Trading Glossary

Aggregate Risk

Can vary depending on context, but generally defined as the amount of exposure a customer has to the (potential) movement of spot and forward rates.

Aggregate Demand

Used loosely to describe all private and public sector demand for goods and services produced by a given country. In practice, it is interchangeable with Gross Domestic Product (GDP). Academic notions of aggregate demand make a distinction between short-term and long-term, and are modeled as a function of price levels

Accrual Swap

An interest rate swap under which a counter-party pays a vanilla floating reference rate, usually three or six month LIBOR, and receives LIBOR plus a significant spread. Interest payments to this counter-party will only accrue on days when rates stay within a certain range dictated by preset upper and lower boundaries.

Abenomics

Abenomics refers to the economic policy introduced by Japanese Prime Minister, Shinzo Abe. Abenomics is made up of quantitative easing, stimulus and inflation targets. Abenomics is an attempt to jumpstart the Japanese economy after several decades of minimal economic growth and deflation.

Acquisition definition

When one company decides to take over another one, it is referred to as an acquisition. The acquiring company will do this by purchasing either the majority or entirety of the ownership stake of the company being taken over.

Bollinger Bands

Technical analysis tool used to measure the highness or lowness of the price relative to previous trades, consisting of three bands: middle band (simple moving average), upper band (given number of standard deviations above the middle band), and lower band (given number of standard deviations below the middle band)

Balance of Payments

A systematic record of the economic transactions during a given period for a country. Can refer to either current account (which takes trade into account), capital account, or a combination thereof. Prolonged balance of payment deficits theoretically lead to currency depreciation.

Balance Sheet

Financial statement showing a company’s assets, liabilities, and shareholders’ equity on a given date.

Central Bank Intervention

Refers to a central bank buying or selling its own currency on the spot market in order to bring about a desired exchange rate.

Carry Trade

A trading strategy involving the sale of low-yielding currency (funding currency) in favor of a higher-yielding (carry currency) alternative, with the goal of earning a return on the spread/differential. [This differential is known as the “carry”].

Candlestick Chart

Type of chart that uses shaded bars to indicate trading range (i.e. high and low price) as well as the opening and closing prices for consecutive time periods.

Call Option

Contract in which the buyer has the right but not the obligation to purchase a particular security for a given strike price, on (in the case of European call options) or before (in the case of American call options) the expiration date.

Divergence

Describes the phenomenon whereby a technical indicator and corresponding price chart don’t yield the same peaks/bottoms. It usually indicates trend “exhaustion.”

Deflation

A decrease in the general price level of goods and services, whereby the inflation rate falls below zero percent, resulting in an increase in the real value of money.

Deficit

Describes an excess of liabilities over assets, of losses over profits, or of expenditure over income.

Day Trading

An approach to trading which involves entering and closing trades on the same day or trading session.

Exponential Moving Average

Compared to a simple moving average, which distributes weight equally across a data series, exponential moving averages afford greater weight to recent prices/data.

Eurodollar Bonds

Type of Eurobond that pays both interest and principal in euros, whose most salient feature is that they are not regulated by the SEC.

Elliot Wave Theory

Principle that collective investor psychology (or crowd psychology) moves from optimism to pessimism and back again. These swings create patterns, as evidenced in the price movements of a market at every degree of trend, over durations that range from minutes to decades.

Economic Indicator

Statistic that seeks to proxy current economic growth and stability. Economic indicators fall into three categories: leading, lagging and coincident.

Easing

Refers to the use of monetary policy to expand the money supply, either by lowering interest rates or through open market operations.

Federal Reserve Board

Senior members of the Federal Reserve, each of whom is appointed by the US President. The chairman of the Fed Reserve Board serves a 4-year term, while the other members serve 14-year terms.

Federal Open Market Committee

Committee made up of Federal Reserve members, which meets eight times a year to discuss/ implement monetary policy.

Federal Deposit Insurance Corporation

Interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight. The FFR is guided (but not determined outright) by the Federal Open Market Committee.

Face Value

Value of a bond to be paid out at maturity. Also known as Par Value.

Gross Domestic Product

Basic measure of an economy’s economic performance, equal to the market value of all final goods and services made within the borders of a nation in one year.

Gold Standard

A type of exchange rate regime which fixes a currency to the price of gold. Prior to 1973, the value of the US Dollar was fixed to the price of gold, and all other currencies were fixed to the Dollar.

G8

Forum, for governments of eight nations of the northern hemisphere: US , Germany, Japan, France, UK, Canada, Italy, and Russia. Previously known as the G7 and sometimes expanded to G10 or G20.

Hyperinflation

Inflation that is very high and difficult to control, whereby prices increase rapidly as a currency loses its value. Definitions vary, but one standard is inflation exceeding 50% in one month, and/or 100% in one year.

Historical Volatility

Volatility in the underlying asset price, rate or return over a specific period in the past. It is used to check whether the implied volatility of an option is expensive by historical standards.

Hedge/Hedging

Trading strategy implemented with the goal of reducing risk from adverse price movements that surrounds one’s primary position. Typically involves taking an offsetting position in another security/currency, and/or using derivatives to limit downside.

Hard Currency

Any “major” currency that investors have confidence in.

Initial Margin

Funds required to enter into a leveraged transaction, quoted as a percentage of the price of the asset.

Inflation

Refers to a general rise in the price level of goods and services, measured by a price index, which leads to a decrease in the purchasing power of money.

Index Funds

Investment funds which seek to mirror the returns of a market index by investing directly in the securities that make up that index.

Implied Volatility

The derived volatility of an asset calculated indirectly from options prices.

Jobber

Refers to a trader that aims to achieve small and consistent, short-term (usually intra-day) profits.

J-Curve

Refers to the trend of a country’s trade balance following a devaluation or depreciation. A higher exchange rate initially means imports are more expensive, making the current account worse (a bigger deficit or smaller surplus).

Key Currency

The act of linking one currency to another, usually undertaken by a small country towards that of a major trading partner.

Kiwi

Slang term for the New Zealand Dollar.

Liquidity

Refers to the ability of an asset/currency to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.

Liquid Market

When there are plenty of lots of a particular currency being bought and sold every day.

Liability

Generally, a claim on a company’s assets. In forex, the obligation to deliver to a counter-party an amount of currency at a specified future date, in connection to a forward or spot transaction.

Leverage (Margin)

The ability to borrow money to fund trading/investing activity. The amount that can be borrowed varies between brokers, and is quoted as a multiple of maximum position size to deposited funds.

Market Maker

Refers to any dealer who provides a two-way quote a bid and ask price in which they stand ready to buy or sell.

Margin Call

Oral or written notification requesting a customer to either deposit funds or sell securities in order to return the maintenance margin to an acceptable level.

Maintenance (Margin)

Minimum margin ratio above which margin account balances must remain. Falling below will trigger a margin call, whereby a customer will be requested to either deposit funds or sell securities in order to return the maintenance margin to an acceptable level.

Macro-based

An investment strategy driven by macroeconomic considerations.

Non-Farm Payrolls

Economic indicator that measures the change in the number of employed people during the last month of all non-farming businesses.

NIKKEI

The index of the 225 leading stocks traded on the Tokyo Stock Exchange.

Net Asset Value

In a forex trading account, equal to the balance of deposits, realized and unrealized profit/loss, and interest, minus withdrawals.

Oscillator

Technical analysis indicator that varies over time within a band (above and below a center line, or between set levels), used to discover short-term overbought or oversold conditions.

Open Market Operations

The means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other financial instruments.

Official Settlements Account

US balance of payments category that sums the movement of dollars in foreign official holdings and US reserves.

Off-Balance Sheet

Refers to financing or capital raising activities that does not appear on a given company’s balance sheet, such as derivative agreements and investments in certain types of partnerships.

Purchasing Power Parity

Model of exchange rate determination based on the law of one price, which states that the price of a good in one country should equal the price of the same good in another country.

People’s Bank of China

The central bank for China, whose actions directly influences the value of the Chinese Renminbi (CNY).

Peg

Type of exchange rate regime where one currency’s value is fixed to another currency or basket of currencies.

Parity

The condition whereby an option’s value in the market is the same as its intrinsic value.

Quote Currency

Currency listed second in a currency pairing.

Quantitative Easing

Describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. In practical terms, the central bank purchases financial assets from financial institutions using money it has created out of nothing.

Quantitative Analysis

The development and application of mathematical and statistic models towards investing and trading.

Regulated Market

Any market/exchange monitored by a government agency with the goal of protecting investors.

Recession

General slowdown in economic activity over a sustained period of time, or a business cycle contraction. Defined by the National Bureau of Economic Research as two consecutive quarters of falling GDP.

Rate of Return

The percentage of gained or lost on an investment relative to the amount of money invested.

Rate Differential

Difference between two countries’ benchmark interest rates, often used as a basis for forecasting exchange rates.

Slippage

Refers to the phenomenon whereby the actual fill price differs from the expected fill price, as a result of a fast-moving market or broker error.

Simple Moving Average

Technical analysis indicator commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles, that gives equal weight to all data points.

Short Position

An open position that aims to capture gains from currency depreciation.

Selling Short

The act of selling a currency pair such that one is short the base currency and long the quote currency, with the goal of profiting from depreciation.

Total Return Swap

Provides the buyer with the economic performance of the reference obligation – i.e. the coupon or interest from the reference obligation together with any capital gains – in return for a predetermined
funding cost. The buyer will be required to pay any capital losses.

Tier One

Highest grading that a bank can earn for its financial strength, according to The Bank of International Settlements.

Technical Analysis

Broad approach to forecasting the future direction of prices through the study of past market data, primarily price and volume. It may also employ models and trading rules based on price and volume transformations.

Take-Profit Order

An order specifying the exact rate or number of pips from the current price point at which point a current position should be closed, and gains will be locked in.

Unemployment Rate

Economic indicator defined as the percentage of those in the labor force who are unemployed.

Undervalued

When a currency is trading below purchasing power parity or other valuation metric.

Underlying Asset

The asset/currency on which the covered warrant, futures contract or option is based and derives its value.

Unconvertible Currency

Any currency that cannot be freely exchanged for other(s) because of foreign exchange regulations.

Volatility

A measure of the amount of movement in the price/rate of a currency. Often used as a proxy for risk.

VIX

Ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility.

Variation Margin

Refers to the funds required to bring the margin ratio back up to the required level, calculated daily.

Vanilla

Descriptive term that refers to a relatively simple financial instrument (option or other derivative), with standard features and no special or unusual characteristics. Opposite of Exotic Option.

Valuation

The process of estimating the value of an asset or currency.

West Texas Intermediate

Known as Texas light sweet, a grade of crude oil.

World Trade Organization

International organization designed by its founders to supervise and liberalize international trade.

World Bank

International financial institution that provides leveraged loans to poorer countries for capital programs with a goal of reducing poverty.

Wage Price Index

Any economic indicator that seeks to measure changes in the average price for labor.

XAU/USD

The currency symbol for Gold/U.S Dollar.

XAG/USD

The currency symbol for Silver/U.S Dollar.

Yield Curve

Graph plotting the interest rate of a given issuer (most commonly the US Treasury) for a range of different maturities.

Yield

Return on an investment, usually expressed in percentage terms.

Yard

Slang for one billion.

Zero Bound

Refers to interest rates (and corresponding monetary policy) that are at or very close to zero percent.

Z-Score

Statistical method for normalizing data points around the mean.