Course Terms & Concepts - Forex Market 1

1. Intro to Forex

Central Bank

Most modern nations have central banks that perform similar functions. Usually a branch of government, a central bank is responsible for setting interest rates, stabilizing the economy and reporting to the general public on economic conditions. Typically, central banks will loan funds to commercial banks at a certain set interest rate. Commercial banks then base their lending rates accordingly. Key central banks to the global economy include: The Federal Reserve (USA), The Bank of Japan, the Bank of Canada, The European Central Bank, The Bank of England, etc. etc.

Exchange Rate

When examining currency pairs one must understand what is meant by ‘exchange rate’. Obviously, the exchange rate refers to the rate, or price at which one currency can be exchanged for another. However, many traders look at a currency pair, EUR/USD for example, without understanding a very basic concept: A price quote of 1.4760 is to say that 1.4760 US Dollars (currency on the right) will purchase 1 Euro (currency on the left).

Liquidity

A liquid market refers to a market that is cash heavy, and liquidity refers to substantial level of capital or funds existing within a market or bank. Markets with high trading volume and substantial money flow are considered liquid markets. Banks and brokerages that clear trades are considered liquidity providers, as they are providing the funds necessary to support the execution of trades.

Market Expectations

The idea of market expectations should seem simple enough; essentially, the point is this: Forex traders must be educated! The mass of well educated traders generally have similar expectations in terms of where prices will head. For example, given a poor showing in Nonfarm payroll, the mass of traders are going to expect the Dollar to weaken on the first friday of the month. A trader focused on nothing but moving averages and who is ignorant to obvious market expectations will have very limited success. Do your homework, read the commentary of market analysts, prep your daily trading; in short - know what the market is expecting!

Off - Exchange

The term off-exchange is often used to describe the Forex Market place. Because the Forex market has no central exchange, or physical location wherein trading is facilitated, it is considered an off-exchange market place. The NYSE (New York Stock Exchange) and CME (Chicago Mercantile Exchange) are examples of physical exchanges. The Forex market is essentially a network of banks and brokerages all of which are connected globally to one another, but not through any one physical exchange.

Volume

In any market, trading volume refers to the amount of trades in and out of the market in correlation with their contract size. A market with high trading volume (high amount of transactions and high level of money exchanging hands) will substantially impact the overall economy of a nation. Trading markets with high volume will also impact the individual trader, as increased trade volume ensures that traders can easily enter and exit trades as there is an adequate supply of buyers and sellers.

2. Forex Prices

Base Currency

In a currency pair the base currency refers to the currency listed on the left hand side of the pair. The base currency’s value is always equal to 1. The currency listed on the right, the cross currency, establishes at what rate or price the cross currency will equal or purchase 1 unit of the base currency.

Cross Currency

In a currency pair the cross currency refers to the currency listed on the right hand side of the pair. The cross currency’s value is always set in comparison to 1 unit of the base currency. The cross currency, establishes at what rate or price the currency will equal or purchase 1 unit of the base currency.

Intra-day Traders

Essentially, there are two types of traders; Intra-day traders and Inter-day traders. An intra-day trader prefers to open and close positions within the same trading day. These type of traders are generally trading shorter time frame charts, and tend to stay in positions for hours at a time, as opposed to days at a time. Inter-day traders (or swing traders) on the other hand describes those traders who prefer to hold positions overnight, and possible for days or weeks at a time.nge market place. The NYSE (New York Stock Exchange) and CME (Chicago Mercantile Exchange) are examples of physical exchanges. The Forex market is essentially a network of banks and brokerages all of which are connected globally to one another, but not through any one physical exchange.

Price Volatility

Can also be referred to as price movement; price volatility describes continued and rapid price movement either bullish or bearish, or sometimes both. A market whose prices are fairly stagnant and not moving might be referred to as a sideways market, thus leaving little opportunity for traders to capture profit. A volatile market on the other hand refers to prices that are moving and adjusting rapidly, thus allowing good trading opportunities.

3. Forex vs. Equities

Leverage

Leverage describes the set level at which a trader is essentially borrowing money from their broker or bank. Leverage set at 100 – 1 is to say that a trader can control a position or contract in the market that is 100 times the size of the margin they have posted in order to place the trade. For example, a standard $100,000 contract (1 lot) in the Forex market would require a margin post of $1,000 if a trader were at 100 – 1 leverage.

Long

The Term 'long' refers to the buying side of the market and is most often used by traders as a verb, i.e 'I went long the Euro', thus meaning that I bought the Euro. Traders might also say that they are 'long 20 lots on the Pound', meaning of course that they have bought 20 lots of the Great British Pound.

Lot

In the off-exchange retail Forex market contracts are most often referred to as lots. 1 lot would be the same as saying 1 contract. In a standard account a full lot is equal to $100,000. Thus, a trader placing a 4 lot trade, for example, would be controlling $400,000. In a mini account a full lot is equal to $10,000. Thus, a trader placing a 4 mini lot trade would be controlling $40,000.

Margin

Margin describes the amount of funds a trader must post in order to control a leveraged contract in the market. Often, accounts that are traded with leverage are also referred to as margined accounts. At 100 – 1 leverage a standard FX contract of $100,000 will require $1,000 of margin. If a trader’s account has less than a $1,000 in equity they would not be allowed to open a position of this size.

Short

The Term 'short' refers to the selling side of the market and is most often used by traders as a verb, i.e 'I went short the Euro', thus meaning that I sold the Euro. Traders might also say that they are 'short 20 lots on the Pound', meaning of course that they have sold 20 lots of the Great British Pound.