Trading Glossary


FX


FX is the abbreviation of foreign exchange. It is the exchange of one currency for another or the conversion of one currency into another currency.

Foreign exchange also refers to the global market where currencies are traded virtually around the clock. The largest trading centres are London, New York, Singapore and Tokyo. 

Currency


Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

The FX market combined by currency pairs. A currency pair is the quotation and pricing structure of the currencies traded in the forex market. The value of a currency is a rate and determined by its comparison to another currency. The first listed currency of a currency pair is called the base currency and the second currency is called the quote currency. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.

Trade


1. Bid And Ask: A two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time.The bid price represents the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security. A trade or transaction occurs when the buyer and seller agree on a price for the security.

The difference between the bid and asked prices, or the spread, is a key indicator of the liquidity of the asset - generally speaking, the smaller the spread, the better the liquidity.

Also known as bid and ask, bid-ask or bid-offer.

2. Basis point: Basis point (BPS) refer to a common unit of measure for interest rates and other percentages (like currency) in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

3. Leverage: Leverage is the use of various financial instruments or borrow capital, such as margin, to increase the potential return of an investment.

Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft (MSFT) stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10.

4. Lots: In general, any group of goods or services is making up a transaction. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body. For exchange-traded securities, a lot may represent the minimum quantity of that security that may be traded.

5. Commission: A commission is a service charge assessed by a broker or investment adviser in return for providing investment advice and or handling the purchase or sale of a security. Most major, full-service brokerages derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.

6. Cost of Carry: The cost of carry refers to costs incurred as a result of an investment position. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts and interest on loans used to purchase a security. They can also include economic costs, such as the opportunity costs associated with taking the initial position.

In this case, cost of carry in FX market, is the difference of interest rates between two countries on one currency pair.

Hints of Trade


Risk in the market can be sorted by two parts, systematic risk and unsystematic risk. Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk. 

Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. 

Diversification is the only way to protect yourself from unsystematic risk. 

The other way to avoid the risk when the investors can not ensure the direction of market is hedge. A hedge is an investment to reduce the risk of adverse price movements for an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
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