Money in Motion: Key Terms Dictionary
An upward moving channel formed with two parallel, upward sloping trend lines. The upper trend line connects the price highs over a period, with each subsequent high price higher than the previous. Conversely, the lower trend line connects the price lows, with each subsequent low price higher than the previous.
A bullish chart pattern used in technical analysis that is created by two trend lines. In an ascending triangle, one trend line is drawn horizontally at a level connecting the price highs. The second trend line connects a series of increasing lows. The resulting shape is a flat top triangle. Traders enter into long positions when the price of the asset breaks above the top resistance.
In the currency market, this is the abbreviation for the Australian dollar.
Average Directional Index (ADX):
An indicator used in technical analysis to determine the strength or weakness of a trend without regard to trend direction. The ADX is measured on a scale between zero and 100. Readings below 20 are used to indicate a weak trend, while reading over 25 indicates a strong trend.
Average True Range (ATR):
An indicator used in technical analysis that measures volatility. The True Range reflects the price absolute price movement. Strong trending moves generally have larger true ranges where range bound markets have lower true ranges. The Average True Range is a moving average (generally 14 days) of the True Ranges.
Bank For International Settlements (BIS):
An international organization of central banks that fosters monetary and financial cooperation. It seeks to make monetary policy more predictable and transparent among its member banks. Established in 1930, it is the oldest international financial organization, and was created to administer the transaction of monies according to the Treaty of Versailles. Among others, its main goals are to promote information sharing and to be a key center for economic research.
Bank of Canada (BOC):
The central bank of Canada, that came into existence after the passing of the Bank of Canada Act in 1935, influences the country's economy and money supply.
Bank of Japan (BOJ):
The Japanese central bank. The bank is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system, and providing settling and clearing services.
A graphical representation of a stock’s movement that usually contains the open, high, low, and closing prices for a set period of time.
A style of chart used by some technical analysts. The top of the vertical line indicates the highest price a security traded at during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. A single bar represents one day of trading.
The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency. For accounting purposes, a firm may use the base currency to represent all profits and losses.
Bearish Engulfing Pattern:
A bearish chart pattern that consists of a small bullish candlestick with short shadows or tails followed by a large bearish candlestick that eclipses or "engulfs" the previous one.
A trend indicated by a large candlestick followed by a much smaller candlestick whose body is located within the vertical range of the larger candle's body. Such a pattern is an indication that the previous upward trend is coming to an end.
The stem, or whole dollar price, of a quote, often used in reference to foreign currencies or money markets.
Used in technical analysis, a band is plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger. Generally, you will find 2 bands, one is located 2 standard deviations above the moving average and the second band located 2 standard deviations below the moving average. The typical setting is 20 period moving average with 2 standard deviations.
The chairman of the United States Federal Reserve, the central bank of the US. Bernanke took over the helm from Ian Greenspan on February 1, 2006, ending Greenspan's 18-year leadership at the Fed. From 2002 to 2005, he served as a member of the Board of Governers of the Federal Reserve System.
A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support. The benefit of trading breakouts is that it is a price based strategy rather than an indicator based strategy. Price based strategies tend to be more responsive to market movements in volatile conditions.
A type of trader who uses technical analysis to find potential trading opportunities, identifying situations where the price of an asset is likely to experience a substantial movement over a short period of time. Breakout traders generally look for key levels of support and resistance and will place transactions when the price passes through these levels. Long positions are taken when the price breaks through a level of resistance, and short positions are taken when the price breaks below a level of support.
Bretton Woods Agreement:
A 1944 agreement made in Bretton Woods, New Hampshire, which helped to establish a fixed exchange rate in terms of gold for major currencies. The International Monetary Fund was also established at this time.
Bullish Engulfing Pattern:
A bullish chart pattern that forms when a small bearish candlestick is followed by a large bullish candlestick. The large bullish candlestick will completely "engulf" the previous day's candlestick. The shadows or tails of the small candlestick are short, which enables the body of the large candlestick to cover the entire candlestick from the previous day.
A bullish candlestick chart pattern in which a large bearish candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body.
In the context of the forex market, the exchange rate between the U.S. dollar and the British pound sterling. Because it is the norm in forex for most major currencies to be quoted against the U.S. dollar on a regular basis, “cable” is a commonly used term. “Cable” can also be used to refer simply to the British pound sterling.
In currencies, this is the abbreviation for the Canadian Dollar.
A price chart that displays the high, low, open, and close for a security each day over a specified period of time.
The entity responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.
In currencies, this is the abbreviation for the Swiss franc.
In currencies, this is the abbreviation for the China Yuan Renminbi.
Commodity Channel Index (CCI):
An oscillator used in technical analysis to help determine when an investment vehicle has been overbought and oversold. It can then be traded as a mean reversion oscillator. The Commodity Channel Index, first developed by Donald Lambert, quantifies the relationship between the asset's price, a simple moving average (SMA) of the asset's price, and mean deviations (MD) from that average. It is computed with the following formula: CCI = [(High+Low+Close)/3 – SMA] / (.015 X Mean Deviation)
Consumer Price Index (CPI):
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Sometimes referred to as “headline inflation.”
Cross Currency Pair:
A pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having to first exchange the currencies into American dollars.
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.
A selected group of currencies in which the weighted average is used as a measure of the value or the amount of an obligation. A currency basket functions as a benchmark for regional currency movements - its composition and weighting depends on its purpose.
Currency Carry Trade:
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
Dark Cloud Cover:
In candlestick charting, this a bearish reversal pattern involving multiple candlesticks. It first starts with a continued uptrend with bullish candles. The next day opens at a new high then closes below the midpoint of the body of the first day.
A market structure that consists of a network of various technical devices that enables investors to create a marketplace without a centralized location. In a decentralized market, technology provides investors with access to various bids/ask prices and makes it possible for them to deal directly with other investors/dealers rather than with a given exchange.
A descending channel or downtrend is the price action contained between two downward sloping parallel lines. Lower pivot highs and lower pivot lows are a bearish signal. In a downtrend, a trade might be entered short at the upper resistance trend line and exited at the lower support channel line. A lower low below a descending channel can signal continuation.
A bearish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second trend line that is horizontally placed at a strong level of support. Traders watch for a move below support, as it suggests that downward momentum is building. Once the breakdown occurs, traders enter into short positions and aggressively push the price of the asset lower.
A deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country's government (i.e. central bank) can alter the official value of the currency.
In currencies, this is the abbreviation for the Danish Krone.
Dojis form when a security's open and close are virtually equal. It looks like a plus sign “+”.
An indicator developed by Richard Donchian and may also be referred to as Price Channels. It plots the highest high and lowest low over the last period intervals. Breakout traders will trade breaks above the upper channel to go long or a break below the lower channel to go short.
A a bullish charting pattern used in technical analysis. It describes the drop in price, a rebound, another drop to the same (or similar) price level as the original drop, and finally another rebound. The shape of this pattern resembles the letter ‘W’.
A bearish charting pattern used in technical analysis. It describes the increase in price, a short term pull back, then another increase in price to the same (or similar) price level as the first swing high. The shape of this pattern resembles the letter ‘M’.
Describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when you see a series of lower highs and a series of lower lows than the ones found earlier in the trend.
Elliott Wave Theory:
Theory named after Ralph Nelson Elliott, who concluded that the movement of the prices could be predicted by observing and identifying a repetitive pattern of waves. 5 waves are made in the direction of the trend and 3 waves are made in the counter trend direction.
In currencies, this is the abbreviation for the euro.
European Central Bank:
The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.
European Union (EU):
A group of European countries that participates in the world economy as one economic unit and operates under one official currency, the euro. The EU's goal is to create a barrier-free trade zone and to enhance economic wealth by creating more efficiency within its marketplace.
A geographic and economic region that consists of all the European Union countries that have fully incorporated the euro as their national currency. Also referred to as "euro land".
A bearish candlestick pattern consisting of three candles that have demonstrated the following characteristics:
- The first bar is a large bullish candlestick located within an uptrend.
- The middle bar is a small-bodied candle that closes above the first candle bar.
- The last bar is a large bearish candle that opens below the middle candle and closes near the center of the first candle's body.
This pattern is used by traders as an early indication that the uptrend is about to reverse.
The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen.
Exponential Moving Average (EMA):
A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average".
A contrarian investment strategy used to trade against the prevailing trend. "Fading the market" is typically very high risk, requiring the trader to have a high risk tolerance. A fade trader would sell when a price is rising and buy when it's falling. Also known as "fading".
A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going higher). The Fibonacci retracement is the potential retracement of a financial asset's original move in price. Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trend line between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 78.6%.
Fixed Exchange Rate:
A country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a country's currency value within a very narrow band. Also known as pegged exchange rate.
The foreign exchange (also known as “forex” or “FX”) market is the place where currencies are traded. The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $4 trillion per day and includes all of the currencies in the world.
In the currency market, this is the abbreviation for the British pound.
A slang term for U.S. paper dollars.
Group of Eight (G-8):
Eight of the world’s economically leading countries that in a cooperative effort meet periodically to address international economic and monetary issues.
A bullish price pattern in candlestick charting that occurs when prices trade significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.
A bearish candlestick pattern that forms at the end of an uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price. Generally the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning.
In currencies, this is the abbreviation for the Hong Kong dollar.
In currencies, this is the abbreviation for the Indian Rupee.
In currencies, this is the abbreviation for the Japanese Yen.
A slang term for the New Zealand dollar (NZD). It derives its name from New Zealand’s national icon – a flightless bird called a kiwi.
A style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line.
A slang term for a Canadian dollar. It is derived from the picture of a loon on one side of the coin.
A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.
A bullish candlestick pattern that consists of three candles that have demonstrated the following characteristics:
- The first bar is a large bearish candlestick located within a defined downtrend.
- The second bar is a small-bodied candle that closes below the first candle.
- The last bar is a large bullish candle that opens above the second candle and closes near the center of the first candle's body.
This pattern is used by traders as an early indication that the downtrend is about to reverse.
Moving Average (MA):
An indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure trend direction, momentum and define areas of possible support and resistance.
Moving Average Convergence Divergence (MACD):
A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD. A trader would buy when the MACD line crosses above the signal line. A trader would sell when the MACD line crosses below the signal line.
In the currency market, this is the abbreviation for the Mexican peso.
In currencies, this is the abbreviation for the Norwegian Krone.
In the currency market, this is the abbreviation for the New Zealand dollar.
In technical analysis, this term describes a situation in which the price has risen to such a degree that an oscillator has reached its upper bound. This is generally interpreted as a sign that the price of the asset is becoming overvalued and may experience a pullback.
A situation in technical analysis where the price of an asset has fallen to such a that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for traders.
The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point. A common exception is for JPY pairs which are quoted to the second place to the right of the decimal. That means a pip on JPY pairs are the second decimal place to the right.
The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency. Also known as the “secondary currency” or “counter currency”.
Relative Strength Index (RSI):
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 - 100/(1 + RS*)*Where RS = Average of x days' up closes / Average of x days' down closes.
The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.
A charge that is incurred by Forex investors who rollover their positions to the following delivery date. Rollover can be a positive amount added to the forex trader’s account, or an interest expense incurred depending upon the currency trade. A popular strategy that incorporates positive rollover earnings is called the Carry Trade.
In currencies, this is the abbreviation for the Russian ruble.
In currencies, this is the abbreviation for the Swedish Krona.
In currencies, this is the abbreviation for the Singapore dollar.
A type of bearish candlestick formation that results when the price, at some point during the day, advances well above the opening price but closes lower than the opening price.
A technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator is used to gauge if the price is potentially overbought or oversold. There are 2 types of stochastic oscillators. Many traders use slow stochastics.
The price level which, historically, an asset has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter into new long positions of the asset while sellers cease their sales.
A term used in technical analysis that refers to the peak reached by an indicator or an asset's price. A swing high is formed when the high of a price is greater than a given number of highs positioned around it. A series of consecutively higher swing highs indicates that the given asset is in an uptrend.
A term used in technical analysis that refers to the troughs reached by an indicator or an asset's price. A swing low is created when a low is lower than any other point over a given time period. Successively lower swing lows indicate that the underlying asset is in a downtrend, while higher lows mean it is in an uptrend.
A style of trading that attempts to capture gains in a trade within one to four days.
A slang term for the Swiss franc. The Swiss franc, or Swissie, has often been considered a safe-haven currency during times of geopolitical unrest. This is mainly due to the country's neutral stance in global conflicts.
A chart pattern used in technical analysis that is easily recognized by the distinct shape created by two converging trend lines. The pattern is identified by drawing two trend lines that connect a series of sequentially lower peaks and a series of sequentially higher lows. Both trend lines act as barriers that prevent the price from heading higher or lower, but once the price breaches one of these levels, a sharp movement often follows.
Take-profit Order (T/P):
An order used by currency traders specifying the exact rate or number of pips from the current price point where to close out their current position for a profit.
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
The general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. Trend traders will determine the direction of the trend and filter all of their trades in that direction.
A technical analysis pattern created by drawing trend lines along a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include symmetrical, ascending and descending triangles.
In currencies, this is the abbreviation for the U.S. dollar.
The Dow Jones FXCM USDollar Index measures the value of the USD versus four of the most liquid currencies (EUR, GBP, AUD, JPY). This index provides a relatively balanced value of the USD against the main currencies spread out in the main geographic portions of the world (Europe, Asia, and Australia).
Slang for one billion units in currency.
In currencies, this is the abbreviation for the South African Rand.