Forex Indicator - Parabolic SAR

Introduction

Developed by Welles Wilder, creator of RSI and DMI, the Parabolic SAR sets trailing price stops for long or short positions. Also referred to as the stop-and-reversal indicator (SAR stands for "stop and reversal"), Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first, and then trading with Parabolic SAR in the direction of the trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.

Calculation

The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction.

There are two variables: the step and the maximum step. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at .02 and the maximum step at .20.

Example

The chart for Microsoft shows how the Parabolic SAR can catch most trends and allow the trader to profit from the buy/sell signals. The default settings that Wilder recommends diminishes distracting fluctuations, but does not make the indicator immune to whipsaws (black arrow). A proper interpretation of this indicator would suggest that a trader should close long positions when the price falls below the SAR (red arrow) and close short positions when the price rises above the SAR (green arrow).

The Parabolic SAR works best during strong trending periods, which Wilder himself estimates occur roughly 30% of the time. Therefore, the user may first want to determine if the market is trending by using other indicators such as Wilder's ADX line

Forex Indicator - Moving Average (50)

Simple Moving Averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets.

Let’s discuss MA (50). ‘50’ means that the indicator uses 50 latest days to make its average. And I use 1H of time scale in implementing the indicator. The moving average represents the consensus of investor’s expectations over the indicated period of time. If the instrument price is above its moving average, it means that investor’s current expectations are higher than their average ones over the last 50 days, and that investors are becoming increasingly bullish on the instrument. Conversely, if today’s price is below its moving average, it shows that current expectations are below the average ones over the last 50 days.

The classic interpretation of a moving average is to use it in observing changes in prices. Investors typically buy when the price of an instrument rises above its moving average and sell when it falls below its moving average. That’s it!



Take a look at the picture above. When market price crosses MA(50), it tells you that the trend will change. But unfortunately all moving averages are lagging indicators and will always be "behind" the price.

But however, I use MA(50) to help me indicating long term bullish trend and bearish trend. But please be very careful when you see sideways market like picture above. This is the weakness of using MA indicator.

Forex Indicator - Relative Strength Index (RSI)

Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems, the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. In his book, Wilder recommends using 14 periods.

The RSI's full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis such as John Murphy's "Relative Strength" charts and IBD's "Relative Strength" rankings. Most other kinds of "Relative Strength" stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, many people avoid using the RSI's full name and just call it "the RSI."

Calculation



To simplify the formula, the RSI has been broken down into its basic components which are the Average Gain, the Average Loss, the First RS, and the subsequent Smoothed RS's.

For a 14-period RSI, the Average Gain equals the sum total all gains divided by 14. Even if there are only 5 gains (losses), the total of those 5 gains (losses) is divided by the total number of RSI periods in the calculation (14 in this case). The Average Loss is computed in a similar manner.

Calculation of the First RS value is straightforward: divide the Average Gain by the Average Loss. All subsequent RS calculations use the previous period's Average Gain and Average Loss for smoothing purposes. See the "Smoothed RS" formula above for details. The table below illustrates the formula in action.



Here's how lines 14 and 15 were calculated:



Note: It is important to remember that the Average Gain and Average Loss are not true averages! Instead of dividing by the number of gaining (losing) periods, total gains (losses) are always divided by the specified number of time periods - 14 in this case.

When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1. Conversely, when the average loss is greater than the average gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100. Note: If the Average Loss ever becomes zero, RSI becomes 100 by definition.

Important Note: The more data points that are used to calculate the RSI, the more accurate the results. The smoothing factor is a continuous calculation that - in theory - takes into account all of the closing values in the data set. If you start an RSI calculation in the middle of an existing data set, your values will only approximate the true RSI value. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To duplicate its RSI number, you'll need to use at least that much data also.

Use

Overbought/Oversold

Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.

Divergences

Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.

Centerline Crossover

The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.

Example



The DELL example shows a number of extreme readings as well as a negative divergence. In Oct-99, RSI reached oversold for a brief moment to mark the low around 38. The next extreme reading (overbought) occurred after a large advance that peaked in Dec-99. RSI reached overbought levels in late Dec-99 and moved below 50 by the second week of Jan-00. The next oversold reading occurred in Feb. for another brief moment and marked the low around 35. By the end of Feb-00, RSI moved back above 50 and into overbought territory in March. A negative divergence formed in March and marked the high in the upper fifties.

Forex Glossary ( A - Z )

A

Accrual: The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.

Actualize: The underlying assets or instruments which are traded in the cash market.

Adjustable Peg: Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency, often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.

Adjustment: Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

Agent Bank: (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.

Aggregate Demand: Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.

Aggregate Risk: Size of exposure of a bank to a single customer for both spot and forward contracts.

Aggregate Supply: Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

Agio: Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.

Appreciation: Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage: The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage Channel: The range of prices within which there will be no possibility to arbitrage between the cash and futures market.

Around: Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation: Dividing instrument funds among markets to achieve diversification or maximum return.

Ask: The price at which the currency or instrument is offered.

Asset: In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal.

At Best: An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better: An order to deal at a specific rate or better.

Authorized Dealer: A financial institution or bank authorized to deal in foreign exchange.


B

Back Office: Settlement and related processes.

Backwardation: Term referring to the amount that the spot price exceeds the forward price.

Balance of Payments: A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Band: The range in which a currency is permitted to move. A system used in the ERM.

Bank Line: Line of credit granted by a bank to a customer, also known as a "line".

Bank Rate: The rate at which a central bank is prepared to lend money to its domestic banking system.

Base Currency: The currency in which the operating results of the bank or institution are reported.

Basis: The difference between the cash price and futures price.

Basis Point: One per cent of one per cent.

Basis Trading: Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basket: A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear Market: A prolonged period of generally falling prices.

Bear: An investor who believes that prices are going to fall.

Bid: The price at which a buyer has offered to purchase the currency or instrument.

Book: The summary of currency positions held by a dealer, desk, or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the close of the day, e.g. from London to New York.

Bretton Woods: The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Broker: An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.

Bull Market: A prolonged period of generally rising prices.

Bull: An investor who believes that prices are going to rise.

Bundesbank: Central Bank of Germany.

Buying Rate: Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.


C

Cable: A term used in the foreign exchange market for the US Dollar / British Pound rate.

Capital Risk: The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.

Carry: The interest cost of financing securities or other financial instruments held.

Cash Delivery: Same day settlement.

Cash Market: The market in the actual financial instrument on which a futures or options contract is based.

Cash: Cash normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.

Cash and Carry: The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

Cash Settlement: A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central Bank: A bank which is responsible for controlling a countries monetary policy. It is normally the issuing bank and controls bank licensing, and any foreign exchange control regime.

Central Rate: Exchange rates against the ECU adopted for each currency within the EMS. Currencies have limited movement from the central rate according to the relevant band.

Chartist: An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Clean Float: An exchange rate that is not materially effected by official intervention.

Closed Position: A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission: The fee that a broker may charge clients for dealing on their behalf.

Confirmation: A memorandum to the other party describing all the relevant details of the transaction.

Contract: An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

Conversion Account: A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.

Conversion: The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion Arbitrage: A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

Convertible Currency: A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey: Slang for the Danish krone.

Correspondent Bank: The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Counterparty: The other organisation or party with whom the exchange deal is being transacted.

Countervalue: Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country Risk: The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organisations generate country risk tables.

Cover: (1) To take out a forward foreign exchange contract. (2) To close out a short position by buying currency or securities which have been sold.

Covered Arbitrage: Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin: The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

Crawling Peg: A method of exchange rate adjustment; the rate is fixed / pegged, but adjusted at certain intervals in line with certain economic or market indicators.

Credit Risk: The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.

Cross Deal: A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross Rates: Rates between two currencies, neither of which is the US Dollar.

Current Account: The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.


D

Day Trader: Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Deal Date: The date on which a transaction is agreed upon.

Deal Ticket: The primary method of recording the basic information relating to a transaction.


Dealer: An individual or firm acting as a principal, rather than as an agent, in the purchase and / or sale of securities. Dealers trade for their own account and risk.

Deflator: Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Delivery Date: The date of maturity of the contract, when the exchange of the currencies is made This date is more commonly known as the value date in the FX or Money markets.

Delivery Risk: A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Depreciation: A fall in the value of a currency due to market forces rather than due to official action.

Desk: Term referring to a group dealing with a specific currency or currencies.

Details: All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.

Devaluation: Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Direct Quotation: Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Dirty Float: Floating a currency when the rate is controlled by intervention by the monetary authorities.


E

Easing: Modest decline in price.

Economic Indicator: A statistics which indicates current economic growth rates and trends such as retail sales and employment.

ECU: European Currency Unit.

EDI: Electronic Data Interchange.

Effective Exchange Rate: An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

EFT: Electronic Fund Transfer.

EMS: European Monetary System.

European Monetary System: A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.


Exchange Control: A system of controlling inflows and out flows of foreign exchange, devices include licensing multiple currencies, quotas, auctions, limits, levies and surcharges.

Exotic: A less broadly traded currency.

Exposure: (i) Net working capital - The current assets in a foreign currency minus current liabilities in the currency; (ii) Net financial method The current assets in a foreign currency minus current liabilities and long term debt in the currency; (iii) Monetary / non-monetary method - Monetary assets and liabilities in the foreign currency are valued at present exchange rates, while non-monetary items are entered at the relevant historic rates.


F

Fast Market: Rapid movement in a market caused by strong interest by buyers and / or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.

Fed Fund Rate: The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

Fed: The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Reserve System: The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state chartered banks.

Fill or Kill: An order which must be entered for trading, normally in a pit three times, if not filled is immediately canceled.

Fisher Effect: The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fixed Exchange Rate: Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible Exchange Rate: Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating Exchange Rate: An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

FOMC: Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.

Foreign Exchange: The purchase or sale of a currency against sale or purchase of another.

Forex: Foreign Exchange.

Forex Club: Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of Association Cambiste International.

Forward Margins: Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Operations: Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright: A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Rate: Forward rates are quoted in terms of forward points, which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefor the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.

Free Reserves: Total reserves held by a bank less the reserves required by the authority.

Front Office: The activities carried out by the dealer, normal trading activities.

Fundamentals: The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

FX: Foreign Exchange.


G

G7: The seven leading industrial countries, being US, Germany, Japan, France, UK, Canada, Italy.

G10: G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gap: A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Going Long: The purchase of a stock, commodity, or currency for investment or speculation.

Going Short: The selling of a currency or instrument not owned by the seller.

Gold Standard: The original system for supporting the value of currency issued. The was that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Good Until Canceled: An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

Grid: Fixed margin within which exchange rates are allowed to fluctuate.

Gross Domestic Product: Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross National Product: Gross domestic product plus "factor income from abroad" - income earned from investment or work abroad.


H

Hard Currency: A currency whose value is expected to remain stable or increase in terms of other currencies.

Head and Shoulders: A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedge: The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

Hit the Bid: Acceptance of purchasing at the offer or selling at the bid.


I

IMF: International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM: International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Implied Rates: The interest rate determined by calculating the difference between spot and forward rates.

Indicative Quote: A market-maker's price which is not firm.

Inflation: Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial Margin: The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-Bank Rates: The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Interest Arbitrage: Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest Parity: One currency is in interest parity with another when the difference in the interest rates is equalized by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

Interest Rate Swaps: An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Internationalization: Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention: Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.


K

Kiwi: Slang for the New Zealand dollar.


L

Leading Indicators: Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Liability: In terms of foreign exchange, the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Limit Order: An order to buy or sell a specified amount of a currency at a specified price or better.

Liquidation: Any transaction that offsets or closes out a previously established position.

Liquidity: The ability of a market to accept large transactions.


M

Maintenance Margin: The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.

Make a Market: A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed Float: When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin Call: A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.

Margin: For currencies a deposit made to the forex firm on establishing a futures position account.

Mark to Market: The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market Maker: A market maker is a person or firm authorized to create and maintain a market in an instrument.

Market Order: An order to buy or sell a financial instrument immediately at the best possible price.

Micro Economics: The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-Price or Middle Rate: The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Minimum Price Fluctuation: The smallest increment of market price movement possible in a given futures contract.

Monetary Base: Currency in circulation plus banks' required and excess deposits at the central bank.

Moving Average: A way of smoothing a set of data, widely used in price time series.


N

Net Position: The amount of currency bought or sold which have not yet been offset by opposite transactions.


O

Odd Lot: A non standard amount for a transaction.

Offer: The price at which a seller is willing to sell. The best offer is the lowest such price available.

Offset: The closing-out or liquidation of a futures position.

Off-shore: The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Overnight Limit: Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

Overnight: A deal from today until the next business day.


P

Parity: (1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency.

Parities: The value of one currency in terms of another.

Pegged: A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pip: Minimum fluctuation or smallest increment of price movement.

Position: The netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short (more currency sold than bought).

Profit Taking: The unwinding of a position to realize profits.


Q

Quote: An indicative price. The price quoted for information purposes but not to deal.


R

Rally: A recovery in price after a period of decline.

Range: The difference between the highest and lowest price of a future recorded during a given trading session.

Rate: (1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution.

Reaction: A decline in prices following an advance.

Reciprocal Currency: A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Resistance Point or Level: A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.

Revaluation: Increase in the exchange rate of a currency as a result of official action.

Revaluation Rate: The rate for any period or currency which is used to revalue a position or book.

Risk Management: The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Risk Position: An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Rollover: An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Round Trip: Buying and selling of a specified amount of currency.


S

Same Day Transaction: A transaction that matures on the day the transaction takes place.

Selling Rate: Rate at which a bank is willing to sell foreign currency.

Settlement Date: The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.

Settlement Risk: Risk associated with the non settlement of the transaction by the counter party.

Short Sale: The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term Interest Rates: Normally the 90 day rate.

Sidelined: A major currency that is lightly traded due to major market interest being in another currency pair.

Soft Market: More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot: (1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot Next: The overnight swap from the spot date to the next business day.

Spot Price / Rate: The price at which the currency is currently trading in the spot market.

Spread: (1) The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Square: Purchase and sales are in balance and thus the dealer has no open position.

Squawk Box: A speaker connected to a phone often used in broker trading desks.

Squeeze: Action by a central bank to reduce supply in order to increase the price of money.

Stable Market: An active market which can absorb large sale or purchases of currency without major moves.

Standard: A term referring to certain normal amounts and maturities for dealing.

Sterilization: Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling: British pound, otherwise known as cable.

Stocky: Market slang for Swedish Krona.

Stop Loss Order: Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common.

Support Levels: When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further down ward movement. See resistance point.

Swap Price: A price as a differential between two dates of the swap.

Swap: The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swissy: Market slang for Swiss Franc.


T

Technical Correction: An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Thin Market: A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.

Thursday / Friday Dollars: A US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

Tick: A minimum change in price, up or down.

Today / Tomorrow: Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Tomorrow Next (Tom Next): Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.

Trade Date: The date on which a trade occurs.

Tradeable Amount: Smallest transaction size acceptable.

Transaction Date: The date on which a trade occurs.

Transaction: The buying or selling of currencies resulting from the execution of an order.

Two Tier Market: A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way Quotation: When a dealer quotes both buying and selling rates for foreign exchange transactions.


U

Uncovered: Another term for an open position.

Under-Valuation: An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

Up Tick: A transaction executed at a price greater than the previous transaction.


V

Value Date: For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value Spot: Normally settlement for two working days from today. See value date.

Volatility: A measure of the amount by which an asset price is expected to fluctuate over a given period.

Vostro Account: A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.


W

Wash Trade: A matched deal which produces neither a gain nor a loss.

Whipsaw: Term for where a trader takes a position, then has to move against it triggering stop loss limits and liquidation of positions, then having to move in the original direction. Normally occurs in volatile markets.

Working Day: A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).

Major Economic Indicators

The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Industrial Production - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.

Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.

Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.

Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.

Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.

Retail Sales - The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.

Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
 

Candlestick

This is the oldest type of chart that used to predict price movement. It is developed by Munehisa Homma, Japanese trader, in 1700’s. Is it that accurate? Well, nothing works all the time in market. But he (read: Munehisa Homma) claimed to have over 100 consecutive winning trades using this method!

Ok, now let’s start to learn the basics knowledge of candlestick.

There are two types of candlestick according to its opening and closing price position.

Those are:

1. Empty/Clear Candlestick, that describes strength

The bottom corner is the opening price and the upper corner is the closing price. Note that some of you might have different color with mine. Check out you chart’s background. If it’s black then your empty candlestick should colored black as mine.

But if your chart’s background is not black colored then your empty candlestick would have the same color as your chart’s background color.


2. Shaded Candlestick, that describes weakness

The upper corner is the opening price and the bottom corner is the closing price.

Note that some of you might have different color with mine. Check out you chart’s background. If it’s black then your shaded candlestick should colored white as mine.

But if your chart’s background is not black colored then your shaded candlestick would have a different color as your chart’s background color.


Note:
I will always use the black color background in every picture of this article.

Now, let’s identify the whole shape of those candlesticks.

Explanation:
1. Real Body, is the shape that starts from the opening price and ended at the closing price.
2. Shadows describe high levels of the period and low levels of the period.
3. Range (real body+shadows) is the whole candlestick. Starts from the high level and ended at the low level.

Empty Candlestick

Shaded Candlestick

Understanding the basic concept of candlestick, now let's learn some basic pattern. Click here to read more about candlestick pattern.

Short-Term Trendline

Have you ever heard of words saying “the trend is your friend”? Yup, everybody keeps saying that when they enter the market. Especially in forex which is running in 24 hours in every work day.

This article is discussing how short-term trend is being developed. First of all, let’s us know that “bullish” means upward trend and “bearish” means downward trend.

Bullish trend is occurred when series of market price that represented by candlesticks/bars on chart are showing upward movement.

And vice versa, bearish trend is occurred when series of market price that represented by candlesticks/bars on chart are showing downward movement.

And the next question is what are we going to do in bullish or bearish trend?

Since I trade by following the big trend, then I only buy in bullish trend and only sell in bearish trend. But this is not what swing traders do (let’s talk about this some other time).

Now, we’re going to determine bullish and bearish trend by drawing diagonal line on our chart.


Bullish Trend Line

Below is example of Usd/Jpy at 1H time scale. We will use 1H time scale to determine short-term trend.

Now, let’s see on June 5 to June 6. We see that market price tends to move upward. Then we can draw upward diagonal line to represent bullish trend. Find lowest opening/closing prices at each candlestick. Then connect those opening/closing prices and make diagonal line like picture below.

There you go. Now you have bullish trend line. And as long as price moved above bullish trend line, then market is considered to be bullish. And it is recommended to buy the pair just above the bullish trend line (but not too far above trend line).

Now we step forward. Let’s see what happen on the next days.

As we can see, most of the candlesticks are moving above our bullish trend line. So if we buy just above that line, then we might gain some profits there.

But when market price crosses below our bullish trend line (shown on chart at June 7), then it is time for us to wait and see. And expect the new trend to come.


Bearish Trend Line

Below is example of Usd/Jpy at 1H time scale. We will use 1H time scale to determine short-term trend.

Now, let’s see on May 9. We see that market price tends to move downward. Then we can draw downward diagonal line to represent bearish trend. Find highest opening/closing prices at each candlestick. Then connect those opening/closing prices and make diagonal line like picture below.

There you go. Now you have bearish trend line. And as long as price moved below bearish trend line, then market is considered to be bearish. And it is recommended to sell the pair just below the bearish trend line (but not too far below trend line).

Now we step forward. Let’s see what happen on the next days.

As we can see, most of the candlesticks are moving below our bearish trend line. So if we sell just below that line, then we might gain some profits there.

But when market price crosses above our bullish trend line (shown on chart at May 10), then it is time for us to wait and see. And expect the new trend to come.

Pivot Level

Pivot point is a point of rotation. It’s the level where market price is potentially being rotated back to where market price came from or being continued and making significant distance from pivot point.

Pivot point calculated by using previous period’s high, low, and closing prices taken from the daily chart. Most of traders use pivot level together with support and resistance levels to predict daily market price movement.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use New York market’s closing time as the open and close). This information basically contains all the data you need to use pivot points.


In order to calculate pivot level, we need 3 prices which are:

H = previous period’s high price
L = previous period’s low price
C = previous period’s closing price


Then calculate pivot level using this equation:
Pivot Point (PP) = (High + Low + Close) / 3

Support and resistance levels are then calculated off of this pivot point using the following formulas:

Resistance:
R1 = Resistance Level 1 = (2*PP)-L
R2 = Resistance Level 2 = (PP-S1) + R1
R3 = Resistance Level 3 = (PP-S2)+R2

Support:
S1 = Support Level 1 = (2*PP)-H
S2 = Support Level 2 = PP - (R1 - S1)
S3 = Support Level 3 = PP - (R2-S2)

Technical Analysis

Technical Analysis is probably the most common and successful method of making trading decisions and analyzing forex and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell decisions or to predict market direction.
Support and Resistance Levels

One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

Popular Technical Analysis Tools

Moving Averages (MA): Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar;

Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold;

Bollinger Bands: Bands that are placed x moving average standard deviations above and below a simple MA line;

Fibonacci Retracement Levels: Indicator used to identify potential levels of support and resistance;

Directional Movement Index (DMI): A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure;

Relative Strength Index (RSI): Momentum oscillator that is plotted on a vertical scale from 0 to 100;

Stochastics: Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars;

Trendlines: Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance;

Fundamental analysis

Fundamental analysis is the evaluation of non-visual information to evaluate trading activity and make trading decisions. Whereas technical analysts utilize charts and mathematical indicators to quantify price activity, fundamental analysts utilize market news and market forecasts to qualify price activity.

There are numerous market events that move the currency markets every week. Some affect every currency pair while others affect specific currency pairs. If the outcome of a market event has been fully discounted by the market, traders will not notice any discernible impact on their charts. If the outcome of a market event has not been fully discounted by the market, the result is either price appreciation or price depreciation and traders will see this activity on their charts.
Every week, there are fundamentally-important market events that are scheduled in every country at specific times. Similarly, there are fundamentally-important market events that may not be scheduled for specific times. Some countries (Germany, for instance) often do not schedule market events for specific times. The outcome of market events is sometimes leaked in advance in certain countries (Germany, for instance) for different reasons.

Market events include the release of economic data, speeches and testimony by government officials, interest rate decisions, and others.

Analysis

There are two types of analysis that traders use to enter market. Those are fundamental analysis and technical analysis.

Fundamental Analysis

Prices in the currencies market are affected by macroeconomic factors, such as inflation, unemployment, and industrial production. Information on events such as these is easy to find and are based on their analysis of economic data, which traders take positions on the market to make profit.

Fundamental analysts use economical data to predict market movement and to decide when is the best time to enter and exit from market.

Technical Analysis

Once a trader masters technical analysis, it is easy to apply it to any currency or time frame, and thus allowing a relatively short time to figure out where trends are going. Because of the short time, technicians can follow numerous currencies at the same time, whereas fundamentalists usually focus on one or two pairs of currencies, because there is so much information in the market to analyze.

Technical analysts use only graphical data shown on chart to predict market movement and to decide when is the best time to enter and exit from market.

Tutorial Forex part II

What is Pip?

Pip stands for percentage in point. It is the smallest price unit of a currency.

In Forex (foreign exchange), each currency has different value of 1 pip. 1 pip is equal to 1 point at the last number on each currency pair. For example, if you see Eur/Usd are traded at 1.2945 then price moves to 1.2946. We could say that price is moving upward for 1 pip. And if price moves to 1.2950 then we could say that price is moving upward for 5 pips.

Other example, Usd/Jpy are traded at 117.10. If price moves to 117.11 then we could say that price is moving upward for 1 pip. And if it moves to 117.15 then we could say that price is moving upward for 5 pips.


What is Lot?

Lot describes the standard unit size of a transaction. There are some unit sizes that used in forex. Those are:

1. Standard Lot. In standard lot, 1 lot is equal to 100,000 unitsMini Lot
2. Mini Lot. In mini lot, 1 lot is equal to 10,000 units.
3. Micro Lot. In Micro lot, 1 lot is equal to 1,000 units.


But some brokers may offer no fixed size of lot that allow their clients to trade in units.


What is Spread?

Spread is the difference between the sell quote (bid) and the buy quote (ask). If Eur/Usd quotes read 1.2910/1.2912 then the spread is 2 pips.


How to calculate profit?

Let’s us assume that we are using Standard lot. It means that 1 lot is equal to 100,000 units. Let’s see how to calculate your profit in each currency pair.

• Eur/Usd
Let’s say we buy Eur/Usd when the rate is 1.2908/1.2910 (bid or sell quote=1.2908 and ask or buy quote=1.2910). It means that we buy euro and sell dollar exactly at the same time at 1.2910. Why it has to be 1.2910? Because that’s the value of buy quote.

Now Eur/Usd is moving to 1.2920/1.2922. And we decide close the order. It means that we sell in order to exit the trade at 1.2920. Why it has to be 1.2920? Because that’s the value of the sell quote.

Our trade is ended with profit of +10 pips (1.2920 – 1.2910).

How many is +10 pips in dollar? Let’s calculate it.

In cases where the dollar is not quoted first (such as: Eur/Usd, Gbp/Usd, Nzd/Usd, etc), then we are using this is the formula:

(1 pip value/exit value) x (lot size) x (exit value) = profit or loss in dollar.

So, our profit would be:
(0.0001/1.2920) x (100,000) x (1.2920) = $10

Note:
The number of 0.0001 is came from 1 pip is equal to 0.0001 in Eur/Usd pair.

• Usd/Jpy
Let’s say we buy Usd/Jpy when the rate is 117.07/117.10 (bid or sell quote=117.07 and ask or buy quote=117.10). It means that we buy dollar and sell yen exactly at the same time at 117.10. Why it has to be 117.10? Because that’s the value of buy quote.

Now Usd/Jpy is moving to 117.20/117.23. And we decide close the order. It means that we sell in order to exit the trade at 117.20. Why it has to be 117.20? Because that’s the value of the sell quote.

Our trade is ended with profit of +10 pips (117.20 – 117.10).

How many is +10 pips in dollar? Let’s calculate it.

In cases where the dollar is quoted first (such as: Usd/Jpy, Usd/Chf, etc), then we are using this is the formula:

(1 pip value/exit value) x (lot size) = profit or loss in dollar.

So, our profit would be:
(0.01/117.20) x (100,000) = $8.53

Note:
The number of 0.01 is came from 1 pip is equal to 0.01 in Usd/Jpy pair.

Tutorial Forex part I

What is Forex ?

The Foreign Exchange market, also referred to as the "Forex" or "FX" market, is the largest financial market in the world, with a daily average turnover of well over US$1 trillion -- 30 times larger than the combined volume of all U.S. equity markets. Unlike other financial markets, the forex market has no physical location or central exchange. It is an over-the-counter market where buyers and sellers including banks, corporations, and private investors conduct business. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.the unmatched liquidity and around-the-clock global activity make forex the ideal market for active traders.

Pair

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second currency is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you buy EUR/USD you have bought Euros (and simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar. FX is traded in lots, which represent 100,000 units of the base currency. If the EUR/USD is quoted at 1.2253, that means that one Euro is currently worth just over $1.22. If the market moves from 1.2253 up to 1.2254 that represents a move of one pip. A pip is the smallest increment a currency pair can move and in the case of the EUR/USD currency pair a pip is worth $10 in a 100K account and is $1 in a mini account.

Leverage

Leverage allows traders to borrow money and use that money to invest in the foreign exchange market. Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in. Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to buy a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses.

Margin

Margin is a performance bond, or good faith deposit, to ensure against trading losses.

How are leverage and margin related?

The amount of leverage a market maker gives to a client defines the amount of margin that the client will have to commit in order to take a position in the market. For example, when leverage is 100:5, the “5” in the leverage ratio signifies the amount of capital the customer has invested of his own money, which is also known as the margin.

Bid and Ask

The bid rate is the price at which traders can sell the pair. The ask rate is the price at which traders can buy the pair.

This is the example of bid and ask on major currencies:

The ask rate will always be higher than the bid rate. The difference between the bid rate and the ask rate is the spread.