Forex Glossary

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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

Algorithmic trading (algo-trading, black box trading) is the process of using mathematical models run by computers to execute orders according to pre-set parameters without human intervention. Algorithmic trading was initially adopted by large financial institutions such as investment banks but it has however recently been introduced to retail traders as well.

Arbitrage

Arbitrage is the concurrent purchase and sale of asset in order to profit from the price difference (i.e. selling an asset in one market to simultaneously buy it in another market at a cheaper price). Arbitrage is the result of price inefficiencies and is extremely difficult for individual traders to exploit. Thus, the capitalization of these price inefficiencies is usually achieved by large financial institutions that employ advanced algorithmic trading programs.

Ask Price

Market prices are quoted in pairs; the bid price and the ask price. The ask price is the price at which an underlying instrument is available for purchase. Thus, in a given currency pair (e.g EUR/USD) the ask price represents how much of the quote currency (USD) is required for a trader to purchase a unit of the base currency(EUR). In a given bid/ask spread (e.g 1.32166/1.32184) the ask price is 1.32184; meaning that 1 EUR equals 1.32184 USD.

B

Back-Testing

Back-testing is the process of testing an algorithmic trading strategy (Expert Advisor, trading bot) over historical price data in order to determine how accurately the strategy would have forecasted the end results. This necessarily involves tweaking the parameters of the initial strategy and re-testing it in order to optimise its performance.

Balance

The amount of money a trader currently has available in his trading account.

Base Currency

The base currency is the first currency in a given currency pair quotation. The base currency represents how much of the quote currency (the second currency in a given currency pair quotation) is required to purchase a unit of the base currency.

Bear Market

A bear market is characterised by falling prices and increased selling of assets. The situation is often self-sustaining due to the fact that falling prices encourage investors to sell assets which in turn exacerbates the downward trend. A drop in value of 20% or more, for a period of minimum two months, is often regarded as an official entry into a bear market.

C

CFDs (Contracts for Difference)

Contracts for Difference are derivative instruments that allow traders to speculate on the changing values of underlying assets without having to take ownership of them. In a contract for difference a buyer and a seller agree that the seller will, upon the expiration of the contract, pay the buyer the difference between the value of the asset at the time of the contract agreement and the contract expiration. If the difference is negative then the buyer must pay the difference to the seller. When trading CFDs traders buy (or go long) when they are expecting a rise in price and sell (or go short) when expecting a drop in value.

Commodity

Commodities are basic goods traded over an exchange. Commodities fall into two broad categories: hard commodities such as crude oil, gold, silver and platinum (extracted from the earth) and soft commodities such as wheat, corn, coffee and sugar (cultivated and harvested). The standardisation of commodities (basis grade) ensures that a commodity is of a standard quantity and above a minimum quality level so as to make it interchangeable with the same product from all other producers trading on a given exchange.

Currency Pair

Forex Currencies are traded in pairs. Each currency is represented with a three letter abbreviation and is usually separated from the currency it is paired with a space, a point, or a slash. For instance, EUR/USD refers to the Euro US Dollar currency pair. The first currency in the pair is known as the base currency. The second currency in the pair is known as the quote currency. The value of the pair is defined by how much of the quote currency is required to purchase a single unit of the base currency. So if EUR/USD is currently trading at 1.31 then this means that $1.31 is required to purchase €1.

CFDs (Contracts for Difference)

Contracts for Difference are derivative instruments that allow traders to speculate on the changing values of underlying assets without having to take ownership of them. In a contract for difference a buyer and a seller agree that the seller will, upon the expiration of the contract, pay the buyer the difference between the value of the asset at the time of the contract agreement and the contract expiration. If the difference is negative then the buyer must pay the difference to the seller. When trading CFDs traders buy (or go long) when they are expecting a rise in price and sell (or go short) when expecting a drop in value.

D

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E

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F

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G

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