In the Forex market as with any market there are many terms you have to be familiar with, some of these are unique to the Forex market. As already discussed in The Forex market, Exchange Rate & Bid Ask Spreads.
Once again we should think back to what a Foreign Currency or Forex transaction actually is, it is the simultaneous buying of one currency and selling of another currency. In the above example when we place a BUY order we are buying Australian dollars and selling US dollars. Conversely if we place a SELL order we are selling Australian dollars and buying US dollars.
The next term you will hear is Spot Market. This term is not unique to the Forex market. In general any financial market that deals with an instrument based on current price is usually termed a spot market. Nearly all retail Forex brokers deal in the spot market.
The Long and Short of
Two other terms you need to get your head around that are not unique to the Forex market are “long position” and “short position”.
A “long position” or “going long” refers to the buying of a given exchange rate or currency pair. Or more simply you buy the commodity or base currency and sell the counter or quote currency.
A “short position” or “going short” refers to the selling of a given exchange rate or currency pair. Or put more simply you sell the commodity or base currency and buy the counter or quote currency.
Let us now take a closer look at currency quotation symbols. Currency quotation symbols are governed by ISO 4271, this is a standard defined by the International Standards Organization. The standard defines a unique three letter symbol for each country. The first two letters represent the country and the final letter represents the unit in which the currency is expressed. For example AUD represents Australia and the currency is dollars while GBP represents Great Britain and the currency is pounds. Below is a table of the most commonly traded currencies and there nicknames. You should familiarize yourself with these terms.
The eight currencies shown above are known as the major currencies. As a new trader it is best to focus on these currencies. These currencies are generally more liquid and it is easier to obtain commentary and data on these currencies. Another advantage with focusing on these currencies is they tend to have a lower spread then some of the minor less liquid currencies.
This brings me to another term which I should define which is liquidity. Liquidity refers to the ease in which an asset, in this case foreign currency can be converted to cash. There are three primary measures of liquidity for a market, these are:
- The asset can be bought or sold promptly.
- The asset can be bought or sold with a minimal loss of value.
- The asset can be bought and sold anytime during market hours.
A definition of liquidity I like is this one: “Liquidity is the probability that the next trade is executed at a price equal to the last one”. Another common measure of liquidity is volume, which is how often a security is bought and sold.
In this post I have outlined some of the key definitions you need to know. These are by no means complete. Stay tuned for further posts as I introduce more key financial terms. These terms might seem strange or foreign at the start but in no time at all you will be talking like a seasoned trader.