Forex Glossary

American style currency option An option that may be exercised at any

valid business date throughout the life of the option.

Arbitrage A risk-free type of trading in which the same instrument is

bought and sold simultaneously in two different markets in order to

cash in on the divergence between the two markets.

Ascending triangle A triangle continuation formation with a flat upper

trendline and a bottom sloping upward trendline. (See Triangle.)

Ascending triple top A bullish point-and-figure chart formation that

suggests that the currency is likely to break a resistance line the

third time it reaches it. Each new top is higher than the previous

one.

Atekubi A bearish two-day candlestick combination. It consists of a

blank bar that closes at the daily high; the current closing price

equals the previous day’s low. The original day’s range is a long

black bar.

At par forward spread Forward price is zero; therefore, the spot price is

similar to the forward price. It reflects the fact that the foreign

interest rate is similar to the U.S. interest rate for that particular

period.

At-the-money (ATM) option An option whose present currency price is

approximately equal to the strike price.

At the price stop-loss order A stop-loss order that must be executed at

the precise requested level, regardless of market conditions.

Average options Options that refer to the average rate of the

underlying currency that existed during the life of the option. This

rate becomes the strike in the case of the average strike options; or

it becomes the underlying, determining the intrinsic value when

compared to a predetermined fixed strike in the case of average rate

options. Average options can be based on the spot rate (spot style)

or on the forward underlying the option (forward style.) The average

can be calculated arithmetically or geometrically, and the rates can

be tabulated with a variety of frequencies.

B

Balance-of-payments All the international commercial and financial

transactions of the residents of one country.

Bank of Canada (BOC) The central bank of Canada.

Bank of England (BOE) The central bank of the United Kingdom. It is a

less independent central bank. The government may overwrite its

decision.

Bank of France (BOF) The central bank of France.

Bank of Italy (BOI) The central bank of Italy.

Bank of Japan (BOJ) The Japanese central bank. Although its Policy Board

is still fully in charge of the monetary policy, changes are still subject

to the approval of the Ministry of Finance (MOF). The BOJ targets

the M2 aggregate.

Bar chart A type of chart that consists of four significant points: the

high and the low prices, which form the vertical bar; the opening

price, which is marked with a little horizontal line to the left of the

bar; and the closing price, which is marked with a little horizontal line

to the right of the bar.

Barrier options (trigger options, cutoff options, cutout options, stop options,

down/up-and-outs/ins, knockups) Options very similar to

European style vanilla options, except that a second strike price (the

trigger) is specified that, when reached in the market, automatically

causes the option to be expired (knockout options) or “inspired”

(knockin options).

Bearish tasuki A bearish two-day candlestick combination. It consists

of a long blank bar that has a low above 50 percent of the previous

day’s long black body, and closes marginally above the previous

day’s high. The second day’s rally is temporary, as it is caused only

by profit-taking. The sell-off is likely to continue the next day.

Bearish tsutsumi (the engulfing pattern) A bearish two-day candlestick

combination. It consists of a second-day bearish candlestick whose

body “engulfs” the previous day’s small bullish body.

Bilateral grid An exchange rate system that links all the central

rates of the EMS currencies in terms of the ECU.

Black closing bozu A bearish candlestick formation that consists of a

long black bar (upper shadow).

Black marubozu (shaven head) A bearish candlestick formation that

consists of a long black bar (no shadow).

Black opening bozu A bearish candlestick formation that consists of a

long black bar (lower shadow).

Black-Scholes fair value model The original option pricing model, which

holds that a stock and the call option on the stock are comparable

investments and thus a risk less portfolio may be created by buying

the stock and selling the option on the stock, as a hedge. The

movement of the price of the stock is reflected by the movement of

the price of the option, but not necessarily by the same amplitude.

Therefore, it is necessary to hold only the amount of the stock

necessary to duplicate the movement of the price of the option.

Blank closing bozu A bullish candlestick formation that consists of a

long blank bar (lower shadow).

Blank marubozu (shaven head) A bullish candlestick formation that

consists of a long blank bar (no shadows).

Blank opening bozu A bullish candlestick formation that consists of a

long blank bar (upper shadow).

Bollinger bands A quantitative method that combines a moving

average with the instrument’s volatility. The bands were designed to

gauge whether the prices are high or low on a relative basis. They

are plotted two standard deviations above and below a simple

moving average. The bands look like an expanding and contracting

envelope model. When the band contracts drastically, the signal is

that volatility will expand sharply in the near future. An additional

signal is a succession of two top formations, one outside the band

followed by one inside. If it occurs above the band, it is a selling

signal. When it occurs below the band, it is a buying signal.

Book method Point-and-figure chart’s original name.

Box spread A compound option strategy that consists of four options with a

common expiration date: a long call and a short put at one strike

price, and a long put and a short call at a different strike price.

Breakaway gap A price gap that occurs in the beginning of a new

trend, many times at the end of a long consolidation period. It may

also appear after the completion of major chart formations.

Breakout of a spread triple bottom A bearish point-and-figure chart

formation that suggests that the currency is likely to break a support

line the third time it reaches it. The currency failed to reach the

support line once.

Breakout of a spread triple top A bullish point-and-figure chart

formation that suggests that the currency is likely to break a

resistance line the third time it reaches it. The currency failed to

reach the resistance line once.

Breakout of a triple bottom A bearish point-and-figure chart formation

that suggests that the currency is likely to break a support line the

third time it reaches it.

Breakout of a triple top A bullish point-and-figure chart formation that

suggests that the currency is likely to break a resistance line the third

time it reaches it.

Bullish tasuki A bullish two-day candlestick combination. It consists

of a long black bar that has a high above 50 percent of the previous

day’s long blank body, and closes marginally below the previous

day’s low.

Bullish tsutsumi (the engulfing bar) A bullish two-day candlestick

combination. It consists of a second bullish candlestick whose body

“engulfs” the previous day’s small bearish body.

Bundesbank The German central bank. In addition to its domestic

obligations, the Bundesbank has had international obligations since

1979 as the front player of the European Monetary System. The

Bundesbank is a very independent central bank.

Business firms (establishment) survey Survey of the payroll, workweek,

hourly earnings, and total hours of employment in the non farm

sector.

Business Inventories An economic indicator that consists of the items

produced and held for future sale.

Butterfly spread A compound option strategy that consists of a combination

of a bull spread and a bear spread, using either calls or puts.

Calendar combination A compound option strategy that consists of the

simultaneous call calendar spread and put calendar spread, in which

the strike price of the calls is higher than the strike price of the puts.

Calendar spread A combination option of two similar types of options,

either calls or puts, with the same strike price but different expiration

dates. The dissimilarity between the expiration dates allows this type

of spread to capitalize on both the impact of the time decay and the

interest rate differentials.

Calendar straddle A compound option strategy that consists of

simultaneous buying of a longer-term straddle and a near-term

straddle with a common strike price.

Call ratio backspread A compound option strategy that consists of

short calls with a lower strike price and more long calls with a higher

strike price. The profit is twofold. The maximum upside profit

potential is unlimited. The downside profit potential consists of the

total premium received. The maximum loss potential occurs when

the currency price reaches the higher strike price at expiration.

Candlestick chart A type of chart that consists of four major prices: high,

low, open, and close. The body (jittai) of the candlestick bar is

formed by the opening and closing prices. To indicate that the

opening was lower than the closing, the body of the bar is left blank.

If the currency closes below its opening, the body is filled. The rest

of the range is marked by two “shadows”: the upper shadow

(uwakage) and the lower shadow (shitakage).

Capacity utilization An economic indicator that consists of total industrial

output divided by total production capability. The term refers to the

maximum level of output a plant can generate under normal

business conditions.

Cardinal square A Gann technique for forecasting future significant

chart points by counting from the all-time low price of the currency.

It consists of a square divided by a cross into four quadrants. The

all-time low price is housed in the center of the cross. All of the

following higher prices are entered in clockwise order. The numbers

positioned in the cardinal cross are the most significant chart points.

Channel line A parallel line that can be traced against the trendline,

connecting the significant peaks in an uptrend, and the significant

troughs in a downtrend.

Chaos theory A theory that holds that statistically noisy behavior may

occur randomly, even in simple environments. This seemingly

random behavior may be predicted with decreasing accuracy if the

source is known.

CHIPS (Clearing House Interbank Payments System) A computerized

system used for foreign exchange dollar settlements.

Christmas tree spread A compound option strategy that consists of

several short options at two or more strike prices.

Classes of options The types of options: calls and puts.

Combination spread (synthetic future) A compound option strategy

that consists of a long call and a short put, or a long put and a short

call, with a common expiration date.

Commodity Channel Index (CCI) An oscillator that consists of the

difference between the mean price of the currency and the average

of the mean price over a predetermined period of time. A buying

signal is generated when the price exceeds the upper (+100) line,

and a selling signal occurs when the price dips under the lower (-

100) line.

Commodity Futures Trading Commission (CFTC) An independent agency

created by Congress in 1974 with a mandate to regulate commodity

futures and options markets in the United States. The CFTC’s

responsibilities are to ensure the economic utility of futures markets,

via competitiveness and efficiency; ensure the integrity of these

markets; and protect the participants against manipulation, fraud,

and abusive practices. The Commission, based in Washington, D.C.,

regulates the activities of 285 commodity brokerage firms; 48,211

salespeople; 8017 floor brokers; 1325 commodity pool operators

(CPOs); 2733 commodity trading advisers (CTAs); and 1486

introducing brokers (IBs).

Commodity Research Bureau’s (CR Futures Index Index formed from

the equally weighted futures prices of 21 commodities. The

preponderance of food commodities makes the CRB Index less

reliable in terms of general inflation.

Common gap A price gap that occurs in relatively quiet periods or in

illiquid markets. It has limited technical significance.

Condor spread A compound option strategy that consists of either

four same-type options with a common expiration date—two long

options with consecutive strike prices, one short option with an

immediately lower strike price, and one short option with an

immediately higher strike price; or four same-type options with a

common expiration date—two short options with consecutive strike

prices, one long option with an immediately lower strike price, and

one long option with an immediately higher strike price.

Consumer Price Index (CPI) An economic indicator that gauges the

average change in retail prices for a fixed market basket of goods

and services.

Consumer sentiment A survey of households designed to gauge the

individual propensity for spending. There are two studies conducted

in this area, one survey by the University of Michigan, and the other

by the National Family Opinion for the Conference Board. The

confidence index measured by the Conference Board is sensitive to

the job market, whereas the index generated by the University of

Michigan is not.

Continuation patterns Technical signals that reinforce the current trends.

Cost of carry The interest rate parity, whereby the forward price is

determined by the cost of borrowing money in order to hold the

position.

Council of Ministers The legislative body of the European Economic

Community in charge of making the major policy decisions. It is

composed of ministers from all the 12 member nations. The

presidency rotates every six months by all the 12 members, in

alphabetical order. The meetings take place in Brussels or in the

capital of the nation holding the presidency.

Country (sovereign) risk A trading risk emerging from a

government’s interference in the foreign exchange markets.

Covered interest rate arbitrage An arbitrage approach that consists of

borrowing currency A, exchanging it for currency B, investing

currency B for the duration of the loan, and, after taking off the

forward cover on maturity, showing a profit on the entire set of

deals.

Covered long A compound option strategy that consists of selling a

call against a long currency position. A covered long is synonymous

with a short put.

Covered short A compound option strategy that consists of shorting a

put against a short currency position. A covered short is synonymous

with a short call.

Cox, Ross, and Rubinstein pricing model An option pricing model that

takes into consideration the early exercise provision of the American

style options. As it assumes that early exercise will occur only if the

advantage of holding the currency exceeds the time value of the

option, their binomial method evaluated the call premium by

estimating the probability of early exercise for each successive day.

The theoretical premium is compared to the holding cost of the cash

hedge position, until the option’s time value is worth less than the

forward points of the currency hedge and the option should be

exercised.

Credit risk The possibility that an outstanding currency position may

not be repaid as agreed, due to a voluntary or involuntary action by

a counterparty.

Cross rates Currencies traded against currencies other than the U.S.

dollar. A cross rate is a non-dollar currency.

Currency call A contract between the buyer and seller that holds that the

buyer has the right, but not the obligation, to buy a specific quantity

of a currency at a predetermined price and within a predetermined

period of time, regardless of the market price of the currency. The

writer assumes the obligation of delivering the specific quantity of a

currency at a predetermined price and within a predetermined period

of time, regardless of the market price of the currency, if the buyer

wants to exercise the call option.

Currency fixings An open auction executed in Europe on a daily basis in

which all players, regardless of size, are welcome to participate with

any amount.

Currency futures A specific type of forward outright deal with

standardized expiration date and size of the amount.

Currency option A contract between a buyer and a seller, also known

as writer, that gives the buyer the right, but not the obligation, to

trade a specific quantity of a currency at a predetermined price and

within a predetermined period of time, regardless of the market price

of the currency; and gives the seller the obligation to deliver or buy

the currency under the predetermined terms, if and when the buyer

wants to exercise the option.

Currency put A contract between the buyer and the seller that holds

that the buyer has the right, but not the obligation, to sell a specific

quantity of a currency at a predetermined price and within a

predetermined period of time, regardless of the market price of the

currency. The writer assumes the obligation to buy the specific

quantity of a currency at a predetermined price and within a

predetermined period of time, regardless of the market price of the

currency, if the buyer wants to exercise the call option.

Current account balance The broadest current dollar measure of U.S.

trade, which incorporates services and unilateral transfers into the

merchandise trade data.

Daylight position limit The maximum amount of a certain currency a

trader is allowed to carry at any single time, between the regular

trading hours.

Dead cross An intersection of two consecutive moving averages that

move in opposite directions and should technically be disregarded.

Dealing systems On-line computers that link the contributing banks

around the world on a one-on-one basis.

Delta (A) (1) The change of the currency option price relative to a change

in the currency price; (2) the hedge ratio between the option

contracts and the currency futures contracts necessary to establish a

neutral hedge; (3) the theoretical or equivalent share position. In the

third case, delta is the number of currency futures contracts a call

buyer is long or a put buyer is short. Delta ranges between 0 and 1.

Descending triangle A triangle continuation formation with a flat

lower trendline and a downward-sloping upper trendline. (See

Triangle.)

Descending triple bottom Bearish point-and-figure chart formation

that suggests that the currency is likely to break a support line the

third time it reaches it. Each new bottom is lower than the previous

one.

Diagonal spread A compound option strategy that consists of several

same-type options, in which the long side and the short side have

different strike prices and different expirations.

Diamond A minor reversal pattern that resembles a diamond shape.

Direct dealing An aggressive approach in which banks contact each

other outside the brokers’ market.

Directional Movement Index A signal of trend presence in the market.

The line simply rates the price directional movement on a scale of 0

to 100. The higher the number, the better the trend potential of a

movement, and vice versa.

Discount forward spread A forward price that is deducted from a

spot price to calculate a forward price. It reflects the fact that the

foreign interest rate is lower than the U.S. interest rate for that

particular period.

Discount rate The interest rate at which eligible depository

institutions may borrow funds directly from the Federal Reserve

Banks. The rate is controlled by the Federal Reserve and is not

subject to trading.

Discretion for range to trader stop-loss order A stop-loss order that

gives the trader a number of discretionary pips within which the

order has to be filled.

Double bottoms A bullish reversal pattern that consists of two bottoms

of approximately equal heights. A parallel (resistance) line is drawn

against a line that connects the two bottoms. 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.

Double tops A bearish reversal pattern that consists of two tops of

approximately equal heights. A parallel (support) line is drawn

against a resistance line that connects the two tops. The break of the

support line generates a move equal in size to the price difference

between the average height of the tops and the support line.

Downside tasuki gap A bearish two-day candlestick combination. It

consists of a second-day blank bar that closes an overnight gap

opened on the previous day by a black bar.

Downward breakout of a bearish support line A bearish point-andfigure

chart formation that confirms the currency’s breakout of a

support line the third time it reaches it.

Downward breakout of a bullish support line A bearish point-andfigure

chart formation that confirms the currency’s breakout of a

support line the third time it reaches it. The support line is sloped

upward.

Downward breakout from a consolidation formation A bearish pointand-

figure chart formation that resembles the inverse flag formation.

A valid downside breakout from the consolidation formation has a

price target equal in size to the length of the previous downtrend.

Durable Goods Orders An economic indicator that measures the

changes in sales of products with a life span in excess of three years.

Economic exposure Reflects the impact of foreign exchange changes

on the future competitive position of a company.

Elliott Wave Principle A system of empirically derived rules for

interpreting action in the markets. It refers to a five-wave/threewave

pattern that forms one complete bull market/bear market cycle

of eight waves.

Envelope model A band created by two winding parallel lines above

and below a short-term moving average that borders most price

fluctuations. When the upper band is penetrated, a selling signal

occurs; when the lower band is penetrated, a buying signal is

generated. Because the signals generated by the envelope model are

very short-term and occur many times against the ongoing direction

of the market, speed of execution is paramount.

Eurocurrency Currency deposit outside the country of origin.

Eurodollars U.S. dollar deposits placed in commercial banks outside the

United States.

European Coal and Steel Community European entity established in 1951

by the Treaty of Paris, with the purpose of promoting inter-European

trade in general, and eliminating restrictions on the trade of coal and

raw steel in particular. West Germany, France, Italy, the Netherlands,

Belgium, Luxembourg, and Great Britain formed this community.

European Commission The executive body of the European Economic

Community in charge of making and observing the enforcement of

policy. It consists of 23 departments, such as foreign affairs,

competition policy and agriculture. Each country selects its own

representatives for four-year terms, but the commissioners may only

act for the benefit of the community. The commission is based in

Brussels and consists of 17 members.

European Court of Justice The European Economic Community body in

charge of settling disputes between the EC and member nations. It

consists of 13 members and is based in Luxembourg.

European currency unit A basket of the member currencies. As a

composite unit, the ECU consists of all the European Community

currencies, which are individually weighted. It was created by the

European Monetary System with the eventual goal of replacing the

individual European member currencies.

European Economic Community A community established by the

Treaty of Rome in 1951, with the goal of eliminating customs duties

and any barriers against the transit of capital, services, and people

among the member nations. The signatories were West Germany,

France, Italy, the Netherlands, Belgium, and Luxembourg.

European Joint Float Agreement European monetary system

established in April 1972 by the EC members: West Germany,

France, Italy, the Netherlands, Belgium, and Luxembourg. Great

Britain, Ireland, and Denmark were admitted by January 1973. The

agreement allowed the member currencies to move within a 2.25

percent fluctuation band (nicknamed the snake). As a joint group,

the agreement allowed these currencies to gyrate within a 4.5

percent band (nicknamed the tunnel). The entire agreement was

known as the snake in the tunnel.

European Monetary Cooperation Fund EMS fund established to

manage the EMS credit arrangements.

European Monetary Institute (EMI) The new European Central

Bank created to govern the EMS. As of March 1994, it did not have

any power over inter-EMS monetary policy.

European Monetary System European monetary system established in

March 1979 by seven full members: West Germany, France, the

Netherlands, Belgium, Luxembourg, Denmark, and Ireland. Great

Britain did not participate in all of the arrangements and Italy joined

under special conditions. New members: Greece in 1981, Spain and

Portugal in 1986. Great Britain joined the Exchange Rate Mechanism

in 1990. Also in 1990, West Germany became Germany as a result of

its political unification with East Germany.

European Parliament The European Economic Community body in

charge of reviewing and amending legislative proposals. It has the

power to reject the budget proposals. It consists of 518 members

who are elected. It is based in Luxembourg, but the sessions take

place in Strasbourg or Brussels.

European Payment Union European entity instituted in 1950 to

facilitate the inter-European settlements of international trade

transactions.

European-style currency option An option that may only be exercised on

the expiration date.

European Union Treaty Treaty signed by the 12 EMS members in

February 1992 in the Dutch city of Maastricht, with the stated goal of

forming a “closer union among the peoples of Europe.”

Exchange for physical (EFP) Consists of deals executed in the cash

market, outside the exchanges, for amounts equivalent to the

currency futures amount, on forward outright prices valued for the

futures’ expiration. EFPs are generally quoted by commercial and

investment banks, even during regular trading hours.

Exchange rate risk (1) Foreign exchange risk that is the effect of

the continuous shift in the worldwide market supply and demand

balance on an outstanding foreign exchange position. (2) Trading

risk pertinent to market fluctuation.

Exercise (strike) price The price at which the underlying currency will

be delivered upon exercise.

Factory Orders An economic indicator that refers to total orders for

durable and nondurable goods. The nondurable goods orders consist

of food, clothing, light industrial products, and products designed for

the maintenance of the durable goods.

FASB # 8 (Financial Accounting Standards Board’s Statement Number

The original accounting rules regarding foreign exchange were

standardized in 1975, which set the procedures for foreign currency

translations into U.S. dollars in the consolidated balance sheets of

U.S. multinational corporations.

FASB # 52 (Financial Accounting Standards Board’s Statement Number 52)

A complex set of rules designed in 1981, whose main objective is to

move the foreign exchange P&L from current income into

shareholders’ equity.

Federal funds (Fed funds) Immediately available reserve balances at

the federal reserves. The Fed funds are widely used by commercial

banks or large corporations to lend to each other on an overnight

basis. Although their level is established by the Fed, the prices

fluctuate because they are traded in the market.

Federal Open Market Committee (FOMC) A committee established in

1935, through the Banking Act, to replace the Open Market Policy

Conference (OMPC.) Currently active.

Federal Reserve The central bank of the United States. It was

established in 1913 when Congress passed the Federal Reserve Act.

The Act held that role of the Federal Reserve was “to furnish an

elastic currency, to afford the means of rediscounting commercial

paper, to establish a more effective supervision of banking in the

United States, and for other purposes.”

Federal Reserve Board The board consists of a Governor and four other

regular members. The Secretary of the Treasury and the Comptroller

of the Currency are closely consulted. The 12 regional Federal

Reserve Banks around the country have sufficient autonomy to

manage financial conditions in their districts. They are also managed

by governors.

Fedwire An automated communications and settlement system

linking the Federal Reserve banks with other banks and with

depository institutions.

Fence A compound option strategy that consists of either a long

currency position—a long out-of-money put and a short out-of-themoney

call, where the options have the same expiration date (risk

conversion); or a short currency position—a short out-of-the-money

put and a long out-of-the-money call, where the options have the

same expiration date (risk reversal).

Fibonacci percentage retracements Price retracements of 0.382

and 0.618, or approximately 38 percent and 62 percent.

Fibonacci ratio 0.618 and 0.312.

Fibonacci sequence Takes a sequence of numbers that begins with 1

and adds 1 to it, then takes the sum of this operation (2) and adds it

to the previous term in the sequence (1). Next it takes the sum of

the second operation (3) and adds it to the previous term in the

sequence (the sum of the first operation, i.e., 2). The Fibonacci

sequence continues iterating in this manner, adding the most recent

sum to the previous term, which is itself the sum of the two previous

terms, etc. This yields the following series of numbers: 1 1 2 3 5 8 13

21 34 55 89 144 233 377 610 987 1597 2584 4181 (etc.).

FINEX A currency market that is part of the New York Cotton

Exchange (NYCE), the oldest futures exchange in New York. The

exchange lists futures on the European Currency Unit and the USDX,

a basket of ten currencies: deutsche mark, Japanese yen, French

franc, British pound, Canadian dollar, Italian lira, Dutch guilder,

Belgian franc, Swedish krona, and Swiss franc.

Fisher effect A theory holding that the nominal interest rate consists

of the real interest rate plus the expected rate of inflation.

Flag A continuation formation that resembles the outline of a

flag. 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 are parallel to each other or

very mildly converging, making it look like a flag (parallelogram). The

previous sharp trend is known as the flagpole. When the currency

resumes its original trend by breaking out of the consolidation, the

price objective is the total length of the flagpole, measured from the

breakout price level.

Floor brokers Any individuals on the exchange floor engaged in

executing orders for another person. They may also trade for their

own accounts, with the primary responsibility of executing the

customers’ orders first. Brokers are licensed by the federal

government.

Floor traders (locals) Exchange members who execute their own

trades by being physically present in the pit, or place for futures

trading.

Foreign exchange The mechanism that values foreign currencies in

terms of another currency.

Foreign exchange brokers Intermediaries among banks who bring

together buyers and sellers to the market, optimize the prices they

show to their customers, and do not take positions for themselves.

Foreign exchange exposure The potential effect of currency

fluctuations on shareholders’ equity.

Foreign exchange rate The price of one currency in terms of another.

Forward outright Foreign exchange deal that matures at a day past the spot

delivery date (generally two business days).

Forward spread (forward points or forward pips) Forward price used to

adjust a spot price to calculate a forward price. It is based on the

current spot exchange rate, the interest rate differential, and the

number of days to delivery.

Fractal geometry Geometry theory that refers to the fact that certain

irregular objects have a fractal number of dimensions. In other

words, an object cannot fill an integer number of dimensions.

French-West German Treaty of Cooperation A treaty signed in 1963

by President Charles de Gaulle and Chancellor Konrad Adenauer,

which established that West Germany would lead economically

through the cold war and France, the former diplomatic powerhouse,

would provide the political leadership.

Fuzzy logic Method that attempts to weigh the quality of the patterns

recognized by neural networks. Because not all patterns have equal

financial significance for foreign currency forecasting, this method

qualifies the degree of certainty of the results.

Gamma The rate of change of an option’s delta, or the sensitivity of

the delta.

Gann percentage retracements The Gann theory focuses mostly on the

eighths, along with retracements in thirds.

Gap The price gap between consecutive trading ranges (i.e., the low of

the current range is higher than the high of the previous range).

Genetic algorithms Method used to optimize a neural network. Trial

and error are applied to an evolutionlike system, which mimics

natural selection for financial forecasting purposes.

GLOBEX An electronic trading system conceived in 1987 as an afterhours

trading system and geared toward global futures trading;

created through a joint venture of the Chicago Mercantile Exchange

(CME), the Chicago Board of Trade (CBT), and Reuters PLC.

Golden cross An intersection of two consecutive moving averages

that move in the same direction and suggest that the currency will

move in the same direction.

Gross Domestic Product The sum of all goods and services

produced in the United States.

Gross National Product The sum of government expenditure,

private investment, and personal consumption.

Gross National Product Implicit Deflator Deflator tool designed to

adjust the Gross National Product for inflation. It is calculated by

dividing the current dollar GNP figure by the constant dollar GNP

figure.

Harami bar A “wait-and-see” two-day candlestick combination. It

consists of two consecutive ranges having opposite directions, but it

does not matter which one is first. The second day’s range results

fall within the previous day’s body.

Head-and-shoulders A bearish reversal pattern that consists of a series of

three consecutive rallies, such that the first and third rallies (the

shoulders) have about the same height and the middle one (the

head) is the highest. The rallies are based on the same support line,

known as the neckline. When the neckline is broken, the price target

is approximately equal in amplitude to the distance between the top

of the head and the neckline.

Hedging A method used to minimize or eliminate the risk of

exchange rate fluctuations.

High-low band A band created by two winding parallel lines above

and below a short-term moving average that borders most price

fluctuations. The moving average is based on the high and low

prices. The resulting two moving averages define the edges of the

band. A close above the upper band suggests a buying signal and a

close below the lower band gives a selling signal.

Hoshi (star) A “wait-and see” two-day candlestick combination. It

consists of a tiny body that appears the following day outside the

original body. It is not important whether the star reaches the

previous day’s shadows. The direction of the two consecutive ranges

is also irrelevant.

Households survey Consists of the unemployment rate, the overall

labor force, and the number of people employed.

Implied volatility Method of measuring volatility by considering the

premiums currently trading in the market and calculating the figure

based on the level of the option premium.

In-the-money (ITM) call A call whose present currency price is higher

than the strike price.

In-the-money (ITM) put A put whose present currency price is lower than

the strike price.

Industrial Production An economic indicator that consists of the total

output of a nation’s plants, utilities, and mines.

Initiation margin A margin paid by the trading party in order to trade

currency futures. A trader’s daily loss cannot exceed the size of this

margin.

Interest rate risk Amount of mismatches and maturity gaps among

transactions in the foreign exchange book.

International Fisher effect Theory holding that investors will hold assets

denominated in depreciating currencies only to the extent that

interest rates are sufficiently high to balance the expected currency

losses.

International Monetary Market The major currency futures and

options on currency futures market in the world. It is a division of

the Chicago Mercantile Exchange in Chicago.

Intrinsic value The amount by which an option is in-the-money. In

the case of a call, the intrinsic value equals the difference between

the underlying currency price and the strike price. In the case of the

put, the intrinsic value equals the difference between the strike price

and the present currency price, when beneficial.

Inverse head-and-shoulders A bullish reversal pattern that consists of a

series of three consecutive sell-offs. Among the three consecutive

sell-offs, the shoulders have approximately the same amplitude, and

the head is the lowest. The formation is based on a resistance line

called the neckline. After the neckline is penetrated, the target is

approximately equal in amplitude to the distance between the top of

the head and the neckline.

Irikubi A bearish two-day candlestick combination. It consists of a

modified atekubi bar. All the characteristics are the same, except

that the second day’s closing high is marginally higher than the

original day’s low.

Island reversal An isolated range or ranges that occur at the tip of a

V-formation.

ISO codes Standardized currency codes developed by the International

Organization for Standardization (ISO).

J-Curve theory Devaluation of a currency will trigger export gains in

the long term, rather than the short term, because of previous

contracts, existing inventories, and behavior modification.

Jittai Body of the candlestick (See Candlestick charts.)

Journal of Commerce Index Index that consists of the prices of 18

industrial materials and supplies used in the initial stages of

manufacturing, building, and energy production. It is more sensitive

than other indexes, as it was designed to signal changes in inflation

prior to the other price indexes.

Kabuse (dark cloud cover) A bearish two-day candlestick

combination. It consists of a second-day long black bar that opens

above the high of the previous day’s blank bar and closes within the

previous day’s range (in an uptrend).

Karakasa (hangman at the top, hammer at the bottom) A bearish

candlestick at the top of the trend, bullish at the bottom of the trend.

The candlestick can be either blank or black. The body of the

candlestick is very small and only half the length of the shadow.

Kenuki (tweezers) A “wait-and-see” two-day candlestick combination. It

consists of consecutive bars that have matching highs or lows. In a

rising market, a tweezers top occurs when the highs match. The

opposite is true for a tweezers bottom.

Key reversal day The daily price range on the bar chart of the reversal

day fully engulfs the previous day’s range; also, the close is outside

the preceding day’s range.

Kirikomi A bullish two-day candlestick combination. It consists of a

blank marubozu bar that opens the second day lower (than the

previous low of a long black line) and closes above the 50 percent

level of the previous day’s range.

Knockin A plain vanilla option that does not exist until the trigger is

reached. Knockout a plain vanilla option that goes away if the trigger

is reached.

Koma (spinning tops) A reversal candlestick formation that consists of

a short bar, either blank or black. This candlestick may also suggest

lack of direction.

Larry Williams %R A version of the stochastics oscillator. It consists

of the difference between the high price of a predetermined number

of days and the current closing price; that difference in turn is

divided by the total range. This oscillator is plotted on a reversed 0

to 100 scale. Therefore, the bullish reversal signals occur at under 80

percent and the bearish signals appear at above 20 percent. The

interpretations are similar to those discussed under stochastics.

Leading Indicators Index An economic indicator designed to offer a

six- to nine-month future outlook of economic performance. It

consists of the following economic indicators: average workweek of

production workers in manufacturing; average weekly claims for

state unemployment; new orders for consumer goods and materials

(adjusted for inflation); vendor performance (companies receiving

slower deliveries from suppliers); contracts and orders for plant and

equipment (adjusted for inflation); new building permits issued;

change in manufacturers’ unfilled orders for durable goods; change

in sensitive materials prices; index of stock prices; money supply,

adjusted for inflation; and the index of consumer expectations.

Line chart The line connecting single prices for each of the time

periods selected.

Linearly weighted moving average A moving average that assigns more

weight to the more recent closings.

Long legged shadows’ doji A reversal candlestick formation that

consists of a bar in which the opening and closing prices are equal.

Long straddle A compound option that consists of a long call and a

long put on the same currency, at the same strike price, and with the

same expiration dates. The maximum loss for the buyer is the sum of

the premiums. The upside break-even point is the sum of the strike

price and the premium on the straddle. The downside break-even

point is the difference between the strike price and the premium on

the straddle. The profit is unlimited.

Long strangle A compound option that consists of a long call and a

long put on the same currency, at different strike prices, but with the

same expiration dates. The profit is unlimited.

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

between 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.

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.

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.

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.

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

the 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.

FOREX. On-line Manual For Successful Trading 133

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.

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.