A Beginners Guide To Self-Trading
On the Foreign Currency Exchange Market

A Short List of Foreign Currency Trading Terms and Terminology

This is an abbreviated list of terms that will help in understanding common terms that you will come across in reading this site. For a more in-depth Glossary of Terms, plus other interesting information and articles about the Foreign Currency Market, please refer to "About Forex -- Glossary of Terms".

Foreign Exchange Market
Also known as Forex, and by its acronym FX. This is a Market where currencies are traded internationally. Over a trillion (a million million) dollars-worth of foreign exchange is traded globally every day, making forex larger than all bond markets put together. Currency markets exist in the form of spot, forward, futures and options markets. Foreign exchange transactions are made up of Trade flows (only 5% to 10% of total forex transactions). Imports usually need to be paid for in the currency of the country from which they originate. Exports are usually paid for in one's own currency. A trade deficit therefore causes a currency to depreciate. Flow-ons are created when a large trade is split up into several smaller trades. Capital flows are cross-border investment. Speculation Short-term investment, also called Spot Forex, based on expected currency movements, accounts for the lion's share of forex market volume.

Clearinghouse (Forex Clearinghouse)
This is usually (but not always) a regulated and registered firm that is connected directly to the Foreign Currency Exchange Market. A Clearinghouse is also known as a Brokerage Firm, Broker, Market Maker etc.) It has the capacity to facilitate buys and sells almost instantaneously through online access.

Trader (Forex Trader, or Self-Trader)
This is a term referring to the individual who trades currencies on the Forex Exchange Market. Traders access the FX Market through registered and regulated Clearinghouse which provides the traders with instantaneous live market activity feeds, and with internet access to conduct trade transactions.

Leverage
In options terminology, this expresses the disproportionately large change in the premium in terms of the relative price movement of the underlying instrument. Also known as margin trading. A term used to in the relationship of actual equity versus controlling equity. Leverage can range widely, and as an investor in a currency program, you should be aware what the leverage ratio is, primarily because, the greater the leverage, the greater the volatility of return. A ratio of up to 50 to 1 is not uncommon. Other risk measurements should be used also to better model the potential outcome and volatility.

Risk Management
The identification and acceptance or offsetting of the risks threatening the profitability or existence of an individual or organization. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counter-party risk.

Stop Loss
An order given to the clearinhouse by the trader to ensure that, should a transaction move in the wrong direction by a set number of pips, that the transaction will be automatically closed if though it involves taking a loss.

Spread
The difference between the bid and ask price of a currency (between the buy and sell prices). This amount is set by the Clearinghouse, and represents their profit, which is taken from each transaction of trading activity.

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