Main definitions and formulas
Information about changing prices on financial instruments is accumulated from all over the world in electronic information systems like "Reuters", "Bloomberg", "Dow Jones".
Financial instruments quotations get to trade terminal from all these electronic information systems.
Trader is dealing company's client who carries out buy/sell operations at his own expense or at an investor's expense.
Investor is natural or legal person who makes investment.
Investment includes money capital, bank deposits, shares, assets and other types of securities invested into entrepreneurial objects in order to get profits.
Currency is a form of money in circulation.
Main currencies:
Currency exchange rate is a price of currency of one country expressed in units of another currency. This price can be set up reasoning from correlation between demand and offer of a certain currency in free market conditions. It can also be determined by decision made by the Government or its major financial body, usually central bank.
Currency rates are displayed by a pair of currencies participating in one transaction. For instance, GBP/USD, USD/CHF, GPB/USD, where GPB/USD shows how many dollars is equal to 1 British Pound (how many dollars can be purchased for 1 British Pound) and USD/CHF shows how many Swiss Franks there are in one dollar (how many Swiss Franks can be purchased for 1 dollar).
The first currency is called basic currency (XXX or USD) and it determines how much of another national currency can be purchased for one unit of this basic currency.
Purchasing is always done by price Ask.
Ask is a price by which you can buy currency being the first in a pair (XXX) and sell corresponding amount of currency being the second one in a pair (YYY).
Expression to sell XXX/YYY, for example, corresponds to selling XXX (first currency) and buying YYY (second currency).
Selling is always done by Bid price.
Bid is a price by which you can sell currency being the first in a pair (XXX) and buy corresponding amount of currency being the second one in a pair (YYY).
Spread is a difference between Ask and Bid
Pips is a minimum price change.
Trade diapason within 100 points is called "Figure" on Forex market.
Currency exchange rates of different countries are expressed by national currencies. This is a so called direct quotation system. For example, In Japan one US dollar (USD) will be equal to some amount of Japanese Yens (JPY), while in New York one Japanese Yen will be equal to some amount of cents (or dollars).Direct quotation shows how many units of national currency there are in one US dollar.
For example, a quotation USD/JPY - 120.56 means that one US dollar is equal to 120.56 Japanese Yens.
Great Britain, Europe, New Zealand, Australia belong to those few countries that use indirect quotation system.
Indirect quotation is a quotation that shows how many US dollars there are in one unit of national currency.
Quotation GBP/USD - 1/5855 means that one British Pound is equal to US $ 1.5855, EUR/USD - 1.0343.
So, abbreviation XXX/YYY in shows how many units of YYY currency there are in one unit of XXX currency. Therefore, currency exchange rate (quotation) is a quantity of YYY currency given for 1 unit of XXX currency.
If currency exchange rate is shown by USD/YYY abbreviation, it means we deal with currency pair of direct quotation.
If currency exchange rate is shown by XXX/USD abbreviation, it means we deal with currency pair of indirect quotation.
Spot rate is a price of one currency expressed by another currency fixed at the moment of transaction under the condition of exchange of these currencies by banks on the second day after the transaction was carried out. Spot rate shows how high the national currency is valued abroad at the moment of transaction.
Both direct and indirect quotations can be applied to spot rates.
The abbreviation XXX/YYY is called cross rate if consideration of both direct and indirect quotations. Cross rate is a correlation between two currencies based on correlation between their exchange rate and third currency exchange rate. World market operation s usually use cross rates there American dollar plays a role of such third currency, since it's not only reserve currency but also a key currency of monetary operations.
All calculations on cross rates connected with direct quotation currencies are determined by multiplying, all calculations on cross rates connected with indirect quotation currencies are determined by division.
If XXX/YYY is a cross rate abbreviation and XXX corresponds to direct quotation currency, then:
If YYY corresponds to indirect quotation currency, then:
If YYY element corresponds to direct quotation currency, then multiplying is needed:
If YYY element corresponds to indirect quotation currency, then division is needed:
For example, EUR/CHF = USD/CHF * EUR/USD.
GBP/EUR = GBP/USD : EUR/USD
GBP/EUR = GBP/USD : EUR/USD
Marginal trading is selling or buying of financial instruments by Forex clients via their own margin (deposit) and credit leverage, given to him/her by a broker (dealing center or bank). Marginal trading requires accomplished transaction.
Client is a physical or legal person that has trade relationship with a company.
Company is an enterprise, group of enterprises or household pursuing commercial goals.
Brokerage is a company providing services on international financial markets.
Broker is an independent person or a company playing a middleman role in trade, stock exchange and monetary bargaining. Brokers make deals on behalf of clients and on their own behalf but at the expense of a trustee. Brokers get certain profits for mediation between sellers and buyers of securities, goods, precious metals etc. this amount of money is fixed according to both sides agreement or according to stock exchange committee tariffs.
Stock exchange market is an organized form of wholesale trade including international trading of popular goods that have stable and specific qualitative features (goods stock exchange market) or a form of systematic operations on trading with securities, gold and currency (stock exchange, currency exchange).
Kerb-stone market is a type of trade with financial instruments, which is not attached to one specific geographical spot and which doesn't have fixed opening and closing time.
Credit lever is granted by dealing center (bank or broker) to its clients. Credit lever means that a dealing company gives clients credit for trading operations on Forex market. It means that with credit lever of 1:1000 client can operate with an amount of money that does not exceed his own capital by more than 100 times. So, if your deposited amount is equal to US $ 1000 and the credit lever offered by your broker is 1:100, then you have a right to buy and sell US $ 100 000.
Accomplished transaction means two equal but opposite operations (opening position and closing position). Purchasing of financial instrument following by its future selling (opposite transaction); Selling of financial instrument following by its future purchasing (opposite transaction).
