how to become an online forex trader

HOW TO BECOME AN ONLINE FOREX TRADER

3 EASY STEPS TO CURRENCY TRADING FOR BEGINNERS

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How To Become An Online Forex Trader 3 Easy Steps to Currency Trading for Beginners

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CONTENTS

1. Introduction to Forex trading .................................................................. 3

No Commission ....................................................................................... 4

2. How does currency market work? .......................................................... 5

3. What impacts the currencies? ................................................................ 7

Interest Rates .......................................................................................... 7

4. How to sign-up for a demo account? ...................................................... 8

5. What does it take to become a Forex trader with real money? .............. 9

6. Choosing Trading Strategy .................................................................... 10

7. Choosing the Forex Broker Platform .................................................... 13

8. Technical Analysis and Forex Signals ................................................... 15

9. Trade Commodities similar to Forex .................................................... 17

10. Glossary ................................................................................................ 19


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1. INTRODUCTION TO FOREX TRADINGWhat is Forex? The word Forex or FX stands for Foreign Exchange. It is a process of buying one currency for the other, which involves speculation and aims at making profit when the exchange rates of the currencies being traded move in favour of the trader. For example: A trader selling Euro to buy USD, if the exchange rates move in his favour.

Forex is the worlds largest financial market and is open 24 hours a day. The daily turnover is estimated to be around 4 trillion USD, which is more than the combined turnover of the major stock markets of the world. A Forex market is a desirable choice for the traders due to its high liquidity factor.

PLAYERS IN FOREX

Retail Traders and the Beginners These are non-professional part-time traders and small investors, trying to speculate the market direction to earn profit.

Dealers The dealers are the market makers. They set prices and execute the trades on behalf of the traders.

Institutional Traders These comprise of the banks and the government agencies. The trade volumes are massive and influence the market movements. The institutional traders follow proprietary trading.


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Professionals Professionals are full-time traders having sound technical knowledge about the market. These professionals operate from investment firms or from their homes.

Why trade Forex online? Under normal circumstances, trade orders are instantly executed. If an exchange rate changes, one can order and execute a trade instantly and hence get the benefits of real time quotes. Traders also use Forex trading robots. These are the automated computer programmes that handle market activities on the basis of criteria such as price, volume and timing of the order entered by the trader. Online Forex trading is a feasible and convenient process.

Why Forex is better than stock markets? Unlike a stock market, a Forex market has following important features.

24-hour Market A Forex market operates for 24 hours a day, making it possible for a trader to trade as per his or her convenience. It enables a trader to customise his or her own schedule to trade during U.S., European and Asian market hours.

No Commission The brokers do not charge any commission or transaction fees for executing transactions online or over the phone. They are compensated for their services through the bid/ask spread.

Short-selling without an uptick There is no restriction to short-sell in a Forex market. Currency trading involves constantly buying a currency and selling another, it makes no difference if a trader is long or short of any currency.


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Therefore, irrespective of the market movements, a trader can harness the opportunity by short-selling a currency. No Middlemen

Spot trading is a decentralised process and it involves no middlemen. Due to the tough competition, a trader gets the best deals directly from the dealers. This saves on the cost of the middlemens charges and also saves time. Leverage

Forex trading allows borrowing leverage up to 200 times the value of the traders account. This helps maximising the profits. The amount of leverage is determined by the ratio of margin to the full value of the trade.

2. HOW DOES CURRENCY MARKET WORK?Global Currency Market

The Forex market is a global market and it has no common meeting point. All the trades are done online; one can see the transaction between the two currencies on the computer screen. Investors and speculators trade currencies from all over the world. The supply and demand for the currencies fluctuate depending upon the economic scenario in different countries.

The term Interbank is often used in the context of Forex. Interbank means between two banks. Information regarding the exchange rates is shared between the two banks. But today, as forex can be traded by dealers and individual traders, the term Interbank is not just limited to a bank. Spot forex is traded in lots also called as contracts. The standard size of a lot is $100000, a mini lot is worth $10000 and a micro lot is worth $1000.


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Who sets the currencies?

A currency is worth of whatever the buyer is willing to pay. Hence, the traders set the buying and selling price. Other factors like demand and supply, economic conditions, etc. affect the exchange rate.

If a buyer wishes to buy a currency, he pays a Good Faith deposit to the seller in order to complete the trade, at the specified price. Over 90 per cent of the currencies are traded against a US Dollar. The most traded currencies after USD are Euro, JPY, GBP, and CHF. These currencies are traded in pairs.For example, UDS-CHF, USD-CAD, GBP/USD, etc are some of the combinations. Forex quotes will have always 2numbers- bid price and ask price. Bid price is the one at which the buyer wishes to buy the base currency. Ask price is the one at which the seller wishes to sell the base currency. The difference between the bid and ask price is the spread through which the dealers manage to make profit.

If we consider an example of Euro/USD, where Euro is the base currency and USD is the counter currency, there would be two numbers in the quote, let us say 1.2228/1.2232. The first number 1.2228 is the bid price at which the traders are ready to buy Euros against the USD. The second number 1.2232 is the rate at which the trader is ready to sell the Euros against the USD.

For the four major currencies, the spread is normally 5 pips, plus or minus. The pip (Percentage In Point) is the last decimal place of the quotation. In the above case, the spread is 4 pips. This is the parameter that one can use to measure the profit and loss associated with the trade.


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3. WHAT IMPACTS THE CURRENCIES? The following factors impact the currencies and the exchange rates. Interest Rates

The interest rates from the central banks influence retail rates charged by the financial institutions. If an economy is under-performing, the central bank reduces the interest rates on lending, which make credit cheaper. This boosts consumer spending and helps expand the economy. In the opposite case, to bring down the rate of inflation, the interest rates are increased making the credit more expensive. In case of investments and Forex, interest rates are a tool to balance the yield returns and safety of funds. When interest rates are increased, the yield for assets denominated in that currency increases as well. This leads to increased demand for that currency in the Forex market, ultimately increasing its value and exchange rate.

Employment Scenario

The level of employment in a country also affects the exchange rate of its currency. If the employment ratio is high, people will have income to spend, which boosts the economic activities and the economic growth. This leads to appreciation of the currency in the Forex market.

Balance of Trade

The difference between the value of exports and the value of imports is called the balance of trade. If this difference is positive, the country supposedly has the balance of trade in its favour and the exchange rate of its currency


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increases since other countries have to pay more of their home currency to purchase the goods. If the balance of trade is negative, the country is said to be in trade deficit. The exchange rate goes down, resulting in devaluation of the currency.

Political Factors

If the political condition of a country is stable, it can focus on economic growth and development. Investors always seek to invest in such strong economies for safety of funds as well as maximum returns. Hence, alongside the favourable economic conditions, the demand of the currency increases, which leads to appreciation in its value.

Speculation

Most of the trades in the Forex market are speculative in nature. If it is speculated that the rate of a certain currency is going to go up, traders start buying that currency in large volumes. Thus, due to this increased demand and high buying volumes, the price of the currency shoots up fulfilling the speculation. Similarly, if it is speculated that the rate of the currency will go down, traders start selling it and ultimately the rate of the currency drops.

4. HOW TO SIGN-UP FOR A DEMO ACCOUNT?Signing up for a demo account is free. One can sign up for a demo account on the website of the online trading portals.A demo account is a practice trading account with the functions of real account, wherein one can experience real market conditions.

Trading forex using a demo account involves virtual money/play money and no real money.


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So a beginner can sharpen his or her skills in trading without using real money and bearing no losses or earning any profit. However, real pressure is not involved in demo account trading as it is in case of the real accounts. 5. WHAT DOES IT TAKE TO BECOME A FOREX TRADER WITH REAL MONEY? KNOWLEDGE

Basic knowledge of the Forex markets operations and working methodology is essential for any trader. He or she must understand the technicalities and the risks involved in the market. One must practice on demo accounts too before taking a plunge into the real market. Patience Forex trading is not about becoming rich overnight. It needs patience; it takes time to become a successful Forex trader. The movement in the currency rates is less than 1 per cent in a day. So, one should trade constantly to earn decent profits. Mistakes are bound to be made by a novice, but one must analyse the mistakes and learn from them.

DISCUSSIONS

Discussing things with the experts and other traders is a fastest way to learn. One can discuss the difficulties or mistakes with the experts and get a deeper insight into it. Successful traders can help beginners by sharing their experiences and strategies.

QUALITATIVE ANALYSIS

Though experts mainly rely on technical analysis, it is important for a beginner to carry out a qualitative analysis. Qualitative analysis takes into consideration not only the changes in the values of currencies and trade volumes but also the reasons behind such changes.


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For example, factors such as civil unrest, government policies (fiscal policy, tight money policy, etc.), and natural calamities can influence the trend of the forex market.

RISK MANAGEMENT

A novice must understand the risk involved in forex trading before investing his or her hard earned money. Risk management is an important part of forex trading. Implementing the strategy value at risk to measure the volatility, using stop-loss to mitigate the loss, etc. are the examples of risk management strategies.

GOING LIVE

After a comprehensive research and understanding of the Forex market, one can think of trading Forex with real money. Its now time to design a trading strategy and test the skills and knowledge he or she acquired during the practice on a demo account. The trader should also decide if he or she would like to trade manually or use automated programmes or a combination of both. A trader can start off with a mini-account with a small upfront amount.

6. CHOOSING TRADING STRATEGY One can frame a trading strategy that will suit their risk appetite and budget. For framing or choosing a successful strategy, especially for a beginner, it is very crucial to know all the aspects of Forex trading. Without proper knowledge and sufficient practice on a demo account a beginner runs the risk of making huge losses and getting discouraged. The following points must be considered while designing a trading strategy.


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SHORT-TERM POSITIONING

If a trader wants to make some quick money without his capital being tied up in a long position, he can choose to go for short-term openings. This way he can also take up opportunities that crop up in near future. Short-term positioning transaction lasts from a few minutes to a few hours. It means buying one currency at a lower rate, selling it if the value goes up, buying it again when the value comes down.

SWING TRADE

It is a trading strategy wherein a trader holds the position for a brief period, say a week. Such traders are technical analysts who aim to gain from the volatility during the time they hold the position.

STOP LOSS

Market conditions are bound to become unfavourable every now and then, and the traders run a risk of making loses. Traders try to mitigate this loss by placing a stop-loss. It is an instruction designed to limit a traders loss on a currency position. For example- If the trader sets a stop-loss order for 20 per cent below the value at which a currency is bought, then it will limit the loss to 20 per cent.

CARRY TRADE

This is a popular strategy in the Forex market and assures a trader making at least some gain on mid-term to long-term positions. Traders buy the high-interest currencies and sell the low-interest currencies. This ensures the rollover interest getting posted into the traders account for each trading day, thereby enhancing the returns.


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FILL OR KILL (FOK)

It is a strategy wherein a buy order or a sell order must be executed immediately and in entirety. If the order is not executed immediately, then it will get cancelled. No partial executions are allowed. FOK strategy is generally used by active traders, who trade in large volumes. The main purpose of a FOK order is to ensure that the trader enters the position at a desired price.

The opposite of FOK is Good Til Cancelled, which means an order to buy or sell the currency at a set rate will be valid until it is cancelled by the trader or when the trade is executed.

THE BUDGET FACTOR

Traders with a smaller capital can use the leveraging strategy. Leverage in simple terms is a loan meant for a specific purpose. Here, leverage is used to trade in Forex. Leverage of up to 200 times of the equity money/ traders account value is available in Forex trading.

Traders working with leverage generally operate in day trading position, which enhances their returns as well as liquidity.

ELEMENT OF RISK

Hedging is a way for a trader to minimise or eliminate foreign exchange risk. There are two common hedges- forwards and options. A forward contract will lock in an exchange rate at which the transaction will occur in the future. An option sets a rate at which the trader may choose to exchange currencies. If the current exchange rate is more favourable, then the trader will not exercise this option.


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AUTOMATED TRADING V/S MANUAL TRADING

Automated trading, also known as algorithmic trading, uses automated Forex signal system trading programmes known as Forex robots. Many such programmes are available in the market. Many traders prefer these automated programmes due to its simplicity and ease of use.

The automated Forex signal system trading programme monitors the buying price and produces a signal for the trader to place a trade on a specific pair of currencies. A fully automated signal system also places the trade, monitors the same and exits the trade.

It saves time and ensures better levels of accuracy. It is free from the involvement of a traders emotions. On the other hand,

when a trader trades manually, he needs to place the trades depending upon the market conditions and the price trends of the currency in question.

However, this method is high on risk since a speculation may not go right in the beginning. It is a time-consuming process and is not very suitable for a novice with a weak psychological profile. A trader may design his own strategies based on a comprehensive market research. Manual trading involves emotions like greed and fear and may result in the trader closing the trade prematurely or he might indulge in overtrading. This hampers the profitability of the trade. 7. CHOOSING THE FOREX BROKER PLATFORM A trader needs to consider various parameters while choosing a Forex broker platform. Minimum upfront amount needed to start trading, network with other traders, ease of using the platform, deposit options, resources, trading signals in real time, execution speed, Forex spread, commodities available, support and service, bonuses, etc. are some of the parameters


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8. TECHNICAL ANALYSIS AND FOREX SIGNALSTECHNICAL ANALYSIS

It is the method of evaluating a currency and predicting its price movements on the basis of past performances and market trends. Technical analysis takes into consideration only the changes in the value of the currency and the volume of trade at various points of time. In other words, it tries to identify a thin

market and a tight market. It does not consider the reasons that brought about these changes. It helps identify the pattern of market behaviour. Experts believe that there is a high probability of certain market behaviour patterns being repeated over the time, and that past performances of a currency determines the future performance. Hence, this historical data is used to make charts as a primary tool to forecast the behaviour of the Forex market. Technical analysis is carried out with the help of technical indicators.

TOOLS/ INDICATORS OF TECHNICAL ANALYSIS Following are the various tools or indicators used to carry out technical analysis of the Forex market.

RELATIVE STRENGTH INDEX (RSI) The RSI takes into consideration the upward and downward movements of the currency, and normalises it so that it is expressed within a range of 0-100. If the RSI is at 70 or above, the currency is assumed to be overbought. It implies that the value of the currency rose beyond the market expectations. If the RSI is at 30 or below, the currency is assumed to be oversold. It implies that the value of the currency fell beyond the market expectations.

NUMBER THEORY The Fibonacci number series is constructed by adding the first two numbers to give the third number. For example: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on. Any number in the series is in the ratio of 62 per cent to the next number. 62 per cent is a popular Fibonacci retracement number. One can observe certain levels of retracement on applying these percentages to the trending prices and also with prediction of the new highs and lows.


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These marks hold significance for the forex traders because they are supposedly the support and resistance areas. The price in these areas will either fluctuate for some time or will reverse.

WAVES The Elliott wave theory is yet another method of market analysis. It is based on repetitive wave patterns and the Fibonacci number sequence. Ideally, Elliott wave patterns show a five-wave advance followed by a three-wave decline.

TRENDS In simple words, a trend means the direction in which the value of a currency tends to move. Rising crests denote an upward trend in the price, while falling troughs denote a downward trend in the price. The crest and trough together determine the steepness of the price movements. The breaking of the trend line usually denotes a trend reversal. Horizontal crests and troughs denote a trading range. Moving averages are used to normalise the price information and confirm a trend, as well as the support and resistance levels.

STOCHASTIC OSCILLATOR A stochastic oscillator helps a trader identify the oversold and overbought conditions on the scale of 0-100 per cent. This indicator is based on the idea that in a strong up trend market prices tend to close near the higher part of the price range. Similarly, the prices in a down trend market tend to close near the lower part of the price range.

This tool produces two lines on the chart that are used to denote the areas of overselling and overbuying. On a scale of 0-100 per cent, values less than 20 denote the oversold condition, and the values above 80 denote the overbought condition. Divergence between the price trend of the currency and stochastic lines gives a trading signal.


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GANN NUMBERS This indicator was developed my W.D. Gann, a stock and commodity trader during the early 1900s. This indicator is based on the price movements and the time, called as the price/time equivalent. This method uses the angles in the charts to identify the support and resistance areas.

Each angle proportionately divides the price and time, and is expressed as points per day. The 1x1 or the 45 angle is the most important angle, which represents one unit of price for one unit of time. To understand this concept, one needs to draw a perfect square and draw a diagonal from one corner to the other corner of the square. It is observed that the angle moves up one point per day.

GAP ANALYSIS A gap is the space left on a chart when the trade doesnt take place. This usually happens on weekends when the traders or dealers are not operative. An up gap occurs when the last Fridays closing price is lower than the current Mondays opening price. This gap is generally called as the bullish gap and it signifies market strength. A down gap occurs when the last Fridays closing price is higher than the current Mondays opening price. This gap is called as the bearish gap and it signifies market weakness. A price gap forms on completion of an important price pattern and it is called as the breakaway gap. It usually means a beginning of an important price movement. A price gap that forms in the middle of an important market trend is called as the runaway gap.

9. TRADE COMMODITIES SIMILAR TO FOREXWHAT IS COMMODITY TRADING? Commodity trading is a form of investing activity. It is similar to Forex, but instead of buying and selling currencies, an investor or trader buys and sells commodities.


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Commodities are traded on exchanges, where buyers and sellers come together to trade, either to get the products they need or to gain profits from the fluctuating prices. There are a few ways to trade commodities.

Futures are contracts to buy or sell commodities at a pre-determined price on a future date (future delivery). Options are buying the right to buy or sell a commodity at a specific price and date.

Commodity trading is comparatively easier, since it depends mainly upon the demand and supply of the factor, and other natural factors like weather, crop percentages planted, etc.

WHAT ARE TRADED COMMODITIES? Commodities like gold, silver, copper, iron ore, cotton, crude oil, heating oil, rubber, lumber, natural gas, corn, coffee cocoa, frozen orange juice, pork bellies, etc. are traded over the exchanges.

CAN COMMODITIES BE TRADED USING A FOREX TRADING PLATFORM? Yes, most of the commodities can be traded on a Forex trading platform. Energy commodities such as crude oil, heating oil, and gas oil are traded over a Forex trading platform for the purpose of hedging, investment, and speculation.


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10. GLOSSARYA

Algorithmic Trading (Algo Trading, Robo Trading) Algorithmic trading is the use of computer programs to conduct market activity. An automated software algorithm enters orders based on criteria such as the price, volume and timing of the order.

Arbitrage Profiting from price difference in a currency, by trading against various currency crosses. For instance, you can trade USD against both GBP and JPY in order to take home some risk free profits.

At best (for best exchange rate) A common term used in international forex platforms. Means that you are willing to buy or sell at the best rate in the market right now. This type of order can be an alternative when there is low volatility and no big news are about to effect the currency rates.

B Bar Chart Probably the most used chart in forex trading. Consists of four points; high, low, opening and closing rate.

The highest and lowest exchange rate forms the vertical bar in an intraday graph. Then we have the opening price, which are marked by a horizontal line to the left of the bar staple.

Finally, there is the closing price, marking a horizontal line to the right of the bar staple.

Base currency The first currency in a currency pair, which shows how much the base currency is worth in terms of the other currency in the pair.


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Bear Market A period of down going prices in a currency pair.

Bid/Ask Spread (Bid/Offer Spread) The bid/ask spread is the quoted prices at which a single participant is willing to both buy and sell a currency. The bid price is the price they are willing to buy at, and the ask price is the price they will sell at. The spread is the difference between the two figures. Usually trading will occur somewhere in the middle as participants adjust to complete a trade.

Broker A forex broker or forex brokerage acts as the middle man between one purchasing currency and one selling currency.

Buy Order A buy order is an instruction to a broker, bank, market maker or financial institution to purchase a specific currency or commodity.

C Cable Forex traders use the term cable when talking about the currency pair GBP/USD. The name was created because the exchange rate was originally transferred through a trans-atlantic cable between USA and UK in the beginning of the 19th century.

Carry Trade A carry trade is a common and typically low-risk trading strategy in FX markets. The participant uses a low interest currency to purchase another currency with a higher interest rate. The lower interest currency can be repaid from the rollover interest of the long position.


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Central bank Usually a government that create a currency and administrate fiscal policy, such as open market operations and keeping a currency reserve in other currencies.

Examples of central banks are the Federal Reserve (FED) in USA, Bank of England (BOE) in UK and European Central Bank (ECB) in EU.

Currency The type of money used by a country. Each currency has a value relative to others for forex trading.

DDay Trading A day trade is a position which is opened and closed in the same day. As markets generally fluctuate less over the course of a single day, day traders rely on leverage to multiply their returns. Day traders can work independently or as part of an institution. Day traders bring liquidity and efficiency into the marketplace.

Delivery Date The date a contract matures and the transaction is settled by exchanging currencies.

E European Currency Unit (ECU) A weighted basket of all the European Community currencies. Created by the European Monetary System to eventually replace individual currencies.

Exercise Price The price an option can be exercised at.


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Exposure The potential for profit or loss due to market fluctuations.

F Fill or Kill (FOK) Fill or kill is an order given to a broker that must either be immediately filled in its entirety, or cancelled. This allows traders to make an order which will only be completed at a specific time, or at a specific price.

Fixed Exchange Rate The official rate set by monetary authorities for a currency. Central banks will intervene if the rate fluctuates too far.

Foreign Exchange (Forex, FX) Foreign exchange (FX) is the trading of one currency for another. In FX trading, every time you buy one currency you are also selling the currency with which you make that purchase. Unlike many other markets, the FX market is open for trade 24 hours a day.

Forex Robot A forex robot is a software program which provides automated trading decisions. A forex robot can be used to notify the trader when certain market conditions are met thus allowing the trader to make an order, or it can place and manage orders directly without human interaction. Because forex robots are automated traders, and because the FX market does not close, a forex robot can complete trades for you 24 hours a day.

Forward Contract A contract with a date in the future for delivery of a specified currency if not liquidated before the contract reaches maturity.

Fundamental Analysis Analysis based on news, current events, economic and political factors and global events.


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G Gap Difference between Fridays close and Mondays open price in forex markets.

Gross Domestic Product (GDP) A total measure of a countrys output, income and expenditure. It is a statistical concept that is an important forex indicator.

Good Faith Deposit A good faith deposit is a deposit paid by the buyer to the seller to prove his intentions to complete a trade.

Good Til Cancelled (GTC) Good til cancelled is an instruction to a broker that an order should be left open until it is either completed or cancelled by the trader. Even so, a broker will typically cancel the order after 30 to 60 days or may require the trader to confirm that the GTC order should be left open after that time. GTC orders are also known as open orders.

H Hedge A hedge is a strategic trade or investment which is designed to safeguard against loss, and to offset any negative price movements. Hedging is a common tactic used to protect futures contracts. If one company wishes to purchase components from another, foreign, company in a month's time, it may offset the risk of negative currency movements within the month by purchasing the foreign currency immediately. If the foreign currency goes up in value then the losses on the futures contract will be hedged by the forex trade, and vice versa.


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IInitial Margin A deposit required by a broker before trading occurs. This protects against default by the client.

Interest Rate Risk The potential loss that can arise from interest rate movements.

J Jobber Slang term for traders that operate on short-term fast profits and will not usually leave open positions overnight.

K Kiwi Slang term for the New Zealand dollar.

L Leading Indicators Composite macroeconomic indexes that predict future changes in economic growth and business activity.

Leverage Leverage is a figure, expressed as a ratio, which states the value a buyer controls in a trade in relation to the margin. The margin is a good-faith


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deposit made on a trade. If the buyer puts down a margin of 100,000 on a 1,000,000 position, then his leverage is said to be 10:1.

Limit Order Order to buy or sell at a pre-defined rate or one that is better during a defined period.

Liquidity The capacity of a market to handle large transactions without it leading to major changes in currency and interest rates.

Long Long is a trading position taken when buying a commodity or currency. In the forex market, every time you buy a currency you sell another. So if you use US dollars to buy pound sterling, you are said to be long sterling and short the dollar.

Lot Amounts of units of money. Usually it is a multiple of 100.

MMargin The margin is a good faith deposit made by a trader when he opens a position which is larger than the funds he uses to open with. The ratio of the margin to the full value of the position determines the leverage of the trade.

Margin Call A demand for more money to cover trading positions.

Maturity The date for settlement or the closing date of a contract.


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N Note A financial instrument that represents a promise to pay.

O Offer Price a dealer is willing to sell the base currency at.

Open Position Any deal which has not been settled on buying (long) or selling (short) for a currency pair.

Option A contract which gives the right to buy or to sell at a specified amount and price before a certain date is reached.

Order Order for a broker to buy or sell a certain currency within a specified price range.

P Percentage In Point (Pip) The percentage in point, or pip, refers to the last decimal place of a currency pricing. Because forex markets track the value of currencies to four decimal points, a single pip increase in the US Dollar would mean an increase of 1/100th of a cent.

Point 100th of 1 per cent. Exchange rate movements are usually cited in terms s of points.


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Position A trader is said to hold a position when he enters into a binding agreement to buy or sell a certain asset, commodity or currency at a certain price.

The overall exposure to a given currency. It can be flat when there is no exposure, long if more currency has been bought than sold, or short where more currency has been bought than sold.

Profit The amount of money gained when a position is closed.

Proprietary Trading (Prop Trading) Proprietary trading includes all trading activity by a financial institution which affects only its own accounts but not those of its clients. In a bank or securities firm, such trading is said to take place at the prop desk. Proprietary trades use the company's own capital and all profits are retained by the company.

Put Option A contract which gives the right, but not the obligation, to sell at a specified amount and price before a certain date is reached.

Q Qualitative Analysis Qualitative analysis is an approach to price prediction. Qualitative analysis is an investment strategy which puts greater significance on underlying circumstances and aims to collate research data that may influence market conditions and determine price movements. In the forex market, a qualitative analyst may look towards civil unrest, government policy and natural disasters amongst many other factors in an attempt to establish a market position. For example, if the Bank of England announces a plan to resume a program of quantitative easing, a qualitative analyst may decide to go short GBP in response.

Quote An indicative price for information purposes.


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R Rate The amount of one currency in the value terms of another.

Resistance A price level where selling generally leads to price increases.

Risk management Identifying and accounting for the risks associated with the market. Foreign currency trading can be affected by interest rates, yield curves, volatility, credit, country events like political changes and wars.

S Sell Order A sell order is an instruction given by a trader to sell a specific currency or commodity.

Selling Rate Rate at which the seller or bank is willing to sell a particular currency.

Short Short is a trading position taken when selling a currency or commodity. In the forex market, every time you buy a currency you sell another. So if you sell the US dollars to buy pound sterling, you are said to be short the dollar. Outside the forex market where trades do not occur in asset pairs, short selling of stock is a potentially risky strategy that can incur unlimited losses if the underlying asset rises in value indefinitely. Although short selling of stock was once banned for this reason, it is considered an important source of market liquidity today.

Short Position A market position where the trader has sold a currency that he does not own yet.


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Speculation Speculation is the practice of a trader taking on a controlled level of risk in the hope of receiving returning profits from the investment. Speculation is a calculated investment aimed at generating profit. It differs from hedging, which is an investment made to prevent or minimize losses.

Spread The difference between the bidding and asking prices of a currency.

Sterling The currency of the British pound. Also known as cable.

Stop-Loss A stop-loss is an instruction placed on a trade which acts as a safety net against loss. It stipulates a point at which an order must be killed if market conditions become unfavorable. For example,

Stop-Loss Order An order to buy or sell if a currency reaches a certain price. It will sometimes mean a loss is made, but is to protect against massive losses if a market moves suddenly.

Swap Purchases made at the same time for buying and selling the same amount of a currency at different dates. You do not physically receive the currency but get the price differential between the two transactions.

Swing Trade A swing trade is an investment strategy where the trader holds a position for a relatively brief period of usually a day to a week in duration. The trader will exploit volatility and attempt to repeat the same trade a number of times under favorable market conditions to maximize returns.

T Take-Profit Order An order to buy or sell when a currency reaches a certain price that will give you a profit. It is often combined with stop-loss orders.


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Technical Analysis Analysis based on supply and demand factors that influence a currency.

Trend The direction the market is moving in.

U Useable Margin The amount of money in an account that can be used for trading.

V Volatility A statistical measure of the amount of fluctuations for a given currency over a specified time period. Often measured as the annual standard deviation of historic daily price changes.

W Writer The party that is selling a position. If you write a currency you are selling it.

Y Yield Curve A graph showing the change in yield of currencies and other instruments compared to the time until maturity.

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