Learn Forex
July 15th, 2008 at 04:38pm
Under Forex Glossary
Wedge A continuation formation that resembles the outline of a pennant, but without the pole. It consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation is sharply angled in the opposite direction from the slope of the original trend. The consolidation is bordered by a support line and a resistance line that converge, making it look like a sharply angled triangle. When the currency resumes its original trend by breaking out of the consolidation, the price objective is the height of the wedge, measured from the breakout price level.
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July 15th, 2008 at 04:38pm
Under Forex Glossary
Value at risk The expected loss from an adverse market movement, with a specified probability over a particular period of time.
Variation (maintenance) margin Margin paid by the trading party in order to fully cover any unrealized loss. Any trader holding an overnight position with a negative P&L must post it in cash. It must be kept on deposit at all times.
Vega The sensitivity of the theoretical value of an option to a change in volatility.
Velocity of money The rate at which money is turning over on an annual basis to facilitate income transactions.
Vertical bear call spread A compound option strategy of buying two options with a common expiration date; one option is a short call with a lower strike price and the other is a long call with a higher strike price. The seller’s maximum profit is limited to the premium paid for the two options. The break-even point is calculated as the sum of the lower strike price and the total premium. The maximum loss consists of the dollar difference between the two strike prices, minus the total premium received.
Vertical bear put spread A compound option strategy of buying two options with a common expiration date; one option is a long put with a higher strike price and the other is a short put with a lower strike price. The buyer’s maximum profit consists of the dollar difference between the two strike prices, minus the total premium paid. The break-even point is calculated as the difference between the higher strike price and the total premium. The maximum loss is limited to the premium paid for the two options.
Vertical bear spread An option combination whose theoretical value will decline to a predetermined maximum profit if the price of the underlying currency declines and whose maximum loss is also predetermined.
Vertical bull call spread A compound option strategy of buying two options with a common expiration date; one option is a long call with a lower strike price and the other is a short call with a higher strike price. The buyer’s maximum profit consists of the dollar difference between the two strike prices, minus the total premium paid. The break-even point is calculated as the sum of the lower strike price and the total premium. The maximum loss is limited to the premium paid for the two options.
Vertical bull put spread A compound option strategy of buying two options with a common expiration date; one option is a long put with a lower strike price and the other is a short put with a higher strike price. The buyer’s maximum profit consists of the net premium paid for the two options (one paid, the other received). The break-even point is calculated as the difference between the higher strike price and the total premium received. The maximum loss is limited to the dollar difference between the two strike prices, minus the total premium received.
Vertical bull spread An option combination whose theoretical value will rise to a predetermined maximum profit if the price of underlying currency rises, and whose maximum loss is also predetermined.
Vertical spread A compound option that consists of two similar options (i.e., calls or puts), one being bought and the other sold, on the same currency and with the same expiration date, but with different strike prices.
V-formation (spike) Reversal formation that shows sudden trend changes and is accompanied by heavy trading volume. This pattern may include a key reversal day, or an island reversal and an exhaustion gap.
Volatility The degree to which the price of currency tends to fluctuate within a certain period of time.
Volume The total amount of currency traded within a period of time, usually one day.
Vostro account A vostro account from the point of view of the counterparty.
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July 15th, 2008 at 04:34pm
Under Forex Glossary
Unemployment Rate An economic indicator released as a percentage that is calculated as the ratio of the difference between the total labor force and the employed labor force, divided by the total labor force.
Upside gap tasuki Bullish two-day candlestick combination. It consists of a second-day black bar that closes an overnight gap opened on the previous day by a blank bar.
Upward breakout of a bearish resistance line Bullish point-and-figure chart formation that confirms the currency’s breakout of a resistance line the third time it reaches it. The resistance line is sloped downward.
Upward breakout of a bullish resistance line Bullish point-and-figure chart formation that confirms the currency’s breakout of a resistance line the third time it reaches it.
Upward breakout from a consolidation formation Bullish point-and-figure chart formation that resembles the flag formation. A valid upside breakout from the consolidation formation has a price target equal in size to the length of the previous uptrend.
USDX Currency index that consists of the weighted average of the prices of ten foreign currencies against the U.S. dollar: deutsche mark, Japanese yen, French franc, British pound, Canadian dollar, Italian lira, Dutch guilder, Belgian franc, Swedish krona, and Swiss franc.
Uwakage Upper shadow of the candlestick. (See Candlestick chart.)
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July 15th, 2008 at 04:31pm
Under Forex Glossary
Tan Book An economic report prepared by the Federal Reserve for FOMC meetings.Tankan Economic Survey The Japanese equivalent of the American Tan Book, which is released by the Federal Reserve. The survey is released on a quarterly basis.
Technical analysis The chart study of past behavior of commodity prices for purposes of forecasting their future performance.
Theory of elasticities A model of exchange rate determination stating that the exchange rate is simply the price of foreign exchange that maintains the BOP in equilibrium. The degree to which the exchange rate responds to a change in the trade balance depends entirely on the elasticity of demand to a change in price.
Theta (T) or time decay Occurs as the very slow or nonexistent movement of the currency triggers losses in the option’s theoretical value.
Three Buddha top formation A reversal candlestick combination. It consists of a head-and-shoulders formation, or three consecutive rallies in which the first and the third are of approximately the same height, and the second is the highest.
Threshold of divergence A safety feature for the EMS that creates an emergency exit for currencies that become the singular focus of various adverse forces. The threshold of divergence indicates when the specific country with the pressured currency should take additional steps other than simple central bank intervention in the foreign exchange markets.
Time decay See Theta.
Time value (time premium or extrinsic value) The difference between the option premium and its intrinsic value.
Tohbu (gravestone doji) A reversal candlestick formation.
Tomorrow/next (T/N) deal A foreign exchange deal that matures the next business day, or one day prior to the spot date.
Tonbo (dragonfly) A reversal candlestick formation.
Traditional (Charles Dow) percentage retracements Occur at 33 percent, 50 percent, and 66 percent.
Transaction exposure Potential profit and loss generated by current foreign exchange transactions.
Translation exposure The risk of change of the consolidated corporate earnings as a result of past volatility in the base currency.
Trend The general direction of the market, as shown by the significant peaks and troughs of the currency fluctuations.
Trendline A straight line connecting the significant highs (peaks) in a downtrend, and the significant lows (troughs) in an uptrend.
Triangle A continuation formation that resembles the outline of a pennant, but without the pole. It consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat. The consolidation is bordered by converging support and resistance lines, making it look like a triangle. When the currency resumes its original trend by breaking out of the consolidation, the price objective is the height of the triangle, measured from the breakout price level.
Triple bottom A bullish reversal pattern that consists of three bottoms of approximately equal heights. A parallel—resistance—line is drawn against a support line, which connects these tops. The break of the resistance line generates a move equal in size to the price difference between the average height of the bottoms and the resistance line.
Triple top A bearish reversal pattern that consists of three tops of approximately equal heights. A parallel—support—line is drawn against a resistance line, which connects these tops. The break of the support line generates a moveequal in size to the price difference between the average height of the topsand the support line.
TRIX Index An oscillator that consists of a one-day ROC calculation of a triple exponentially smoothed moving average of the closing price.
Tunnel The nickname of the European Joint Float Agreement’s total fluctuation band of the European currencies.
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July 15th, 2008 at 04:12pm
Under Forex Glossary
Sangu (three gaps) A reversal candlestick signal applicable in either a steeply rising or falling market, when the daily limits will break the trading. The theory holds that after the third gap, the market will reverse at least to the second gap.
Sanpei (three parallel bars) A reversal candlestick combination. It refers to the similarity in direction and velocity of three consecutive bars, as otherwise all the entries are parallel. They generate a reversal formation after an extended rally. When bullish, the formation is known as the three soldiers. When bearish, the name is the three crows.
Sanpo (three methods) A candlestick combination that advises that retracements are in order before the market will reach new highs and new lows.
Sansen (three rivers) method A reversal candlestick combination. It consists of three daily entries. The first day is a long blank bar (a bullish move), followed by a bullish but short-range one-day island. The third entry is a bearish long black line.
Sanzan (three mountains) A reversal candlestick combination. It consists of a triple-top formation.
Sashikomi A bearish two-day candlestick combination. It consists of a modified irikubi bar. The difference is that the opening of the second day’s blank bar is much lower than that of the irikubi bars. Despite the wider gap thus formed, the blank candlestick closes only slightly above the previous day’s low.
Settlement risk A form of credit risk that may occur due to the time zones separating the nations. Payment may be made to a party who will declare insolvency (or be declared insolvent) immediately after receipt, but prior to executing its own payments.
Shitakage Lower shadow of the candlestick. (See Candlestick chart.)
Short straddle A compound option that consists of a short call and a short put on the same currency, at the same strike price, and with the same expiration dates. The maximum profit consists of the combined premium of the two individual options. The loss occurs when the level of the premium is overpassed by the currency swing, and the loss is unlimited.
Short strangle A compound option that consists of a short call and a short put on the same currency, with the same expiration dates, but with different strike prices. The maximum profit consists of the combined premium of the two individual options. The loss is unlimited.
Simple moving average or arithmetic mean An average of a predetermined number of prices over a number of days, divided by the number of entries.
Slow stochastics A version of the original stochastic oscillator. The new, slow %K line consists of the original %D line. The new, slow %D line formula is calculated from the new %K line.
Snake The nickname of the European Joint Float Agreement’s 2.25 percent fluctuation band for the European currencies against each other, derived from its curvaceous movement. Speedlines Support or resistance lines that divide the range of the trend into thirds on a vertical line. The two resulting speedlines are plotted by using as coordinates the origin and the 1/3 and 2/3 prices respectively.
Spot deal A foreign exchange deal that consists of a bilateral contract between a party delivering a certain amount of a currency against receiving a certain amount of another currency from a second counterparty, based on an agreed exchange rate, within two business days of the deal date. The exception is the Canadian dollar, in which the spot delivery is executed within one business day.
Spot next (S/N) A foreign exchange deal that matures one business day past the spot date, or three business days.
Sterilized intervention A central bank intervention in the foreign exchange market that consists of a sale of government securities that offsets the reserve injection which occurs due to the foreign exchange intervention. The money market activity sterilizes the impact of the foreign exchange intervention on the money supply. Sterilized interventions have a short- to medium-term effect.
Stochastics Oscillators that consist of two lines called %K and %D. Visualize %K as the plotted instrument and %D as its moving average. The resulting lines are plotted on a 1 to 100 scale. Just as in the case of the RSI, the 70 percent and 30 percent values are used as warning signals. The buying (bullish reversal) signals occur at under 10 percent and the selling (bearish reversal) signals come into play at above 90 percent.
Strike price See Exercise price.
Support level The troughs representing the level at which demand exceeds supply.
Swap deal A foreign exchange deal that consists of a spot deal and a forward outright deal. A party simultaneously buys and sells (or sells and buys) the same amount of a currency with another counterparty; the two legs of the transaction mature on different dates (one of the dates being the spot date) and are traded at different exchange rates (one of the exchange rates being the spot rate). Exceptions may be made with regard to the value dates (forward-forward) and amount (different amounts).
SWIFT (Society of Worldwide Interbank Financial Telecommunications) An automated system set up to send standardized payment instructions for foreign currencies among international banks. Swing Index (SI) A momentum oscillator that is plotted on a scale of -100 to +100. The spikes reaching the extremes suggest reversal.
Symmetrical triangle A triangle continuation formation in which the support and resistance lines are symmetrical. (See Triangle.)
Synthetic call option A combination of a long currency and a long currency put. Synthetic put option A combination of a short currency and a long currency call.
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July 15th, 2008 at 04:07pm
Under Forex Glossary
Random walk theory An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information. Rate of change A momentum oscillator in which the oldest closing price is divided into the most recent one.
Ratio call spread A compound option strategy that consists of a number of long calls with lower strike prices and a larger number of short calls with a higher strike price. The maximum profit is realized when the currency price is at the higher strike price. This combination has two break-even points. The downside break-even point consists of he sum of the lower strike price and the debit, divided by the number of long calls. The upside break-even point consists of the sum of the higher strike price and the maximum profit potential, divided by the number of naked calls. The maximum loss is twofold. The maximum downside risk is the net premium. The upside risk is unlimited.
Ratio put spread A compound option strategy that consists of a number of long puts with higher strike prices and a larger number of short puts with a lower strike price. The maximum profit is realized when the currency price is at the lower strike price. This combination has two break-even points. The downside break-even point consists of the difference between the lower strike price and the maximum profit potential, divided by the number of naked puts. The upside break-even point consists of the difference between the higher strike price and the debit, divided by the number of long calls. The maximum loss is twofold. The maximum downside risk is unlimited. The upside risk is the net premium.
Ratio spread A compound option strategy in which the number of long options is different from the number of short options.
Rectangle A continuation formation that resembles the outline of a parallelogram. The price objective is the height of the rectangle.
Regulation Q Regulation passed by the Federal Reserve that prohibited payment of interest on demand deposits and prescribed maximum rates banks could pay on time deposits. These ceilings had been imposed since 1933 by the U.S. government. The regulation is not currently in effect.
Relative Strength Index An oscillator that measures the relative changes between the higher and lower closing prices. The RSI is plotted on a 0 to 100 scale. The 70 and 30 values are used as warning signals, whereas values above 85 indicate an overbought condition (selling signal), and values under 15 suggest an oversold condition (buying signal).
Replacement risk A form of credit risk that holds that counterparties of failed banks will find their books unbalanced to the extent of their exposure to the insolvent party. In order to rebalance their books, these banks must enter new transactions.
Repurchase agreements (repos) Daily operations executed by the Federal Reserve. A repurchase agreement between the Federal Reserve and a government securities dealer consists of the Fed’s purchasing a security for immediate delivery, with the agreement to sell the same security back at the same price at a predetermined date in the future (usually within 15 days). This arrangement amounts to a temporary injection of reserves in the banking system. Resistance level The peaks representing the price level at which supply exceeds demand.
Reversal patterns Patterns that occur at the end of the trend, signaling the trend change.
Rollover (tomorrow/next or torn/next) swap A swap designed for spot trades’ maintenance. It was designed to change the old spot date to the current spot date (on the front office’s side) and to enable the bank to make the payments to the counterparty (on the back office’s side).
Rounded bottom A bullish reversal pattern that consists of a very slow and gradual change in the direction of the market. Rounded top (saucer) A bearish reversal pattern that consists of a very slow and gradual change in the direction of the market.
Runaway or measurement gap A price gap that occurs within solid trends. It is also called a measurement gap because it tends to occur about midway through the life of a trend.
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July 15th, 2008 at 04:03pm
Under Forex Glossary
Parabolic system A stop-loss technical system, based on price and time. The system was devised to supplement the inadvertent gaps of the other trend-following systems. Although not technically an oscillator, the parabolic system can be used with the oscillators. SAR stands for stop-and-reverse. The stop moves daily in the direction of the new trend. The built-in acceleration factor pushes the SAR to catch up with the currency price. If the new trend fails, the SAR signal will be generated. The name of the system is derived from its parabolic shape, which follows the price gyrations. It is represented by a dotted line. When the parabola is placed under the price, it suggests a long position. Conversely, a price above the parabola indicates a short position.
Pennants A continuation formation that resembles the outline of a pennant. It consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat. The consolidation is bordered by a support line and a resistance line, which converge, creating a triangle. The previous sharp trend is known as the pennant pole. When the currency resumes its original trend by breaking out of the consolidation, the price objective is the total length of the pole, measured from the breakout price level.
Personal Income An economic indicator that consists of the income received by individuals, nonprofit institutions, and private trust funds. Some of the components of this indicator are wages and salaries, rental income, dividends, interest earnings, and transfer payments Social Security, state unemployment insurance, and veteran’s benefits).
Philadelphia Stock Exchange (PHLX) The oldest U.S. securities exchange, it offers currency futures and options on currency futures.
Point-and-figure chart A type of chart that plots price activity without regard to time. When the currency moves up, the fluctuations are marked with X’s. The moves on the downside are plotted with O’s. The direction on the chart only changes if the currency reverses by a certain number of pips.
Premium The price of the option paid by the buyer to the seller.
Premium forward spread Forward price that is added to a spot price to calculate a forward price. It reflects the fact that the foreign interest rate is higher than the U.S. interest rate for that particular period.
Prime rate The rate that commercial banks charge customers, which is based on the discount rate.
Producer Price Index An economic indicator that gauges the average changes in prices received by domestic producers for their output at all stages of processing.
Purchasing power parity (PPP) Model of exchange rate determination stating that the price of a good in one country should equal the price of the same good in another country, exchanged at the current rate (the law of one price).
Put-call-forward exchange parity (PCFP) theory A relationship between a call option and a put option established through the forward market. The theory holds that the option of buying the domestic currency with a foreign currency at a certain price X is equivalent to the option of selling the foreign currency with the domestic currency at the same price X. Therefore, the call option in the domestic currency becomes the put option in the other, and vice versa.
Put ratio backspread A compound option strategy that consists of short puts with a higher strike price and more long puts with a lower strike price. The profit is twofold. The maximum upside profit potential consists of the total premium received. The downside profit potential is unlimited. The maximum loss potential occurs when the currency price reaches the lower strike price at expiration.
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July 15th, 2008 at 03:59pm
Under Forex Glossary
Open interest The total outstanding position in a currency.
Open Market Investment Committee (OMIC) Committee established in 1923 in order to coordinate the Reserve Bank operations. It was composed of the Governors of the Federal Reserve Banks in New York, Boston, Philadelphia, Chicago, and Cleveland. Not currently active.
Open Market Policy Conference (OMPC) Committee established in 1930 to replace the OMIC. It consisted of 12 Federal Reserve Banks governors and the members of the Board. Not currently active.
Optimal options Options that refer to the most favorable rate of the underlying currency that existed (from the holder’s perspective) during the life of the option. This rate becomes the strike in the case of optimal strike options, or it becomes the underlying, determining the intrinsic value when compared to a predetermined fixed strike in the case of optimal rate options. Optimals can be based on the spot rate (spot style) or the forward rate (forward style).
Option currency spread A long currency option and an offsetting short currency option, generally in the same currency.
Option writers Option sellers.
Oscillators Quantitative methods designed to provide signals regarding overbought and oversold conditions.
Out-of-the-money (OTM) call A call whose present currency price is lower than the strike price.
Out-of-the-money (OTM) put A put whose present currency price is higher than the strike price. Overnight position limit A position kept overnight by traders.
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July 15th, 2008 at 03:56pm
Under Forex Glossary
Naked intervention (unsterilized intervention) A central bank intervention in the foreign exchange market that consists solely of the foreign exchange activity. This type of intervention has a monetary effect on the money supply and a long-term effect on foreign exchange.
National Association of Purchasing Managers Index (NAPM) A survey of 250 industrial purchasing managers, conducted in order to gauge the changes in new orders, production, employment, inventories, and vendor delivery speed.
National Futures Association (NFA) A self-regulatory organization that consists of futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisers (CTAs), introducing brokers (IBs), leverage transaction merchants (LTMs), commodity exchanges, commercial firms, and banks. It is responsible for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and LTMs, focusing primarily on qualifications and proficiency, financial conditions, retail sales practices, and business.
Netting A process that enables institutions to settle only their net positions with one another at the end of the day, in a single transaction, not trade by trade.
Neural networks Computer systems that recognize patterns. They may be used to generate trading signals or to be part of trading systems.
Neutral spread (delta-neutral spread) A compound option strategy that consists of a long option position and a short option position whose respective total delta positions are relatively equal.
Next best price stop-loss order A stop-loss order that must be executed after the requested level is reached.
Nonfarm sector Jobs in government, manufacturing, services, construction, mining, retail and others.
Nostro account (clearing account) The account for each foreign currency in the country of origin maintained by the financial institutions for purchase and receiving (P&R) purposes.
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July 15th, 2008 at 03:52pm
Under Forex Glossary
Ml Money supply measure that is composed of currency in circulation (outside the Treasury, the Fed, and depository institutions), traveler’s checks, demand deposits, and other checkable deposits [negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, etc.].
M2 Money supply measure that consists of Ml plus repurchase agreements, overnight Eurodollars, money market deposit accounts, savings and time deposits (in amounts under $100,000), and balances in general accounts.
M3 Money supply measure that is composed of M2 plus time deposits over $100,000, term Eurodollar deposits, and all balances in institutional money market mutual funds.
Margin The amount of money or collateral deposited by a customer with a broker, by a broker with a clearing member, or by a clearing member with the clearinghouse in order to insure the broker or clearinghouse against loss on outstanding futures positions.
Mark-to-market Daily cash flow system used by the U.S. futures exchanges to maintain a minimum level of margin equity for a specific currency future or option by calculating the profit and loss at the end of each trading day in each contract position resulting from the price fluctuation.
Matched sale-purchase agreements Daily operations executed by the Federal Reserve, in which the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within seven days). This arrangement amounts to a temporary drain of reserves.
Matching systems Electronic systems duplicating the traditional brokers’ market. A price shown by a bank is available to all traders.
Maturity date The date when a foreign exchange contract expires.
Merchandise Trade Balance An economic indicator that consists of the net difference between the exports and imports of a certain economy. The data includes food, raw materials and industrial supplies, consumer goods, autos, capital goods, and other merchandise.
Momentum An oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference etween the current closing price and the oldest closing price from a predetermined period. The momentum is measured on an open scale around the zero line.
Moving average An average of a predetermined number of prices over a number of days, divided by the number of entries.
Moving average convergence-divergence (MACD) An oscillator that consists of two exponential moving averages (other inputs may be chosen by the trader as well) plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. A buying signal is generated when this intersection is upward, whereas a selling signal occurs when the intersection takes place on the downside.
Moving averages oscillator An oscillator in which the values of two consecutive moving averages are subtracted from each other (the larger number of days from the previous one) and the new values are plotted.
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