Forex trading or overall investing activity requires constant learning and practice. Sometimes, understanding forex and general trading terminologies can seem confusing and overwhelming, but you should not feel intimidated. It is important to understand all the relevant key terms, as this will only help you to become a better trader. It can help you to gain further knowledge from more professional sites as well as participate in interesting trader-centric forums.
Reading, learning, viewing and using forex terms continually will make you more comfortable with trading lingo over time. There are basic and advanced forex glossaries. Basic terminologies will help you get acquainted in the market, whereas more advanced terminologies can even help you to understand sophisticated strategies. To set you off, here are some of the basic terms you should understand:
This is anything that can be exchanged in the financial markets. Assets can be bought or sold.
- Bid/Ask Prices:
Bid is the price at which the broker or market buys an asset from the trader. It is the price at which the trader sells. Ask is the price at which the broker or market sells an asset to a trader or the price at which the trader buys.
This is the cost of opening a trade in the market. It is the difference between the bid and ask prices that the trader pays to the broker.
- Day Trading:
This is a strategy of opening and closing one or more trades within a single trading session or day.
- Swing Trading:
This is a strategy of holding open trades for a few days up to a few weeks with a view of taking advantage of big price swings in the market.
Below you can see the list of articles about the terms that require more than a couple of lines to explain. Read On!
What Is Correlation?
In the world of financial trading, asset correlation establishes how and when the prices of different financial instruments move in relation to each other. With regards to currencies and forex trading, correlation is the behaviour that certain currency pairs exhibit where they either move in one direction or in different directions, simultaneously.
What is a Currency Swap?
In finance, a currency swap, also known as cross-currency swap, is a legal contract between two parties to exchange two currencies at a later date, but at a predetermined exchange rate.
What is Carry Trade?
One of the most popular investments in the financial markets today is the carry trade. This involves selling or borrowing an asset with a low-interest rate, with the aim of using the proceeds to fund the purchase of another asset with a higher interest rate.
What is Arbitrage?
At its most basic, arbitrage can be defined as the concurrent purchase and sale of similar assets in different markets in order to take advantage of price differentials arising from local supply/demand divergences.
What is Volatility?
Financial market volatility is defined as the rate at which the price of an asset rises, or falls, given a particular set of returns. It is often measured by looking at the standard deviation of annual returns over a set period of time. It has significant impact on market sentiment.
What is Slippage?
In financial trading, slippage is a term that refers to the difference between a trade’s expected price and the actual price at which the trade is executed.
What is Liquidity?
The Liquidity definition refers to the extent to which a particular asset can be bought or sold quickly on the market without having a significant effect on its price. Liquidity is an important factor that investors assess when making their trading decisions since it has an effect on their trades.
What is a Market Cycle?
While asset prices may appear to move randomly up and down, technical analysis shows that there are distinct repetitive cycles that occur. These are predominantly driven by the market moves made by large institutional investors, and in order to trade successfully, individual traders should watch these market moves, or market cycles, closely.
What is Currency Peg?
Currency pegging is when a country attaches, or pegs, its exchange rate to another currency, or basket of currencies, or another measure of value, such as gold. Pegging is sometimes referred to as a fixed exchange rate.
What are Contango and Backwardation?
Contango refers to a situation where the futures price of an underlying commodity is higher than its current spot price. This is usually the case for non-perishable goods. Backwardation is when futures prices are lower than current spot prices. This is a common scenario for perishable goods. Learn how to use these situations in your trading here.
What Is Drawdown?
In financial trading, a drawdown refers to how much an account has fallen from its peak to its trough in terms of the capital or investment amount. Learn how the drawdown is calculated, how to use it for evaluating trading strategies, and how to apply it to your money management rules.
What Is a Stock Market Crash?
A stock market crash is a rapid and steep decline of stock prices that happens unexpectedly. While there is no defined numerical figure, a typical stock market crash will result in losses of over 10% within a couple of days, as measured by major stock indices, such as the S&P 500, NASDAQ, and the DJIA.
What is ATM?
The term “At the Money” (ATM) is used in describing options where the strike price of the option is equal to the price of the underlying asset. It is a concept of moneyness where the difference between the current price of an asset is compared with the market price of the underlying.
What are the "Greeks"?
The various Greek letters are used in the options market to describe parameters of risk when taking an options position. This has led to the term “Greeks” being frequently used in discussions of options trading.
What is Scalping?
The goal of scalping is to capture small profits by taking advantage of small price movements in the market. Scalpers open a large number of trades with the hope that the small profits captured will eventually add up to a large profit amount at the end of the trading session or trading day.
What are Block Trades?
A block order isn’t only used to sell securities, they can also be used when buying a security. This can help to support the price of a security, or even push it higher if the block trade is large enough compared with the typical trading volume of the specific security.
Gearing ratios are a great measure of tracking the financial risk exposure of a company. They help companies manage their debt levels, forecast future sources of risk, and make important corporate decisions. They also help investors and lenders to gauge the risks involved before engaging with any company.
What Is Intrinsic Value?
Valuing investments is something that’s done in a number of different ways. In real time you can look at the market price of an asset and know what investors will pay for that asset right now.
What is Strike Price?
Strike prices are primarily used in options trading, but there are other less used financial derivatives that also use strike prices. The value of options and other derivatives is based on (derived) the price of some underlying asset, usually another financial product.
What is ITM?
The term “In the Money” (ITM), when applied to options, refers to an option that has an intrinsic value. Thus the option has a value as the strike price is favourable when compared with the current market price of the underlying asset.
What is DTM?
When a value becomes quite large the option is then referred to as “Deep in the Money” (DTM). When an option is deep in the money its value is nearly completely intrinsic, with a minimal amount of time value. Another defining characteristic of an option which is deep in the money is that it has a delta which is at or close to 100.
What is OTM?
An “Out of the Money” (OTM) option is one that has no intrinsic value. That means if it is exercised by the holder, they would receive nothing. If it is a call option it is considered out of the money if the price of the underlying asset is below the strike price of the option.
Decentralised finance (DeFi) is considered as superior to traditional, centralized finance for several reasons. One is that there is no requirement to provide any form of ID, which opens it to the masses of people around the world who cannot provide ID documents. Another is that it is controlled by the users themselves, rather than by some massive faceless corporation.
What Are Dividends?
Dividends are a distribution of earnings or profits to shareholders. Dividends can be made in cash, stock or any other form, and they are typically scheduled at regular intervals (monthly, quarterly, or annually). Dividend investing is very popular and ideal for investors who wish to earn regular income without selling their stock holdings.
Meme stocks emerged in 2020 during the COVID-19-inspired recession, and rather than fade away, they have become a common occurrence. Meme stocks are as lucrative as they are risky. But are they worth your attention?
The Treynor ratio is an excellent measure for comparing the performance of a portfolio per unit of risk. However, investors should be aware of its limitations (especially its backwards-looking nature) when utilizing it as a performance metric. The ratio should not be used as a standalone analysis tool- it should be combined with other tools for effective results.
Despite its few limitations, the Sharpe ratio is an excellent metric for assessing the suitability of certain investment decisions in the market. The ratio can help you determine whether you are taking reasonable risks in the market.