

Futures Contract - An obligation to exchange a good or instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange- Traded Contacts - ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

FX - Foreign Exchange.

G

G7 - The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

Going Long - The purchase of a stock, commodity, or currency for investment or speculation.

Going Short - The selling of a currency or instrument not owned by the seller.

Gross Domestic Product - Total value of a country’s output, income or expenditure produced within the country’s physical borders.

Gross National Product - Gross domestic product plus income earned from investment or work abroad.

Good ‘Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.

H

Hedge - A position or combination of positions that reduces the risk of your primary position.

“Hit the bid” - Acceptance of purchasing at the offer or selling at the bid.

I

Industrial Production – Measures the total value of output produced by manufacturers, mines and utilities. This data tends to react quickly to the expansions and contractions of the business cycle and can act as a leading indicator of employment and personal income.

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

Initial Margin - The initial deposit of collateral required to enter into a position as a guarantee on future performance.

Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks.

Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Introducing Broker - A person or corporate entity which introduces accounts to FOREX.com for a fee.

ISM Manufacturing Index – An index that assesses the state of US manufacturing sector by surveying executives on expectations for future production, new orders, inventories, employment and deliveries. Values over 50 generally indicate an expansion, while values below 50 indicate contraction.

ISM Non-Manufacturing – An index that survey service sector firms for their outlook, representing the other 80% of the U.S. economy not covered by ISM MANUFACTURING REPORT. Values over 50 generally indicate an expansion, while values below 50 indicate contraction.

J

Japanese Economy Watchers Survey – Measures the mood of businesses that directly service consumers such waiters, drivers, and beauticians. Readings above 50 generally signal improvements in sentiment.

Japanese Machine Tool Orders – Measures the total value of new orders placed with machine tool manufactures. Machine tool orders are a measure of the demand for machines that make machines, a leading indicator of future industrial production. Strong data generally signals that manufacturing is improving and that the economy is in an expansion phase

K

Kiwi - Slang for the New Zealand dollar.

L

Leading Indicators - Statistics that are considered to predict future economic activity.

Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.

LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below 102. (ie 116.50)

Liquidation - The closing of an existing position through the execution of an offsetting transaction.

Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability.

Long position - A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.

Lot - A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.

M

Manufacturing Production – Measures the total output of the manufacturing aspect of the Industrial Production figures. This data only measure the 13 sub sectors that relate directly to manufacturing. Manufacturing makes up approximately 80% of total Industrial Production.

Margin - The required equity that an investor must deposit to collateralize a position.

Margin Call - A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer.

Market Maker - A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.

Market Risk - Exposure to changes in market prices.

Mark-to-Market - Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.

Maturity - The date for settlement or expiry of a financial instrument.

N

Net Position - The amount of currency bought or sold which have not yet been offset by opposite transactions.

O

Offer (ask) - The rate at which a dealer is willing to sell a currency. See Ask (offer) price

Offsetting transaction - A trade with which serves to cancel or offset some or all of the market risk of an open position.

One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.

Open order - An order that will be executed when a market moves to its designated price. Normally associated with Good ’til Cancelled Orders.

Open position - An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

Overnight Position - A trade that remains open until the next business day.

Order - An instruction to execute a trade at a specified rate.

P

Personal Income – Measures an individuals’ total annual gross earnings from wages, business enterprises and various investments. Personal income is the key to personal spending, which accounts for 2/3 of GDP in the major economies.

Pips - The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.

Political Risk - Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

Position - The netted total holdings of a given currency.

Premium - In the currency markets, describes the amount by which the forward or futures price exceed the spot price.

Price Transparency - Describes quotes to which every market participant has equal access.

Profit /Loss or “P/L” or Gain/Loss - The actual “realized” gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical “unrealized” gain or loss on Open Positions that have been Mark-to-Market.

Purchasing Managers Index Services (France, Germany, Eurozone, UK) – Measures an outlook of purchasing managers in the service sector. Such managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries, and inventories. Readings above 50 generally indicate expansion, while reading below 50 suggest economic contraction.

Q

Quote - An indicative market price, normally used for information purposes only.

R

Rally - A recovery in price after a period of decline.

Range - The difference between the highest and lowest price of a future recorded during a given trading session.

Rate - The price of one currency in terms of another, typically used for dealing purposes.

Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

Retail Sales – Measures the monthly retail sales of all goods and services sold by retailers based on a sampling of variety of different types and sizes. This data gives a look into consumer spending behavior, which is a key determinant of growth in all major economies.

Revaluation - An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.

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.

Roll Over - A rollover is the simultaneous closing of an open position for today’s value date and the opening of the same position for the next day’s value date at a price reflecting the interest rate differential between the two currencies.

The spot forex market is traded on a two-day value date. For example, for trades executed on Monday, the value date is Wednesday. However, if a position is opened on Monday and held overnight (remains open after 1700 ET), the value date is now Thursday. The exception is a position opened and held overnight on Wednesday. The normal value date would be Saturday; because banks are closed on Saturday the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that falls on a holiday will also incur or earn additional interest.

Round trip - Buying and selling of a specified amount of currency.

S

Settlement - The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

Short Position - An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Simple Moving Average (SMA) – A simple average of a pre – defined amount of price bars. For example, a 50 period Daily chart SMA is the average closing price of the previous 50 daily closing bars. Any time interval can be applied here.

Spot Price - The current market price. Settlement of spot transactions usually occurs within two business days.

Spread - The difference between the bid and offer prices.

Square - Purchase and sales are in balance and thus the dealer has no open position.

Sterling - slang for British Pound.

Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49. Refer to Trading Handbook for FOREX.com’s Stop Loss Policy.

Support Levels - A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.

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

Swissy - Market slang for Swiss Franc.

T

Technical Analysis - An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc.

Tick - A minimum change in price, up or down.

Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.

Trade Balance – Measures the difference in value between imported and exported goods and services. Nations with trade surpluses (exports greater than imports), such as Japan, tend to see their currencies appreciate, while countries with trade deficits (imports greater than exports), such as the US, tend to see their currencies weaken.

Transaction Cost - the cost of buying or selling a financial instrument.

Transaction Date - The date on which a trade occurs.

Turnover - The total money value of all executed transactions in a given time period; volume.

Two Way Price - When both a bid and offer rate is quoted for a FX transaction.

U

UK Producers Price Index Input – Measures the rate of inflation experienced by manufacturers when purchasing materials and services. This data is closely scrutinized since it can be a leading indicator of consumer inflation.

UK Producers Price Index Output – Measures the rate of inflation experienced by manufacturers when selling goods and services.

UK Jobless Claims Change – Measures the change in the number of people claiming benefits over the previous month.

Unemployment Rate – Measures the total United States workforce that is unemployed and actively seeking employment, measured as the percentage of the labor force.

University of Michigan’s Consumer Sentiment Index – Polls 500 US households each month. The report is issued in a preliminary version mid – month and a final version at the end of the month. Questions revolve around individuals attitudes about the US economy. Consumer sentiment is viewed as a proxy for the strength of consumer spending.

Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains’ Losses become Profits/Losses when position is closed.

Uptick - a new price quote at a price higher than the preceding quote.

Uptick Rule - In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.

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. Term refers to additional funds that must be deposited as a result of unfavorable price movements.

The VIX or Volatility Index – The market’s expectation of 30 day volatility. Constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX is a measure of market risk and is often referred to as investor fear gauge.

Volatility - A measure of a market’s price movements over time.

W

Wedge Chart Pattern – Chart where price highs in an ascending wedge are incrementally less, or in a descending wedge, price declines are incrementally smaller. Ascending wedges typically conclude with a downside breakout, and descending wedges typically terminate with upside breakouts.

Whipsaw - slang for a highly volatile market where a sharp price movement is followed by a sharp reversal.

Wholesale Prices – Measures the change in prices paid by retailers for finished goods. Inflation will show up here earlier than in the retail headlines.

Y

Yard - Slang meaning a billion.