Glossary of terms
In the foreign exchange markets currency prices are displayed or quoted as currency pairs such as GBP/USD, EUR/USD or USD/JPY. The base currency sometimes known as the transaction currency is the first currency displayed in the price quotation. The second currency displayed is known as the quote currency or sometimes the counter currency.
Some examples may be as follows:
- GBP/USD 1.2420-1.2435 Base/Transaction currency is British Pound & Quote/Counter currency is US Dollar.
- EUR/USD 1.1230-1.1233 Base/Transaction currency is the Euro & Quote/Counter currency is US Dollar
- USD/JPY 108.33-108.39 Base/Transaction currency is US Dollar & Quote/Counter currency is Japanese Yen
Base currencies are used in the foreign exchange markets to indicate how much of the quote or counter currency is required to obtain one unit of the base currency. Using the examples above these would equate to the following:
- You would need US$ 1.2435 to acquire £1
- You would need US$ 1.1233 to acquire €1
- You would need Yen 108.39 to acquire US$1
Foreign exchange prices or quotations are listed as pairs as traders are at the same time buying and selling the quoted pairs to complete the transaction. Again, using the quotations above this would involve a trader carrying out the following transactions:
- GBP/USD - Trader is buying GBP and selling USD against it at a rate of $1.2435 per £1
- EUR/USD - Trader is buying EUR and selling USD against it at a rate of $1.1233 per €1
- USD/JPY - Trader is buying USD and selling JPY against it at a rate of Yen108.39 per US$1
Currency codes/abbreviations are pre-determined and listed by the International Organisation for Standardisation (ISO) and are always three letters. Other common currency codes are AUD for Australian Dollar, CAD for Canadian Dollar, CHF for Swiss Franc & CNY for Chinese Yuan.Key Takeaways:
- Foreign Exchange prices/quotations are always listed in pairs.
- The Base currency is the first pair listed and shows the amount of the quote currency required to purchase one unit of the base currency.Currency codes are standardised and listed by the ISO.
Bearish is a term used to describe how a trader feels about the direction of a certain financial market or alternatively the actual direction a market may already be moving in.
If a trader has a bearish bias towards a specific market or financial instrument, they believe that the future direction of the price will be moving downwards. A market can also be described as being bearish in that it is displaying characteristics that would imply that its future move is down or if already moving downwards that this trend is likely to continue for some time.
Being bearish or being in a bearish or bear market is the opposite to being bullish or in a bull market which is when a market is showing upward trend characteristics or a trader holds a bias that the future direction of the market is up.
Identifying bearish market trends is crucial to the success of a trader because market sentiment is a leading factor in determining the direction in which a financial market will move. If bearish sentiments or pressures outweigh the bullish sentiments or pressures the relative market will likely drop in price. Being able to identify when this is taking place or alternatively coming to an end is a key factor in maximising trading profits or alternatively limiting losses.
Bearish traders believe that the future price of a market is down and try to profit from this by selling or going short of the market with the aim to buy this position back at a cheaper price when the market has fallen as they were predicting.Key Takeaways:
- A trader with a bearish bias believes that the future price of a market will be down.
- Bearish is the opposite to bullish where the trader’s bias is that the market will be moving upwards.
- Identifying bearish and bullish market trends is crucial to a trader’s success.
The bid price is the highest price that a buyer (the bidder) is willing to pay for goods or services. In this definition it is related to financial instruments or products such as securities, commodities or foreign exchange to name just a few examples.
When viewing financial price quotes these will be displayed as two numbers for example GBP/USD (commonly known as cable) may be quoted via a live broker or trading platform as 1.2380-1.2385.
Using the above example, the bid price or simply the bid would be 1.2380 which is the highest price available in the market at which a buyer (bidder) is prepared to buy GBP/USD at. The higher number quoted is the ask or offer price and is the lowest price at which a seller is prepared to sell GBP/USD at.
The difference between the two prices above is referred to as the bid/ask spread or more commonly just the spread. The closer or tighter the spread the more beneficial this is to traders as they are then not losing trading profit by having a large differential between the two available trading prices in the market.
Investors and traders may use the bid price to either fill market orders where they sell at the current market bid price or as a way of increasing profits they may set a limit order to buy at the bid and when the price drops they will be buying at a lower price and therefore increasing their trading profits.
An example of the above would be if the current gold price is $1710.50-$1710.90 the following would apply:
Bid price is $1710.50
Ask price is $1710.90
Spread is £0.40
Trader A instantly fills a sell market order at $1710.50
Trader B sets a buy limit order at $1710.50 and must wait for price to drop down to this level for the order to be filled.Key Takeaways:
- The bid price is the highest price in the market place that a buyer will pay for a financial instrument.
- The difference between the bid price and ask price is known as the spread.
- The bid price is normally lower than the offer price unless in extreme circumstances
Bonds are a fixed income asset instrument and in basic terms represent a loan made by an investor to a borrower who in most cases will either be a country’s government or a corporate entity. Bonds are utilised by governments and corporate entities to raise capital funds in order to finance operations or major projects. The owners of the bonds are classed as creditors of the issuer.
Bond information will always include the end date of the bond, when the sum borrowed (the principal) is scheduled to be repaid and also the rate of interest that is paid on the bond whether this be fixed interest or a variable rate linked to some other rate of interest more than likely a government’s or national bank’s base lending rate of interest.
Most government and corporate bonds can be publicly traded but some are only tradable between the issuer and the borrower of the bond, these are commonly known as over the counter bonds (OTC).
Governments or corporations often need to borrow money in order to fund new projects, roads & schools as an example for governments and purchase of new machinery or plants as an example for a corporation. In order to do this, they might issue various bonds to raise funds by borrowing from members of the public, investment funds or other corporations.
Bonds will be released for a standard price commonly £100 or £1000 which is known as the par price and on redemption of the bond this is the value which the holder of the bond is entitled to receive from the issuer of the bond. During the lifetime of the bond the holder(at the payment date) will receive the coupon rate of interest that is stated on the bond as example if the bond has a 5% coupon rate and a holder owns one £1000 bond they will be entitled to receive £50 of interest on the coupon payment date.
Prices of bonds will obviously fluctuate in the market place depending on various factors including length of time until maturity of the bond, credit quality of the issuer and the coupon rate applicable to the bond compared to other interest rates available at the current time.Key Takeaways:
- Bonds are used by governments and corporate entities to raise capital for major projects or operations.
- Bonds will always display the maturity date (when the principal loan must be repaid) along with the coupon rate (the amount of interest the bond pays) and the coupon date (the date or date at which the coupon rate is paid).
- Bonds are classed as fixed income asset instruments as the most common types of bonds always pay the same rate of interest. However, there are also variable interest bonds now available for investors.
A breakout is when the price of a financial instrument or asset trades below a level of support or alternatively above a level of resistance. Breakouts demonstrate the possibility but obviously not certainty for the price of the asset or instrument to start a trending movement in the direction of the breakout. As an example, a breakout through a major support level to the downside could indicate that price will start to trend lower. Breakouts that occur along with high traded volumes (relative to normal traded volumes) confirm greater conviction and a greater likelihood that prices will trend in the direction of the breakout.
Breakouts will occur when a price has been contained, often for long periods of time, above a major support level or alternatively below a major resistance level. This level will become a line in the sand for breakout traders to enter the market once the level is broken or alternatively for traders already holding positions, who didn’t want the price to breakout, will have stop losses triggered and avoid larger losses.
The large increase in trading activity at the breakout level will more than likely cause an increase in volume traded, the higher traded volume will help to confirm the breakout. However, if volume does not spike upwards the breakout may not be confirmed and likely fail and the price will retrace to the breakout level.
Even on a high-volume breakout the price is likely to retrace to the breakout level as short-term traders will look to take profits and this will result in the price being driven back to the breakout level. If the breakout is of high conviction it should then move again in the direction of the breakout with velocity, not allowing any additional positions to be taken at that level. If the price doesn’t again move in the breakout direction then the breakout has likely failed and the price will continue through the initial level.Key Takeaways:
- Breakouts are used by breakout traders to enter new trades at key support and resistance levels and traders already holding positions to prevent further losses.
- Price will normally retrace to a breakout level due to profit taking by short term traders.
- Breakouts resulting in high trade volume usually have more conviction.
Bullish is a term used to describe how a trader feels about the direction of a certain financial market or alternatively the actual direction a market may already be moving in.
If a trader has a bullish bias towards a specific market or financial instrument, they believe that the future direction of the price will be moving upwards. A market can also be described as being bullish in that it is displaying characteristics that would imply that its future move is up or if already moving upwards that this trend is likely to continue for some time.
Being bullish or being in a bullish or bull market is the opposite to being bearish or in a bear market which is when a market is showing downward trend characteristics or a trader holds a bias that the future direction of the market is down.
Identifying bullish market trends is crucial to the success of a trader because market sentiment is a leading factor in determining the direction in which a financial market will move. If bullish sentiments or pressures outweigh the bearish sentiments or pressures the relative market will likely rise in price. Being able to identify when this is taking place or alternatively coming to an end is a key factor in maximising trading profits or alternatively limiting losses.
Bullish traders believe that the future price of a market is up and try to profit from this by buying or going long in the market with the aim to sell this position back at a higher price when the market has risen as they were predicting.Key Takeaways:
- trader with a bullish bias believes that the future price of a market will be up.
- Bullish is the opposite to bearish where the trader’s bias is that the market will be moving downwards.
- Identifying bullish and bearish market trends is crucial to a trader’s success.
Buying a financial instrument relates to when a trader takes a [long position] on the instrument speculating that the price of the instrument will rise. The buying rate of the [instrument] is referred to as the [asking] or offer price.
Traders who have bought a financial instrument are commonly referred to as bulls and they will buy when an instrument displays signs of strengthening in price due to increased market demands. Conversely traders who have sold a financial instrument are referred to as bears and they have the opposite opinion of an instrument to bulls.
Part of a profit [yielding] strategy for a trader is to know when to buy an instrument. Each buyer will naturally have their own unique style of trading.There are two approaches to this:
- Either a trader would buy at a set price but then sell at a higher price or sell at a set price and buy at a lower price.
- The first approach is referred to as going long and the second approach is referred to as [going short].
An investor can trade by observing buying signals. These are a set of events that are identified by a trader to help them identify when the ideal time would be to enter the trade. The common types of buying signals are bull flags, pin bar, inside bar and engulfing bar.Key Takeaways:
- Buying is a form of trading a financial instrument.
- Bulls are traders who buy instruments as they expect the price to rise and might possibly be holding long positions.
- A big part of trading is developing one’s own unique style of trading in a profitable manner.
- There are a set of alerts, commonly known as buying signals that act as tip-offs and indicate the ideal possible time to enter a trade.