A Glossary of Currency Trading Terms and Definitions – Understanding Foreign Currency Trading
Getting ready to dive into the world of foreign currency trading? Before you do, please take a moment to look over these terms and definitions. They’ll help you navigate the choppy and confusing waters of the Forex Market and get you headed in the right direction.
- Anonymous Trading
Anonymous Trading is the term used to describe transactions made by companies who want to keep their trades secret. Although the trades themselves are visible to the market, the people making the trades are never named. This allows high-profile traders and corporations to make trades without market analysts jumping all over them.
Appreciation is the term used to describe the increase in value a currency experiences due to market factors. Generally appreciation is caused when demand outweighs supply, causing scarcity in the market. Since the buyers in this case place a higher value on the currency, it appreciates in value and becomes more expensive to trade. Appreciation is the opposite of depreciation.
- Authorized Dealer
An Authorized Dealer is the name given to any type of bank, brokerage, clearing house, or investment company that has been authorized to buy and sell foreign currency. Investors should be wary of companies who claim to be Authorized Dealers, but partake in shady or underhanded trading practices. It’s important to look into a company’s history before committing capital to them.
- Base Currency
Base Currency is the currency that a trader uses to keep track of their portfolio. In the Forex Market, prices are generally compared to the U.S. Dollar. Foreign prices are quoted in their relation to $1 US.
- Bretton Woods Accord
The Bretton Woods Accord was enacted in 1944. It was created in an effort to stabilize the various world economies after the Great Depression and World War 2 left them decimated. The Bretton Woods Accord effectively fixed all of the world’s major economies to the U.S. dollar, and then fixed the U.S. dollar to the price of gold, about $35 per ounce. This was known as The Gold Standard, and the Federal Reserve could only print as much currency as they had gold. Eventually, this system fell apart due to the weakening of the U.S. dollar, and it was abandoned in 1971.
A Broker is a person who handles transactions within the Forex Market. Forex Brokers work for Brokerages or Clearing Houses, where they charge commissions for implementing trades, purchases, and swaps for investors. Forex Brokers are not affiliated with any specific company or bank; rather they work to ensure the market itself runs smoothly.
- Central Bank
A Central Bank in a country is the primary bank that monitors all other banks. They are usually responsible for printing currency and keeping track of interest rates. In the United States, The Federal Reserve, also known as “The Fed” is the central bank. In Canada, The Bank of Canada handles the economy and prints out Canadian Money.
A Commission is a fee charged by agents or brokers for purchasing, trading, or selling on the market. In most cases, the fee is nominal, or can be tied to the amount of money that is being handled.
Currency is Money. It is issued by a country’s central bank. It is the lifeblood of any economic system.
Depreciation is a term used to describe the worsening of a currencies value due to various economic factors. Depreciation is caused when supply outweighs demand, for whatever reason, and because of the surplus currency on the market its value to investors drops. Depreciation is the opposite of appreciation.
Devaluation is when a country actively drops the value of their currency in an effort to stave off economic collapse. When a currency’s value is dropped, it can be bought and sold at cheaper prices, which in theory will attract more investors. Currencies are sometimes devalued to make industry more attractive to foreign investors.
- Dirty Float
A Dirty Float is a term used to describe a special type of floating currency. A dirty float is also known as a “managed float” because the interest rates are carefully monitored by a central bank in order to assure stability. The central bank buys and sells large amounts of currencies in order to manipulate their own.
- Fixed Exchange Rates
Fixed Exchange Rates are exchange rates that are locked in at a specific amount and are not allowed to fluctuate. The central bank must carefully ensure that the exchange rate remains constant. Fixed rates that differ from true market value too much can result in black market trading. Generally, fixed exchange rates are used to stabilize fluctuating economies.
- Foreign Exchange (Forex)
Foreign Exchange, also known as Forex, is the market where the buying and selling of the world’s currencies occur. It is a highly profitable, yet highly unstable market completely unregulated by any government policies. For this reason, the Forex Market is subject to wild swings and strong trends.
- Interbank Rate
The Interbank Rate is the term used to describe the rates at which the world’s central and international banks trade currency. This can sometimes be significantly different than the true market value of the currencies.
Liquidity is a term used in a market situation to describe the ability of the market to “absorb” large transactions without affecting the rates of the currency being purchased. The Forex Market has high liquidity, meaning that very large amounts of a currency may be bought or sold without the exchange rate raising or lowering due to the demand.
Pegging occurs when a country attaches the value of it’s currency to the value of another currency. This often happens when countries with poor economies want to stabilize the value of their money. By pegging it to a more stable currency, like the U.S. dollar, a country can stop their currency from fluctuating or depreciating. The downside of this is that the country’s economic stability is now in the hands of another country.
Rate is the term used to describe a currency’s value in regards to another currency. This is also known as the Exchange Rate.
Revaluation is the term used to describe a currency that is intentionally raised in market value by a country’s central bank. This occurs when a country's money becomes inflated, and its price rises rapidly. This can cause huge trade and exchange problems, and is generally an undesirable quality in an economy. Revaluation is the opposite of devaluation.
- Risk Capital
Risk Capital is the term used to describe the money an investor has available over and above the money needed to continue his or her desired lifestyle. Risk Capital is money that will not be missed if it is lost, and because of this it is often used in high-risk trading situations such as the Forex Market.
- Spot Market
The Spot Market is a market where commodities are delivered as soon as they are purchased. This is how the Forex Market operates. The commodities (Foreign Currencies) are delivered the instant they are purchased and deposited into a bank account. There is no need to trade in the money (such as stocks and bonds), as it is instantly accessible.
- The Gold Standard
The Gold Standard is the term used to describe how the American economy was once tied to the value of gold. Abandoned in 1971, the American dollar was directly related to the then-static price of gold by the Bretton Woods Accord of 1944. At the time, gold was valued at $35 an ounce. This was later upped to $70 an ounce when the American dollar was devalued to combat strong foreign currencies.
Volume is all of the buying, selling, and trading that goes on during the course of any given trading period. Volume is measured in a dollar amount, and often is measured in daily numbers. At over $1.5 trillion, the Forex Market far outpaces the New York Stock Exchange ($16 billion) or the London Stock Exchange ($11 billion).
We know how confusing the world of currency trading can be. Hopefully, this article will help you straighten out some of those confusing terms and definitions that Forex agents and brokerages can throw at you.
Never be afraid to ask questions. Remember, it’s YOUR money, and if you're not 100 per cent sure of something, ask. If the answers don’t satisfy you completely, you can always go somewhere else where they will.
About The Author
Bill Schnarr is a successful freelance copywriter, who works from home providing tips and advice for consumers about home owner insurance quotes, work at home ideas and even credit counselling services for consumers. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.
This "Glossary Of Currency Trading Terms & Definitions" reprinted with permission.
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