Important Basic Forex Terms

The Forex market behavior can fluctuate at extremes. A trader can experience huge profits or huge losses in one single trade. Forex market is supposed to be the most liquid of all markets and it is said to be bigger than the world’s largest stock markets.

A lot of analysis has to be done before investing in Forex. Two of the most important types of analysis are fundamental analysis and technical analysis. Fundamental analysis involves the study of external factors that impact the exchange rate fluctuations. Technical analysis involves the study of historical patterns of the exchange rates and deciding the future course of progress of the transactions. The ideal way of trading is to have an excellent mix of both fundamental and technical analysis and ensure that the trading goes on successfully. There are a few terminologies that one must be aware of, before proceeding to understand the intricacies of a Forex trade. The terms are explained below:

All or None - A limit price order that instructs the broker to fill the whole order at the stated price or not at all.

Ask Sizev - The amount of shares being offered for sale at the ask rate.

Ask Rate - The lowest price at which a financial instrument is offered for sale (as in bid/ask spread).

Balance of Payments - A record of a nation’s claims of transactions with the rest of the world over a particular time period. These include merchandise, services and capital flows.

Base Currency - The currency in which an investor or issuer maintains its book of accounts; the currency that other currencies are quoted against. In the Forex market, the US Dollar is normally considered the `base` currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair.

Bid - The price at which the buyer is prepared to purchase; the price offered for a currency.

Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971.

Broker - An individual, or firm, that acts as an intermediary, putting together buyers and sellers usually for a fee or commission. In contrast, a `dealer` commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

Close a Position (Position Squaring) - To eliminate an investment from one’s portfolio by either buying back a short position or selling a long position.

Credit Checking - Due to the large size of certain financial transactions that change hands, it is essential to check that the counter parties have room for the trade. Once the price has been agreed the credit is checked. If the credit is bad then no trade takes place. Credit is very important when trading, both in the Inter-bank market and between banks and their customers.