Forex Market Terminology
There are specific terms and expressions to be considered when involved in forex trading as otherwise, one would not really understand if a specific economic release or speech held by a central banker is beneficial for a currency pair or not. Central bankers are forced to use specific language and expressions due to the fact that financial market is so globally interconnected that one reckless speech in the United States may actually make the global equity markets tumble. This is due to the fact that trading algorithms govern high-frequency trading and this is visible especially on the forex market. These enormous spikes that happen in a blink of an eye on the forex market are not the result of traders buying or selling at the same time but of trading algorithms buying or selling at the same time.
Economic Terms to Consider
Inflation is on every central banker’s speech as inflation is part of the mandate of all central banks. Therefore, watching the President of the European Central Bank (ECB) or any other central bank head giving a speech, one will most likely note the word inflation appearing quite often. However, by a simple look at any economic calendar, one can see that the actual “inflation” term is not to be seen anywhere. The actual terminology is Consumer Price Index (CPI) as this is the economic indicator that reflects changes in prices at the consumer level. When it comes to the jobs data, there are other expressions to watch, depending the country the data is referring to.
In the United States, there are four different jobs data released on a monthly or on a weekly basis. The private payrolls release is being called ADP and the Non-Farm Payrolls release reflects all the jobs created by the US economy excluding the agricultural ones. Moreover, on a weekly basis, initial jobless claims and continuing claims are referring still to the job market. Initial jobless claims number reflects the number of people that are asking for the first time for unemployment benefits while continuing claims number shows people that failed to find a new job by the time they were unemployed and now apply for more unemployment benefits. In the United Kingdom, the jobs number is being called Claimant Count Change and obviously it is reflecting the same thing: change in the overall employment in an economy during a specific period of time. Even though all those terms reflect the same thing, they are presented with different terms and this way the trader knows what is the economy they are referring too and what is the currency that will be affected when they will be announced.
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Special Language Market Uses
The following are special expressions or words both market participants as well as central bankers are using when they refer to things that might affect the foreign exchange market and financial markets in general.
Long and Short
When a trader buys a currency pair, it is being called that he/she took a long position, as expectations are that the pair will move to the upside. If indeed this is happening, the trader makes a profit.
If a trader is selling a currency pair, it is said that he/she went short, as expectations are that the pair will move to the downside.
Bullish/Bearish and Hawkish/Dovish
A trader that takes a long position or is thinking of taking a long position he/she is having a bullish view on that currency pair, or he/she is bullish that currency. For example, one can be bullish Euro and in particular bullish the EURUSD pair.
The opposite is called being bearish, either on a currency or on a currency pair.
A central banker, on the other hand, cannot be neither bullish nor bearish as it is not possible to have a position on the market. Therefore, a central banker’s position/language/expression/statement can be either hawkish or dovish (this being the equivalent of bullish or bearish for the regular trader).
Different Terms for Currency Pairs
Different currencies and currency pairs have so-called nicknames and the most important ones are the following:
- GBP/USD = cable
- CAD = loonie
- NZD = kiwi
- AUD/USD = aussie
- EUR/USD = fiber
It is no wonder to hear traders referring to “cable” being bullish at a specific level and in plain English this is actually meaning that the GBPUSD is about to move to the upside so buying the pair will be recommended.
Other Terms Used
The above terms are the most important and common ones but constantly the financial jargon adds something new when it comes to market terminology.
After the 2008 financial crisis, new terms like the following have become the norm when central bankers and economist discuss monetary policy:
- QE = quantitative easing. This is generally referring to a central bank buying its own government’s bonds, and can take various forms. Bonds being basically debt, in some regions of the world central banks, bought even the debt of private companies in various forms of quantitative easing programs. The United States ran no more than four QE packages, while Japan, Europe, and the United Kingdom are still involved in one way or another in various QE programs.
- LTRO’s and TLTRO’s = Long Term Refinancing Operations and Targeted Long Term Refinancing Operations. These are special conditions offered by central banks to commercial banks under their jurisdictions in order to stimulate them to lend money to the economy.
- Easing = a central bank cuts interest rates.
- Tightening = a central bank hikes interest rates.
Needless to say that the list can go on and on and what a trader needs to do is to understand that some new terms are going to be added on a constant basis, most of them acronyms, as central banking will have to adapt to an every changing and challenging market environment.
Being constantly involved in trading financial markets will make it virtually impossible not knowing these terms and many other that exist or are about to be created.
Other educational materials
Recommended further readings
- Forex Analysis and Money Management Maciejczyk, K., 2012. (Doctoral dissertation, WORCESTER POLYTECHNIC INSTITUTE).
- FIBONACCI NUMBERS AS A TOOL FOR TECHNICAL ANALYSIS IN THE FOREX MARKET–THE ATTEMPT OF APPLICATION. GIRYN, C. and KOZUBSKI, A., 2012. Proceedings Polish Association for Knowledge Management, (61).