Back Testing
The process of designing a trading strategy based on historical data. It is then applied to fresh data to see if and how well the
strategy works. Most technical analysis is tested with this approach
Balance/Account Balance
The net value of an account.
Balance of Payments
A record of all transactions
made by one particular country with others during a certain time period. It compares the amount of economic transactions between a
country and all other countries. This includes trade balance, foreign investments, and investments by foreigners.
Balance of Trade
Net flow of goods (exports minus its imports) between two countries.
Bank for International Settlements
The
BIS is an international organization fostering the cooperation of central banks and international financial institutions.
Essentially, the BIS, located in Basel, is a central bank for central banks. It monitors and collects data on international banking
activity and promulgates rules concerning international bank regulation.
Back Office
Refers to the administrative arm of financial
service companies, who carry out and confirm financial transactions. Duties include accounting, settlements, clearances, regulatory
compliance and record maintenance.
Balance of Payments
Record of all transactions, such
as trade balances and capital flows, carried out by a county with the rest of the world within a certain period.
Base Currency
In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts. 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.
Basis
The difference between the cash price and the futures price.
Basis Point
Measure of a bond's yield equal to 1/100th. A 1% change in yield is equal to 100 basis points and 0.01% is equal to one
basis point.
Bear
Investor acting on the belief that prices or the market will
decline.
Bear Market
Any market that exhibits a declining trend. In the long run they have a down turn of 20% or more.
Bid
The price an investor is willing to pay for an asset.
Bid/Ask Spread
The difference between the bid and the ask price.
Big Figure
Refers to the first number to the left of the decimal point in an exchange rate quote, which changes so infrequently that dealers
often omit them in quotes.
Bonds
Bonds are debt instruments used to raise capital, which
are issued for periods greater than one year. Bondholders are loaning money (investing in debt) to companies and governments, at the
end of which they will be paid a specified interest rate. Bond prices are inversely related to interest rates, as interest rates
rise, bond prices fall. There are numerous types of bonds, including treasury bonds, notes, and bills; municipal bonds and corporate
bonds.
Book
Recording of the total positions held by a trader or desk.
Bretton Woods Accord (1944)
This accord established
a fixed exchange rate regime, whose aim was to provide stability in the world economy after the Great Depression and the WWII. This
accord fixed the exchange rates of major currencies to the US dollar and set the price of gold to $35. The accord required central
bank intervention to maintain the fixed exchange rates. The US Central Bank was required to exchange dollars for gold, which
eventually let to the demise of this system, when the demand for the dollar declined, as well as the gold reserves, forcing Nixon to
stop the exchange of dollars for gold, effectively ending the system in 1971.
Broker
Individual or firm acting as an intermediary to bring
together buyers and sellers typically for a commission or fee.
Bull
Investor who expects markets or prices to rise.
Bull Market
A market where prices are rising or are
expected to rise.
Bundesbank
Germany's Central Bank.
Buy a bounce
A recommendation to instigate a long trade if the price bounces from a certain level.
Buy break
A recommendation to buy the currency pair if it
breaks the current level specified.
Buy stops above
A recommendation to enter the market when the exchange rate breaks through a specific level. The client placing a stop entry order
believes that when the market's momentum breaks through a specified level, the rate will continue in that direction.
C
Cable
Term used to describe the exchange rate between the US dollar and the British Pound.
Candlestick Chart
Chart depicting the daily high, low, opening and closing price, similar to that of a bar chart. If the close is lower than
the open than the body of the candlestick is filled in, and if the open is lower than the close the body is left empty.
Capital Markets
Markets in which capital (stocks, bonds, etc.) are traded. Usually for medium or long term investing.
Carry Trade
An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest
rate differential.
Central Bank
A banking organization, usually independent of government, responsible for implementing a country's monetary policy and for
printing money.
Chartist
Refers to a technical analyst or one who
analyses charts/graphs and data to uncover potential trends.
Clearing
Refers to the settlements/confirmations of trades.
Close a Position (Position Squaring)
Refers to getting rid of a position, either by buying back a short position or selling a long position.
Commission
A fee charged by broker or agent for carrying out transactions/orders.
Confirmation
A written document verifying the completion of a trade/transaction to include such things as date, fees or commissions,
settlement terms and the price.
Contagion
Term used to describe the spread of economic crises from one country's market to other countries within close geographic
proximity. This term was first used following the Asian Financial Crisis in 1997, which began in and soon spread to other
East Asian economies. It now is used to refer to the recent crisis in and its effects on other Latin American countries.
Contract (Unit or Lot)
The standard trading unit on
certain exchanges. A standard lot in the forex market is $100,000.
Convertible Currency
Currencies that can be exchanged for other currencies or gold.
Cost of Carry
When an investor borrows money to
sustain a position. There is a cost for borrowing derived from the interest parity condition, which is used to determine the
forward price.
Counterparty
A participant, either a person or an institution, involved in one side of a financial transaction. With such transaction
there is an associated risk (counterparty risk) involved that the counterparty will not be able to meet the terms outlined in
the contract. This risk is usually default risk.
Country Risk
The risk that a government might
default on its financial commitments/contracts, which typically causes harms to other areas of the financial sector, as well
as those in other countries.
Cover on a Bounce
A recommendation to exit trades on a bounce out of a support level.
Cover on Approach
A recommendation to exit
trades for profit on approach to a support level.
Credit Checking
Before making a large financial transaction, it imperative to check whether the counterparty has enough available credit to
carryout/honor the transaction. Credit checking refers to the process of verifying that counterparty has enough credit. The
check is initiated after the price has been determined.
Credit Netting
Agreements that are made to avoid having to continually recheck credit, usually established between large banks and trading
institutions.
Cross Rate
Refers to the exchange rate between two countries' currencies. Cross rates usually refer to pairs quoted that do not include
the domestic currency. For example, in the US, the EUR/JPY rate would be called a cross rate.
Currency
Notes and coins issued by the central bank or government, serving as legal tender for trade.
Currency Pair
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 and simultaneously sold dollars. You would do so in expectation that the euro will appreciate (increase in value)
relative to the US dollar.
Currency (Exchange Rate) Risk
Risk associated with drastic changes/fluctuations in exchange rates in which one could incur a major loss.
D
Day Trading
Refers to the process of entering and closing out trades within the same day or trading session.
Dealer
One who places the order to buy or sell.
A dealer differs from an agent in that it takes ownership of the asset, and thereby is exposed to some risk.
Deficit
An excess of liabilities over assets,
of losses over profits, or of expenditure over income.
Delivery
Term used to describe the exchange
by both parties (buyer and seller) of the traded currency.
Deposit
Refers to the process of borrowing and lending money. The deposit rate is the rate at which money can be borrowed or
lent.
Depreciation
The decline in the value of an asset or currency.
Derivative
A security derived from another and whose value is dependent the underlying security from which it is derived.
Examples of derivatives are future contracts, forward contracts and options. Underlying securities can include
stocks, bonds or currencies. Derivatives can be traded and are usually used to hedge portfolio risk.
Devaluation
When the value of a currency is lowered against the other, i.e. it takes more units of the domestic currency to
purchase a foreign currency. This differs from depreciation in that depreciation occurs through changes in demand in
the foreign exchange market, whereas devaluation typically arises from government policy. A currency is usually
devalued to improve the balance of trade, as exports become cheaper for the rest of the world and imports more
expensive to domestic consumers.
Dirty Float (Managed Float)
An exchange rate system in which the currency is not pegged, but is “managed” by the central bank to prevent extreme
fluctuations in the exchange rate. The exchange rate is managed through changes in the interest rate to
attract/detract capital flows or through the buying and selling of the currency. This system is contrasted with a
Pure Float in which there is no central bank intervention and the exchange rate is entirely determined by the market
and speculation.
E
Economic Indicator
An economic statistic used to indicate the overall health of an economy, such as GDP, unemployment rates, and
trade balances. Used in fundamental analysis of foreign exchange markets to speculate against the direction of an
exchange rate.
Efficient Markets
Markets where assets are traded in which the price is indicative of all current and relevant information and thus
it is impossible to have undervalued assets.
End of the Day (Mark to
Market)
Accounting measure, referring to the way traders record their positions. There are two
ways that a trader can record his positions: the accrual system in which only cash flows are recorded and the
mark to market method, in which the value of an asset is recorded at the end of each trading day at the closing
rate or value.
Estimated Annual Income
The
expected yearly earnings.
Euro
The new monetary unit of the European Monetary Union used by twelve countries in the European Union. It is now
the legal tender of those countries as of January 2002. Those countries include Germany, France, Belgium, The
Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Ireland, Finland and Greece.
European Central Bank
The central bank of the EMU, responsible for the monetary policy of all member countries.
European Monetary Union
An institution of the EU, whose primary goal is to establish a single currency (the euro) for the entire EU.
Economic Exposure
When the cash flow of a country is vulnerable to changes in the exchange rate.
FOREX INCOME