forex survival guide secrets

The Forex quick guide for beginners and privat e t raders This guide was creat ed by Easy-Forex™Trading Plat form, and is offered FREE t o all Forex t raders Make your Forex learning much more efficient : Regist er now at Easy-Forex™ and get FREE 1-on-1 LIVE training, in your language! Joining is free and simple, and it gives you online access to many supporting tools, such as Forex outlook, Forex charts, info-center, and more www.Easy-Forex.com In this book: (click a chapt er t it le below t o direct ly get t here) page Int ro How t o use t his book Forex? What is it , anyway? (a simple int roduct ion, for t he very beginners…) What is Forex t rading? What is a Forex deal? What is t he global Forex market ? 12 Overview of t rading Forex online 21 Training for success 25 Technical Analysis: pat t erns and forecast met hods used t oday 29 Fundament al Analysis and leading market indicat ors 47 Day-Trading (on t he Easy-Forex™Trading Plat form) 56 Twent y issues you must consider 61 10 Tips for every Forex t rader 67 11 Forex glossary 74 12 Disclaimer (risk warning) 110 version: Sept em ber 2006 / of 111 Introduction: how to use this book This book has been developed t o help t he Forex beginner, t hough experienced and professional t raders may find it a handy reference Beginners and novice t raders are likely t o benefit from reading t he ent ire t ext , st art ing wit h Chapt er 1, which provides a basic overview of what currency t rading is, and how t o get st art ed The chapt ers are set out in a logical flow, but not need t o be read in order t o make sense, as each works as a discret e unit unt o it self You may prefer t o focus first on t hose chapt ers t hat you feel will complement your part icular knowledge base best Chapt er 11 is a glossary of t erms (list ed alphabet ically) used in t he Forex business, t hat will prove helpful as you read t his book, and may serve as a valuable reference as you become an experienced currency t rader Wit h t he help of t his guide, you will soon be ready t o st art t rading Forex – in fact , wit h t he assist ance of t he online Easy-Forex™t eam, you can st art t oday We wish you success in your t rading, and hope you find t his book int erest ing, helpful and enj oyable Before you st art , please remember: • Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone Before deciding t o undert ake such t ransact ions, a user should carefully evaluat e whet her his/ her financial sit uat ion is appropriat e for such t ransact ions Read more in t he "RISK WARNING" sect ion on Easy-Forex sit e / Risk Disclaimer • Always ask your Forex dealer (t he TRADING PLATFORM you wish t o t rade wit h) t he quest ions we prepared for you in t his book (chapt er 9) Select ing t he appropriat e Forex TRADING PLATFORM is essent ial for success in handling your t rading and monit oring your act ivit y, as well as maximizing profit s, while minimizing losses and cost s Your comment s and suggest ions are highly appreciat ed (and may well be incorporat ed in our next edit ion)! Be our guest and writ e us: ForexBooks@Forex.info version: Sept em ber 2006 / of 111 [1] Forex? What is it, anyway? The market The currency t rading (foreign exchange, Forex, FX) market is t he biggest and fast est growing market on eart h It s daily t urnover is more t han 2.5 t rillion dollars The part icipant s in t his market are cent ral and commercial banks, corporat ions, inst it ut ional invest ors, hedge funds, and privat e individuals like you What happens in the market? Market s are places where goods are t raded, and t he same goes wit h Forex In Forex market s, t he “ goods” are t he currencies of various count ries (as well as gold and silver) For example, you might buy euro wit h US dollars, or you might sell Japanese Yen for Canadian dollars It ’ s as basic as t rading one currency for anot her Of course, you don’ t have t o purchase or sell act ual, physical currency: you t rade and work wit h your own base currency, and deal wit h any currency pair you wish t o “Leverage” is the Forex advantage The rat io of invest ment t o act ual value is called “ leverage” Using a $1,000 t o buy a Forex cont ract wit h a $100,000 value is “ leveraging” at a 1:100 rat io The $1,000 is all you invest and all you risk, but t he gains you can make may be many t imes great er How does one profit in the Forex market? Obviously, buy low and sell high! The profit pot ent ial comes from t he fluct uat ions (changes) in t he currency exchange market Unlike t he st ock market , where share are purchased, Forex t rading does not require physical purchase of t he currencies, but rat her involves cont ract s for amount and exchange rat e of currency pairs The advant ageous t hing about t he Forex market is t hat regular daily fluct uat ions – in t he regular currency exchange market s, oft en around 1%- are mult iplied by 100! (Easy-Forex™ generally offers t rading rat ios from 1:50 t o 1:200) How risky is Forex trading? You cannot lose more t han your init ial invest ment (also called your “ margin” ) The profit you may make is unlimit ed, but you can never lose more t han t he margin You are st rongly advised t o never risk more t han you can afford t o lose version: Sept em ber 2006 / of 111 How I start trading? If you wish t o t rade using t he Easy-Forex™Trading Plat form, or any ot her, you must first register and t hen deposit t he amount you wish t o have in your margin account t o invest Regist ering is easy wit h Easy-Forex™and it accept s payment via most maj or credit cards, PayPal, West ern Union Once your deposit has been received, you are ready t o start trading How I monitor my Forex trading? Online, anywhere, anyt ime You have full cont rol t o monit or your t rading st at us, check scenarios, change some t erms in your Forex deals, close deals, or wit hdraw profit s Easy-Forex™ wishes you enj oyable and successful Forex t rading! version: Sept em ber 2006 / of 111 [2] What is Forex trading? What is a Forex deal? The invest or's goal in Forex t rading is t o profit from foreign currency movement s More t han 95%of all Forex t rading performed t oday is for speculat ive purposes (e.g t o profit from currency movement s) The rest belongs t o hedging (managing business exposures t o various currencies) and ot her act ivit ies Forex t rades (t rading onboard int ernet plat forms) are non-delivery t rades: currencies are not physically t raded, but rat her t here are currency cont ract s which are agreed upon and performed Bot h part ies t o such cont ract s (t he t rader and t he t rading plat form) undert ake t o fulfill t heir obligat ions: one side undert akes t o sell t he amount specified, and t he ot her undert akes t o buy it As ment ioned, over 95% of t he market act ivit y is for speculat ive purposes, so t here is no int ent ion on eit her side t o act ually perform t he cont ract (t he physical delivery of t he currencies) Thus, t he cont ract ends by offset t ing it against an opposit e posit ion, result ing in t he profit and loss of t he part ies involved Components of a Forex deal A Forex deal is a cont ract agreed upon bet ween t he t rader and t he market maker (i.e t he Trading Plat form) The cont ract is comprised of t he following component s: • The currency pairs (which currency t o buy; which currency t o sell) • The principal amount (or "face", or "nominal": t he amount of currency involved in t he deal) • The rat e (t he agreed exchange rat e bet ween t he t wo currencies) Time frame is also a fact or in some deals, but t his chapt er focuses on DayTrading (similar t o “ Spot ” or “ Current Time” t rading), in which deals have a lifespan of no more t han a single full day Thus, t ime frame does not play int o t he equat ion Not e, however, t hat deals can be renewed (“ rolled-over” ) t o t he next day for a limit ed period of t ime The Forex deal, in t his cont ext , is t herefore an obligat ion t o buy and sell a specified amount of a part icular pair of currencies at a pre-det ermined exchange rat e Forex t rading is always done in currency pairs For example, imagine t hat t he exchange rat e of EUR/ USD (euros t o US dollars) on a cert ain day is 1.1999 (t his number is also referred t o as a “ spot rat e” , or j ust “ rat e” , for short ) If version: Sept em ber 2006 / of 111 an invest or had bought 1,000 euros on t hat dat e, he would have paid 1,199.00 US dollars If one year lat er, t he Forex rat e was 1.2222, t he value of t he euro has increased in relat ion t o t he US dollar The invest or could now sell t he 1,000 euros in order t o receive 1222.00 US dollars The invest or would t hen have USD 23.00 more t han when he st art ed a year earlier However, t o know if t he invest or made a good invest ment , one needs t o compare t his invest ment opt ion t o alt ernat ive invest ment s At t he very minimum, t he ret urn on invest ment (ROI) should be compared t o t he ret urn on a “ risk-f ree” invest ment Long-t erm US government bonds are considered t o be a risk-f ree invest ment since t here is virt ually no chance of def ault - i.e t he US government is not likely t o go bankrupt , or be unable or unwilling t o pay it s debt s Trade only when you expect t he currency you are buying t o increase in value relat ive t o t he currency you are selling If t he currency you are buying does increase in value, you must sell back t hat currency in order t o lock in t he profit An open t rade (also called an “ open posit ion” ) is one in which a t rader has bought or sold a part icular currency pair, and has not yet sold or bought back t he equivalent amount t o complet e t he deal It is est imat ed t hat around 95% of t he FX market is speculat ive In ot her words, t he person or inst it ut ion t hat bought or sold t he currency has no plan t o act ually t ake delivery of t he currency in t he end; rat her, t hey were solely speculat ing on t he movement of t hat part icular currency Exchange rate Because currencies are t raded in pairs and exchanged one against t he ot her when t raded, t he rat e at which t hey are exchanged is called t he exchange rat e The maj orit y of currencies are t raded against t he US dollar (USD), which is t raded more t han any ot her currency The four currencies t raded most frequent ly aft er t he US dollar are t he euro (EUR), t he Japanese yen (JPY), t he Brit ish pound st erling (GBP) and t he Swiss franc (CHF) These five currencies make up t he maj orit y of t he market and are called t he maj or currencies or “ t he Maj ors” Some sources also include t he Aust ralian dollar (AUD) wit hin t he group of maj or currencies The first currency in t he exchange pair is referred t o as t he base currency The second currency is t he count er currency or quot e currency The count er or quot e currency is t hus t he numerat or in t he rat io, and t he base currency is t he denominat or The exchange rat e t ells a buyer how much of t he count er or quot e currency must be paid t o obt ain one unit of t he base currency The exchange rat e also t ells a seller how much is received in t he count er or quot e currency when version: Sept em ber 2006 / of 111 selling one unit of t he base currency For example, an exchange rat e for EUR/ USD of 1.2083 specifies t o t he buyer of euros t hat 1.2083 USD must be paid t o obt ain euro Spreads It is t he difference bet ween BUY and SELL, or BID and ASK In ot her words, t his is t he difference bet ween t he market maker's "selling" price (t o it s client s) and t he price t he market maker "buys" it from it s client s If an invest or buys a currency and immediat ely sells it (and t hus t here is no change in t he rat e of exchange), t he invest or will lose money The reason for t his is “ t he spread” At any given moment , t he amount t hat will be received in t he count er currency when selling a unit of base currency will be lower t han t he amount of count er currency which is required t o purchase a unit of base currency For inst ance, t he EUR/ USD bid/ ask currency rat es at your bank may be 1.2015/ 1.3015, represent ing a spread of 1,000 pips (percent age in point s; one pip = 0.0001) Such a rat e is much higher t han t he bid/ ask currency rat es t hat online Forex invest ors commonly encount er, such as 1.2015/ 1.2020, wit h a spread of pips In general, smaller spreads are bet t er for Forex invest ors since t hey require a smaller movement in exchange rat es in order t o profit from a t rade Prices, Quotes and Indications The price of a currency (in t erms of t he count er currency), is called “ Quot e” There are t wo kinds of quot es in t he Forex market : Direct Quot e: t he price for US dollar in t erms of t he ot her currency, e.g – Japanese Yen, Canadian dollar, et c Indirect Quot e: t he price of unit of a currency in t erms of US dollars, e.g – Brit ish pound, euro The market maker provides t he invest or wit h a quot e The quot e is t he price t he market maker will honor when t he deal is execut ed This is unlike an “ indicat ion” by t he market maker, which informs t he t rader about t he market price level, but is not t he final rat e for a deal Cross rat es – any quot e which is not against t he US dollar is called “ cross” For example, GBP/ JPY is a cross rat e, since it is calculat ed via t he US dollar Here is how t he GBP/ JPY rat e is calculat ed: version: Sept em ber 2006 / of 111 GBP/ USD = 1.7464; USD/ JPY = 112.29; Therefore: GBP/ JPY = 112.29 x 1.7464 = 196.10 Margin Banks and/ or online t rading providers need collat eral t o ensure t hat t he invest or can pay in t he event of a loss The collat eral is called t he “ margin” and is also known as minimum securit y in Forex market s In pract ice, it is a deposit t o t he t rader's account t hat is int ended t o cover any currency t rading losses in t he fut ure Margin enables privat e invest ors t o t rade in market s t hat have high minimum unit s of t rading, by allowing t raders t o hold a much larger posit ion t han t heir account value Margin t rading also enhances t he rat e of profit , but similarly enhances t he rat e of loss, beyond t hat t aken wit hout leveraging Maintenance Margin Most t rading plat forms require a “ maint enance margin” be deposit ed by t he t rader parallel t o t he margins deposit ed for act ual t rades The main reason for t his is t o ensure t he necessary amount is available in t he event of a “ gap” or “ slippage” in rat es Maint enance margins are also used t o cover administ rat ive cost s When a t rader set s a St op-Loss rat e, most market makers cannot guarant ee t hat t he st op-loss will act ually be used For example, if t he market for a part icular count er currency had a vert ical fall from 1.1850 t o 1.1900 bet ween t he close and opening of t he market , and t he t rader had a st op-loss of 1.1875, at which rat e would t he deal be closed? No mat t er how t he rat e slippage is account ed for, t he t rader would probably be required t o add-up on his init ial margin t o finalize t he aut omat ically closed t ransact ion The funds from t he maint enance margin might be used for t his purpose Import ant not e: Easy-Forex™ does NOT require t hat t raders deposit a maint enance margin Easy-Forex™ guarant ees t he exact rat e (St op-Loss or ot her) as pre-defined by t he t rader If you don’ t wish t o deposit “ maint enance margin” , in addit ion t o t he margin required for t rading, j oin Easy-Forex™: no “ maint enance margin” , t rade from as lit t le as $50! version: Sept em ber 2006 / of 111 Leverage Leveraged financing is a common pract ice in Forex t rading, and allows t raders t o use credit , such as a t rade purchased on margin, t o maximize ret urns Collat eral for t he loan/ leverage in t he margined account is provided by t he init ial deposit This can creat e t he opport unit y t o cont rol USD 100,000 for as lit t le as USD 1,000 There are five ways privat e invest ors can t rade in Forex, direct ly or indirect ly: • The spot market • Forwards and fut ures • Opt ions • Cont ract s for difference • Spread bet t ing Please not e t hat t his book focuses on t he most common way of t rading in t he Forex market , “ Day-Trading” (relat ed t o “ Spot ” ) Please refer t o t he glossary for explanat ions of each of t he five ways invest ors can t rade in Forex A spot transaction A spot t ransact ion is a st raight forward exchange of one currency for anot her The spot rat e is t he current market price, which is also called t he “ benchmark price” Spot t ransact ions not require immediat e set t lement , or payment “ on t he spot ” The set t lement dat e, or “ value dat e” is t he second business day aft er t he “ deal dat e” (or “ t rade dat e” ) on which t he t ransact ion is agreed by t he t rader and market maker The t wo-day period provides t ime t o confirm t he agreement and t o arrange t he clearing and necessary debit ing and credit ing of bank account s in various int ernat ional locat ions Risks Alt hough Forex t rading can lead t o very profit able result s, t here are subst ant ial risks involved: exchange rat e risks, int erest rat e risks, credit risks and event risks Approximat ely 80% of all currency t ransact ions last a period of seven days or less, wit h more t han 40% last ing fewer t han t wo days Given t he ext remely version: Sept em ber 2006 / 10 of 111 Value Definition Margin Call A demand for addit ional funds t o cover posit ions A demand for addit ional funds t o be deposit ed in a margin account t o meet margin requirement s because of adverse fut ure price movement s Marginal Risk The possibilit y t hat a cust omer goes bankrupt aft er ent ering int o a forward cont ract In such an event , t he issuer must close t he commit ment , running t he risk of having t o pay t he marginal movement on t he cont ract Mark-to-Market The profit s and/ or losses are t allied at t he end of t he session according t o t he closing prices of t he securit y, and t he account is "marked t o t he market " daily The part y will be called upon t o make good t he losses if t here has been an adverse movement in t he prices, and it can book t he profit s in t he event t here has been a favorable movement in t he prices Mark Up Premium Market Amount The minimum amount convent ionally dealt for bet ween banks Market Maker A market maker is a person or firm aut horized t o creat e and maint ain a market in an inst rument Market Order An order t o buy or sell a financial inst rument immediat ely at t he best possible price Market Value Market value of a Forex posit ion at any t ime is t he amount of t he domest ic currency t hat could be purchased at t he t hen market rat e in exchange for t he amount of foreign currency t o be delivered under t he Forex Cont ract MATIF Marche a Terme Int ernat ional de France Maturity Dat e for set t lement of t he t ransact ion which is decided at t he t ime of ent ering int o t he cont ract Maturity Date (1) The last t rading day of a fut ures cont ract (2) Dat e on which a bond mat ures, at which t ime t he face value will be ret urned t o t he purchaser Somet imes t he mat urit y dat e is not one specified dat e, but a range of dat es during which t he bond may be repaid Micro Economics The st udy of economic act ivit y as it applies t o individual firms or well defined small groups of individuals or economic sect ors Mid Office The cont rol of t he t rading act ivit y including posit ion keeping Mid-Price or Middle Rate The price half-way bet ween t he t wo prices, or t he average of bot h buying and selling prices offered by t he market makers Milliard European t erm for 1,000 million Mine Expression used t o indicat e t hat t he cont act ing part y is willing t o buy at t he rat e offered by t he quot ing bank Minimum Price Fluctuation The smallest increment of market price movement possible in a given fut ures cont ract version: Sept em ber 2006 / 97 of 111 Value Definition Minimum Reserve Reserves required t o be deposit ed at cent ral banks by commercial banks and ot her financial inst it ut ions, somet imes referred t o as Regist ered Reserves Mio Million MITI Japanese minist ry of Int ernat ional Trade & Indust ry MM Money Market s Money Market A market consist ing of financial inst it ut ions and dealers in money or in credit , who wish t o eit her borrow or lend Money Market Operations Comprises t he accept ance and re-lending of deposit s on t he money market Money Supply The amount of money in t he economy, which can be measured in a number of ways In India t here are four measures of money supply i.e M1, M2, M3, M4 Moving Average A way of smoot hing a set of dat a, widely used in price t ime series Multiple Exchange Rates Different exchange rat es for different t ypes of t ransact ion The Sout h African Rand is an example Mutual Fund An open-end invest ment company Equivalent t o unit t rust Nearby Month The nearest act ively t raded delivery mont h, a.k.a current delivery mont h, lead mont h Net Position The number of fut ures cont ract s bought or sold which have not yet been offset by opposit e t ransact ions Nickel US t erm for five basis point s Nostro Account A foreign currency current account maint ained wit h anot her bank The account is used t o receive and pay currency asset s and liabilit ies denominat ed in t he currency of t he count ry in which t he bank is resident Not Held Basis Order An order whereby t he price may t rade t hrough or bet t er t han t he client 's desired level, but t he principal is not held responsible if t he order is not execut ed Note A financial inst rument consist ing of a promise t o pay rat her t han an order t o pay, or a cert ificat e of indebt edness OECD Organizat ion for Economic Cooperat ion and Development , an int ernat ional organizat ion helping government s t ackle t he economic, social and governance challenges of a globalized economy Offer The rat e at which a dealer is willing t o sell t he base currency Offered Market Temporary sit uat ion where offers exceed bid Official Settlements Account A US balance of payment s measure based on movement of dollars in foreign official holdings and US reserves Also referred t o as reserve t ransact ion account Offset The closing-out or liquidat ion of a fut ures posit ion version: Sept em ber 2006 / 98 of 111 Value Definition Off-Shore The operat ions of a financial inst it ut ion which alt hough physically locat ed in a count ry, has lit t le connect ion wit h t hat count ry's financial syst ems In cert ain count ries a bank is not permit t ed t o business in t he domest ic market , but can business wit h ot her foreign banks This is known as an off-shore banking unit Old Lady Old lady of Threadneedle St reet , a t erm for t he Bank of England One Cancels Other Order Where t he execut ion of one order aut omat ically cancels a previous order - also referred t o as OCO or “ One cancels t he ot her” Open Interest The t ot al number of out st anding opt ion or fut ures cont ract s t hat have not been closed out by offset or fulfilled by delivery Open Market Committee See Federal Open Market Commit t ee Open Market Operations Cent ral bank operat ions in t he market s t o influence exchange and int erest rat es Open Position Any deal which has not been set t led by physical payment or reversed by an equal and opposit e deal for t he same value dat e It can be t ermed as a high risk, high ret urn proposit ion Option A cont ract conferring t he right but not t he obligat ion t o buy (call) or t o sell (put ) a specified amount of an inst rument at a specified price wit hin a predet ermined t ime period Option Class All opt ions of t he same t ype - calls or put s -list ed on t he same underlying inst rument Option Series All opt ions of t he same class having t he same exercise/ st rike price and expirat ion dat e Original Margin See Init ial Margin OTC See – “ Over t he Count er” Out-of-the-Money A put opt ion is out -of-t he-money if t he exercise/ st rike price is below t he price of t he underlying inst rument A call opt ion is out -of-t he money if t he exercise/ st rike price is higher t han t he price of t he underlying inst rument Outright Deal A forward deal t hat is not part of a swap operat ion Outright Forward A foreign exchange t ransact ion involving eit her t he purchase or t he sale of a currency for set t lement at a fut ure dat e Outright Rate The forward rat e of a foreign exchange deal based on spot price plus forward discount / premium Over Bought or Over Sold See long and short version: Sept em ber 2006 / 99 of 111 Value Definition Over The Counter (OTC) A market conduct ed direct ly bet ween dealers and principals via a t elephone and comput er net work rat her t han a regulat ed exchange t rading floor These market s have not been very popular because of t he risks bot h t he part ies face in case t he ot her part y fails t o honor t he cont ract They have never been part of t he St ock Exchange since t hey were seen as "unofficial" Overheated (Economy) Is an economy on a high growt h rat e t raj ect ory placing pressure on t he product ion capacit y, result ing in increased inflat ionary pressures and higher int erest rat es Overnight A deal from t oday unt il t he next business day Overnight Limit Net long or short posit ion in one or more currencies t hat a dealer can carry over int o t he next dealing day Passing t he book t o ot her bank dealing rooms in t he next t rading t ime zone reduces t he need for dealers t o maint ain t hese unmonit ored exposures Package Deal When a number of exchange and / or deposit orders have t o be fulfilled simult aneously Par (1) The nominal value of a securit y or inst rument (2) The official value of a currency Parities The value of one currency in t erms of anot her Parity (1) Foreign exchange dealer's slang for “ your price is t he correct market price” (2) Official rat es in t erms of SDR or ot her pegging currency Payment Date The dat e on which a dividend or bond int erest payment is scheduled t o be delivered Payroll Employment Payroll employment is a measure of t he number of people being paid as employees by non-farm business est ablishment s and unit s of government Mont hly changes in payroll employment reflect t he number of net new j obs creat ed or lost during t he mont h Changes are widely followed as an import ant indicat or of economic act ivit y Large increases in payroll employment are seen as signs of st rong economic act ivit y t hat could event ually lead t o higher int erest rat es t hat are support ive of t he currency at least in t he short t erm Permitted Currency It means a foreign currency which is freely convert ible, i.e a currency which is permit t ed by t he rules and regulat ions of t he count ry concerned t o be convert ed int o maj or reserve currencies, and for which a fairly act ive and liquid market exist s for dealing against t he maj or currencies Petrodollars Foreign exchange reserves of oil producing nat ions arising from oil sales PIBOR Paris Int er-bank Offered Rat e Pip See point (0.0001 of a unit ) Plaza Accord The 1985 Plaza Hot el agreement by t he G5 t o lower t he dollar version: Sept em ber 2006 / 100 of 111 Value Definition Point (1) 100t h part of a per cent , normally 10,000 of any spot rat e Movement s of exchange rat es are usually in t erms of point s (2) One percent of an int erest rat e, e.g from 8-9% (3) Minimum fluct uat ion or smallest increment of price movement Political Risk The pot ent ial for losses arising from a change in government policy or due t o t he risk of expropriat ion (nat ionalizat ion by t he government ) Position The net t ed t ot al exposure in a given currency A posit ion can be eit her flat or square (no exposure), long, (more currency bought t han sold), or short (more currency sold t han bought ) Position Limit The maximum posit ion, eit her net long or net short , in one fut ure or in all fut ures of one currency or inst rument one person is permit t ed t o hold or cont rol PPI Producer Price Indices See Wholesale Price Indices Premium (1) The amount by which a forward rat e exceeds a spot rat e (2) The amount by which t he market price of a bond exceeds it s par value (3) In regard t o opt ions, t he price a put or call buyer must pay t o a put or call seller for an opt ion cont ract (4) The margin paid above t he normal price level Prime Rate (1) The rat e from which lending rat es by banks are calculat ed in t he US (2) The rat e of discount of prime bank bills in t he UK Principal A dealer who buys or sells st ock for his/ her own account Producer Price Index (PPI) PPI is a measure of t he average level of prices of a fixed basket of goods received in primary market s by producers A rising PPI is normally expect ed t o lead t o higher CPI, and t hereby t o pot ent ially higher short t erm int erest rat es Profit Taking The unwinding of a posit ion t o realize profit s Purchasing Power Parity Model of exchange rat e det erminat ion st at ing t hat t he price of a good in one count ry should equal t he price of t he same good in anot her count ry aft er adj ust ing for t he changes in t he price due t o t he change in exchange rat e Also known as t he law of one price Put Call Parity The equilibrium relat ionship bet ween premiums of call and put opt ions of t he same st rike and expiry Put Option A put opt ion confers t he right but not t he obligat ion t o sell currencies, inst rument s or fut ures at t he opt ion exercise price wit hin a predet ermined t ime period Quota (1) A limit on import s or export s (2) A count ry's subscript ion t o t he IMF Quote An indicat ive price The price quot ed for informat ion purposes but not t o deal Rally A recovery in price aft er a period of decline version: Sept em ber 2006 / 101 of 111 Value Definition Range The difference bet ween t he highest and lowest price of a fut ure recorded during a given t rading session Rate The price of one currency in t erms of anot her It has t he same meaning as t he t erm parit ies Ratio Calendar Spread Selling more near-t erm opt ions t han longer mat urit y opt ions at t he same st rike price Ratio Spread Buying a specific quant it y of opt ions and selling a larger quant it y of out -of-t he-money opt ions Reaction A decline in prices following an advance Real A price, int erest rat e or st at ist ic t hat has been adj ust ed t o eliminat e t he effect of inflat ion Recession A decline in business act ivit y Oft en defined as t wo consecut ive quart ers wit h a real fall in GNP Reinvestment Rate The rat e at which int erest earned on a loan can be reinvest ed The rat e may not at t ract t he same level of int erest as t he principal amount Repo Rate See “ Repurchase Agreement ” Report French t erm for premium Repurchase Agreement Agreement s by a borrower where t hey sell securit ies wit h a commit ment t o repurchase t hem at t he same rat e wit h a specified int erest rat e Reserve Currency A currency held by a cent ral bank on a permanent basis as a st ore of int ernat ional liquidit y Reserve currencies are t ypically Dollar, Deut schemark, and st erling Reserve Requirement The rat io of reserves t o deposit s, expressed as a fract ion prescribed by nat ional banking aut horit ies, including US Reserve Tranche (French) The 25%of it s quot a t o which a member of t he IMF has uncondit ional access, and for which t here is no obligat ion t o repay Reserves Funds held against fut ure cont ingencies, normally a combinat ion of convert ible foreign currency, gold, and SDRs Official reserves are t o ensure t hat a government can meet near t erm obligat ions They are an asset in t he balance of payment s Resistance A price level at which t he selling is expect ed t o t ake place Resistance Point or Level A price recognized by t echnical analyst s as a price which is likely t o result in a rebound but if broken t hrough is likely t o result in a significant price movement Retail Price Index Measurement of t he mont hly change in t he average level of prices at ret ail, normally of a defined group of goods version: Sept em ber 2006 / 102 of 111 Value Definition Retail Sales Ret ail Sales are a measure of t he t ot al receipt s of ret ail st ores Mont hly percent age changes reflect t he rat e of change of such sales and are widely followed as an indicat or of consumer spending Rises in Ret ail Sales are oft en associat ed wit h a st rong economy, and t herefore an expect at ion of higher short t erm int erest rat es t hat are oft en support ive t o a currency in at least t he short t erm Reuter Dealing A syst em for screen based t rading t hat has been in operat ion since t he early 1980s Reut er Dealing now has a mat ching opt ional enhancement known as Dealing 2000-2 Revaluation Increase in t he exchange rat e of a currency as a result of official act ion Revaluation Rate The rat e for any period or currency which is used t o revalue a posit ion or book Reversal Process of changing a call int o a put Risk management The ident ificat ion and accept ance, or offset t ing of t he risks t hreat ening t he profit abilit y or exist ence of an organizat ion Wit h respect t o foreign exchange, involves among ot hers considerat ion of market , sovereign, count ry, t ransfer, delivery, credit , and count erpart y risk Risk Position An asset or liabilit y, which is exposed t o fluct uat ions in value t hrough changes in exchange rat es or int erest rat es Risk Premium Addit ional sum payable, or ret urn, t o compensat e a part y for adopt ing a part icular risk Risk Reversal A combinat ion of purchasing put opt ions wit h t he sale of call opt ions The put limit s downside, while t he call limit s t he upside Risks There are risks associat ed wit h any market It means variance of t he ret urns and t he possibilit y t hat t he act ual ret urn might not be in line wit h t he expect ed ret urns The risks associat ed wit h t rading foreign currencies are: market , exchange, int erest rat e, yield curve, volat ilit y, liquidit y, forced sale, count er part y, credit , and count ry risk Rolling over The subst it ut ing of a far opt ion for a near opt ion of t he same underlying st ock at t he same st rike/ exercise price Rollover (1) Where t he set t lement of a deal is carried forward t o anot her value dat e, based on t he int erest rat e different ial of t he t wo currencies example: next day (2) An overnight swap, specifically t he next business day against t he following business day (also called Tomorrow Next , abbreviat ed t o Tom-Next ) Running a Position Keeping open posit ions in t he hope of a speculat ive gain Same Day Transaction A t ransact ion t hat mat ures on t he day t he t ransact ion t akes place Sandwich Spread Same as a but t erfly spread Scalping A st rat egy of buying at t he bid and selling at t he offer as soon as possible version: Sept em ber 2006 / 103 of 111 Value Definition SDR Special Drawing Right A st andard basket of five maj or currencies in fixed amount s as defined by t he IMF Selling Rate Rat e at which a bank is willing t o sell foreign currency Series All opt ions of t he same class which share a common st rike price and expirat ion dat e Settlement Act ual physical exchange of one currency for anot her Settlement Date It means t he business day specified for delivery of t he currencies bought and sold under a Forex cont ract Settlement Price The official closing price for a fut ure set by t he clearing house at t he end of each t rading day Settlement Risk Risk associat ed wit h t he non-set t lement of t he t ransact ion by t he count erpart y Short A market posit ion where t he client has sold a currency he does not already own, usually expressed in base currency t erms Short / Short Position A short age of asset s in a part icular currency See Short Sale Short Contracts Cont ract s wit h up t o six mont hs t o deliver Short Covering Buying t o unwind a short age of a part icular currency or asset Short Forward Date/ Rate The t erm short forward refers t o a period of up t o t wo mont hs, alt hough it is more commonly used wit h respect t o mat urit ies of less t han one mont h Short Sale The sale of a currency fut ures not owned by t he seller at t he t ime of t he t rade Short sales are usually made in expect at ion of a decline in t he price Shorts See “ Short Forward Dat e/ Rat e” Short-Term Interest Rates Normally t he 90 day rat e SITC St andard Int ernat ional Trade Classificat ion A syst em for report ing t rade st at ist ics in a common manner SOFFEX Swiss Opt ions and Financial Fut ures Exchange, a fully aut omat ed and int egrat ed t rading and clearing syst em Soft Market More pot ent ial sellers t han buyers, which creat es an environment where rapid price falls are likely Split Date See Broken Dat e Spot (1) The most common foreign exchange t ransact ion (2) Spot refers t o t he buying and selling of t he currency where t he set t lement dat e is t wo business days forward Spot Month The cont ract mont h closest t o delivery Spot Next The overnight swap from t he spot dat e t o t he next business day Spot Price/ Rate The price at which t he currency is current ly t rading in t he spot market version: Sept em ber 2006 / 104 of 111 Value Definition Spot Week A st andard period of one week swap measured from t he current value dat e of t he currency spot rat e Spread (1) The difference bet ween t he bid and ask price of a currency (2) The difference bet ween t he prices of t wo relat ed fut ures cont ract s (3) For opt ions, t ransact ions involving t wo or more opt ion series on t he same underlying currency Square Purchases and sales are in balance and t hus t he dealer has no open posit ion Squawk Box A speaker connect ed t o a phone, oft en used in broker t rading desks Squeeze Act ion by a cent ral bank t o reduce supply in order t o increase t he price of money Stable Market An act ive market which can absorb large sales or purchases of currency wit hout having any maj or impact on t he int erest rat es Stagflation Recession or low growt h (st agnat ion) in conj unct ion wit h high inflat ion rat es Standard A t erm referring t o cert ain normal amount s and mat urit ies for dealing Standard and Poor’s (S&P) A US firm engaged in assessing t he financial healt h of borrowers The firm also lends it s name t o t he S&P 500 St ock Index Sterilization Cent ral Bank act ivit y in t he domest ic money market t o reduce t he impact on money supply of it s int ervent ion act ivit ies in t he Forex market Sterling Brit ish pound, ot herwise known as cable Stocky Market slang for Swedish Krona Stop Loss Order Order given t o ensure t hat , should a currency weaken by a cert ain percent age, a short posit ion will be covered even t hough t his involves t aking a loss Realize profit orders are less common Stop Out Price US t erm for t he lowest accept ed price for Treasury Bills at auct ion Straddle The simult aneous purchase/ sale of bot h call and put opt ions for t he same share, exercise/ st rike price and expiry dat e Straight A bond wit h unquest ioned right t o repayment of principal and int erest at t he specified dat es wit h no addit ional furt her right s or bonuses Straight Date See “ fixed dat es” Strap A combinat ion of t wo calls and one put Strike Price Also called exercise price The price at which an opt ion holder can buy or sell t he underlying inst rument Strip A combinat ion of t wo put s and one call Structural Unemployment Unemployment levels inherent in an economic st ruct ure version: Sept em ber 2006 / 105 of 111 Value Definition Support Levels A price level at which t he buying is expect ed t o t ake place When an exchange rat e depreciat es or appreciat es t o a level where (1) Technical analysis t echniques suggest t hat t he currency will rebound, or not go below; (2) The monet ary aut horit ies int ervene t o st op any furt her downward movement See Resist ance Point Swap The simult aneous purchase and sale of t he same amount of a given currency for t wo different dat es, against t he sale and purchase of anot her A swap can be a swap against a forward In essence, swapping is somewhat similar t o borrowing one currency and lending anot her for t he same period However, any rat e of ret urn or cost of funds is expressed in t he price different ial bet ween t he t wo sides of t he t ransact ion Swap Price A price as a different ial bet ween t wo dat es of t he swap Swap Rate See “ Forward Margin” Swaption An opt ion t o ent er int o a swap cont ract Swift Societ y for Worldwide Int erbank Financial Telecommunicat ions is a Belgian based company t hat provides t he global elect ronic net work for set t lement of most foreign exchange t ransact ions Swissy Market slang for Swiss Franc Switch See Deposit Swap Synthetics Opt ions or fut ures t hat creat e a posit ion t hat is able t o be achieved direct ly, but is generat ed by a combinat ion of opt ions and fut ures in t he relevant market In foreign exchange a SAFE combines t wo forward cont ract s int o a single t ransact ion where set t lement only involves t he difference in values Tau Expresses t he price change of an opt ion for a percent age change in t he implied volat ilit y T-Bill Treasury Bill Technical Analysis The st udy of t he price t hat reflect s t he supply and demand fact ors of a currency Common met hods are flags, t rendlines spikes, bot t oms, t ops, pennant s, pat t erns and gaps Technical Correction An adj ust ment t o price not based on market sent iment but t echnical fact ors such as volume and chart ing Tender (1) A formal offer t o supply or purchase goods or services (2) In t he UK, t he t erm for t he weekly Treasury Bill issue Terme (French) Period Terms of Trade The rat io bet ween export and import price indices Theta A measure of t he sensit ivit y of t he price of an opt ion t o a change in it s t ime t o expiry Thin Market A market in which t rading volume is low and in which consequent ly bid and ask quot es are wide and t he liquidit y of t he inst rument t raded is low version: Sept em ber 2006 / 106 of 111 Value Definition TIBOR Tokyo Int er-bank Offered Rat e Tick A minimum change in price, up or down Ticket See Deal Slip TIFFE Tokyo Int ernat ional Financial Fut ures Exchange Time Value That part of an opt ion premium which reflect s t he lengt h of t ime remaining in t he opt ion prior t o expirat ion The longer t he t ime remaining unt il expirat ion, t he higher t he t ime value Today/ Tomorrow Simult aneous buying of a currency for delivery t he following day and selling for t he spot day, or vice versa Also referred t o as overnight Tomorrow Next (Tom next) Simult aneous buying and selling of a currency for delivery t he following day and selling for t he next day or vice versa Tradable Amount Smallest t ransact ion size accept able Trade Balance The Trade Balance is a measure of t he difference bet ween import s and export s of t angible good and services The level of t he t rade balance, and changes in export s and import s, are widely followed by foreign exchange market s Trade Date The dat e on which a t rade occurs Trade Deficit/ Surplus The difference bet ween t he value of import s and export s, oft en only report ed in visible t rade t erms Trade Ticket See Deal Ticket Tranche (French) A port ion of Specifically used for borrowings from t he IMF Transaction The buying or selling of securit ies result ing from t he execut ion of an order Transaction Date The dat e on which a t rade occurs Transaction Exposure Pot ent ial profit or loss generat ed by current foreign exchange t ransact ions Translation Loss/ Profit When consolidat ing int o t he base currency, t he calculat ion of loss or profit result ing from t he valuat ion of foreign asset s and liabilit ies for balance sheet purposes Treasury Bills Short -t erm obligat ions of a Government issued for periods of one year or less Treasury bills not carry a rat e of int erest , but are issued at a discount on t he par value Treasury bills are repaid at par on t he due dat e In t he UK t hey are normally for 91 days, and are offered at weekly t enders In t he US t hey are auct ioned Treasury Bonds Government obligat ions wit h mat urit ies of t en years or more Treasury Notes Government obligat ions wit h mat urit ies more t han one year, but less t han t en years version: Sept em ber 2006 / 107 of 111 Value Definition Treasury Stock Previously issued st ock t hat has been repurchased by, donat ed t o or ot herwise acquired by t he issuing firm Treasury st ocks pay no dividends and have no vot ing privileges Troc, Troquer (French) FX t erm for swap Turnover The t ot al money value of currency cont ract s t raded which is calculat ed by mult iplying size by t he number of cont ract s t raded Two-Way Quotation When a dealer quot es bot h buying and selling rat es for foreign exchange t ransact ions Ultimo Cont inent al t erm for mont h or year end Uncovered Anot her t erm for an open posit ion Under Reference (Order) Before finalizing a t ransact ion all t he det ails should be submit t ed for approval t o t he order giver, who has t he right t o t urn down t he proposal Under-Valuation An exchange rat e is normally considered t o be undervalued when it is below it s purchasing power parit y Undo A colloquial t erm for reversing a t ransact ion e.g a spot sale by means of a forward purchase or, if done in error, a spot purchase Unit of Account A device designed t o provide a consist ent value wit h varying currencies e.g ECU and SDR Up Tick A t ransact ion execut ed at a price great er t han t he previous t ransact ion Valeur Compensee (French) Payment s are said t o be "valeur compensee" when payment by one part y in one cent re, and set t lement by t he ot her part y in anot her cent re, t akes place on t he same day Value Date For exchange cont ract s, it is t he day on which t he t wo cont ract ing part ies exchange t he currencies which are being bought or sold For complet e descript ion see t he chapt er on t rading For a spot t ransact ion, it is t wo business banking days forward in t he count ry of t he bank providing quot at ions which det ermines t he spot value dat e The only except ion t o t his general rule is t he spot day in t he quot ing cent re coinciding wit h a banking holiday in t he count ry(ies) of t he foreign currency(ies) The value dat e t hen moves forward a day The enquirer is t he part y who must make sure t hat t he spot day coincides wit h t he one applied by t he respondent The forward mont hs mat urit y must fall on t he corresponding dat e in t he relevant calendar mont h If t he one mont h dat e falls on a non-banking day in one of t he cent ers, t hen t he operat ive dat e would be t he next business day t hat is common The adj ust ment of t he mat urit y for a part icular mont h does not affect t he ot her mat urit ies t hat will cont inue t o fall on t he original corresponding dat e if t hey meet t he open day requirement If t he last spot dat e falls on t he last business day of a mont h, t he forward dat es will mat ch t his dat e by also falling due on t he last business day Also referred t o as mat urit y dat e version: Sept em ber 2006 / 108 of 111 Value Definition Value Spot Normally set t lement for t wo working days from t he dat e t he cont ract is ent ered int o Value Today Transact ion execut ed for same day set t lement ; somet imes also referred t o as "cash t ransact ion" Vanilla A simple opt ion whose t erms and condit ions not include any provisions ot her t han exercise st yle, expiry and st rike To compare wit h exot ic opt ions which have addit ional t erms Variation Margin Funds required t o be deposit ed by a client when a price movement has caused funds t o fall below t he st ipulat ed percent age of t he value of t he cont ract Vega Expresses t he price change of an opt ion for a one per cent change in t he implied volat ilit y Velocity of Money The speed wit h which money circulat es, or t urnover in t he economy It is calculat ed as t he annual nat ional income; average money st ock in t he period Vertical (Bear or Bull) Spread The sale of an opt ion wit h a high exercise price and t he purchase (in t he case of a bull), or t he sale (in t he case of a bear), of an opt ion wit h a lower exercise price Bot h opt ions will have t he same expirat ion dat e Volatility A measure of t he amount by which an asset price is expect ed t o fluct uat e over a given period Normally measured by t he annual st andard deviat ion of daily price changes (hist oric) Can be implied from fut ures pricing, implied volat ilit y Vostro Account A local currency account maint ained wit h a bank by anot her bank The t erm is normally applied t o t he count erpart y's account from which funds may be paid int o or wit hdrawn as a result of a t ransact ion Wholesale Money Money borrowed in large amount s from banks and inst it ut ions rat her t han from small invest ors Wholesale Price Index Measures changes in prices in t he manufact uring and dist ribut ion sect or of t he economy, and t ends t o lead t he consumer price index by 60 t o 90 days The index is oft en quot ed separat ely for food and indust rial product s Working Balance Discret ionary element in t he monet ary reserves of a cent ral bank Working day A day on which t he banks in a currency's principal financial cent er are open for business For FX t ransact ions, a working day only occurs if t he banks in bot h currencies’ financial cent ers are open (all relevant currency cent ers in t he case of a cross) World Bank A bank made up of members of t he IMF whose aim is t o assist in t he development of member st at es by making loans where privat e capit al is not available Writer The seller of a posit ion Also known as t he grant or of t he t rade "Writ ing a Currency" is t o sell it version: Sept em ber 2006 / 109 of 111 Value Definition Yard Slang for milliard, one t housand million (1 European milliard = US billion = 1,000 million) Yield Curve The graph showing changes in yield on inst rument s depending on t ime t o mat urit y A syst em originally developed in t he bond market s is now broadly applied t o various financial fut ures A posit ive sloping curve has lower int erest rat es at t he short er mat urit ies, and higher at t he longer mat urit ies A negat ive sloping curve has higher int erest rat es at t he short er mat urit ies Z-Certificate Cert ificat e issued by t he Bank of England t o "discount houses" in lieu of st ock cert ificat es t o facilit at e t heir dealing in t he short dat ed gilt edge securit ies Zero Coupon Bond A bond t hat pays no int erest The bond is init ially offered at a discount t o it s redempt ion value version: Sept em ber 2006 / 110 of 111 [12] Disclaimer (Risk warning) We would like t o kindly inform t he reader of t he pot ent ial financial risks of engaging in foreign exchange t rading The t ransact ion of such financial inst rument s known as forex, fx, or currency, and dealt on a valued basis known as 'spot ' (or 'forward', 'day t rading', 'opt ion', and similar inst rument s) can cont ain a subst ant ial degree of risk Before deciding t o undert ake such t ransact ions wit h a Forex t rading plat form or wit h any ot her market maker), and indeed, any ot her firm offering similar services, a user should carefully evaluat e whet her his/ her financial sit uat ion is appropriat e for such t ransact ions Trading foreign exchange may result in a subst ant ial or complet e loss of funds and t herefore should only be undert aken wit h risk capit al The definit ion of risk capit al is funds t hat are not necessary t o t he survival or well being of t he user We st rongly recommends t hat a user, who is considering t rading foreign exchange product s, reads t hrough all t he main t opics cont ained in t he t rading plat form’ s websit e so t hat he/ she may obt ain a clear and accurat e underst anding of t he risks inherent t o fx t rading Opinions and analysis on pot ent ial expect ed market movement s cont ained wit hin such websit es are not t o be considered necessarily precise or t imely, and due t o t he public nat ure of t he Int ernet , t rading plat forms cannot at any t ime guarant ee t he accuracy of such informat ion Trading online, no mat t er how convenient or efficient it may be, does not necessarily reduce t he risks associat ed wit h foreign exchange t rading Such plat forms not accept any responsibilit y t owards any cust omer, member or t hird part y, act ing on such informat ion cont ained on t heir websit e as t o t he accuracy or delay of informat ion such as quot at ions, news, and chart s derived from quot at ions You are st rongly advised t o engage in Forex t rading only if you fully underst and t he risks involved, and are willing and prepared t o allocat e t he appropriat e funds, which are not essent ial or vit al for your well being Warning! Do not invest money you cannot afford t o lose! version: Sept em ber 2006 / 111 of 111 ...The Forex quick guide for beginners and privat e t raders This guide was creat ed by Easy -Forex Trading Plat form, and is offered FREE t o all Forex t raders Make your Forex learning... profit s Easy -Forex wishes you enj oyable and successful Forex t rading! version: Sept em ber 2006 / of 111 [2] What is Forex trading? What is a Forex deal? The invest or's goal in Forex t rading... our guest and writ e us: ForexBooks @Forex. info version: Sept em ber 2006 / of 111 [1] Forex? What is it, anyway? The market The currency t rading (foreign exchange, Forex, FX) market is t he