Common Terms and Questions

Forex is short for foreign exchange – the transaction of changing one currency into another currency. This process can be performed for a variety of reasons including commercial, tourism and to enable international trade. Forex is traded on the forex market, which is open to buy and sell currencies 24 hours a day, five days a week, and is used by banks, businesses, investment firms, hedge funds, and retail traders.

EA is short for Expert Advisor.

Arbitrage means taking advantage of price differences across markets to make a buck. If a currency, commodity, or security—or even a rare pair of sneakers—is priced differently in two separate markets, traders buy the cheaper version and then sell it at the higher price to make money.ge

A high-frequency trader will sometimes only profit a fraction of a cent, which is all they need to make gains throughout the day but also increases the chances of a significant loss. One major criticism of HFT is that it only creates “ghost liquidity” in the market.

High-frequency trading (HFT) is algorithmic trading characterized by high-speed trade execution, an extremely large number of transactions, and a very short-term investment horizon. HFT leverages special computers to achieve the highest speed of trade execution possible. It is very complex and, therefore, primarily a tool employed by large institutional investors such as investment banks and hedge funds.

Scalping is a trading strategy where investors buy and sell currencies over a short time frame to make a small profit. This is a very popular trading method used by many investors across different markets. Find out more about scalping and how to use this strategy with our bite-sized guide.

Leverage is the use of borrowed funds to increase one’s trading position beyond what would be available from the cash balance. It is commonly expressed as a ratio.

Forex traders often use leverage to profit from relatively small price changes in currency pairs.

Leverage can increase the potential for profit, but also magnify the potential for losses. Understanding the risks associated with leverage is essential, as is implementing effective risk management, appropriate position sizing, and comprehensive market knowledge. By adhering to these principles, prop traders can leverage their trading activities successfully, generating substantial profits while mitigating the risks associated with trading on leverage.

For example, if you have a balance of $100 and a leverage of 1:30, you essentially have up to $3,000 worth of instruments across all active trades.

Hedging is a form of risk management when trading financial markets. Hedging in financial markets is a trading technique used to protect yourself against major losses. It’s a popular form of risk management used by traders and can be thought of as an insurance policy against your trades in the event of an adverse movement. Hedging in forex involves opening a buy position and a sell position on the same currency pair. This is known as direct hedging or a perfect hedge and protects traders against a movement either way. It essentially eliminates all risk but also eliminates any profits.

Hedging is a complex strategy. A trader may decide to open a buy position and a sell position on two different currency pairs that are positively correlated. In other words, the two currency pairs usually move in the same direction. For example, the EUR/USD and GBP/USD generally move in the same direction, as do the AUD/USD and NZD/USD. This is known as indirect hedging. For another example, you might open a long position on AUD/USD with the belief the AUD would strengthen, and the USD would weaken and at the same time, you would open a short position on the NZD/USD to protect yourself against a rise in the USD.

Understanding CFDs

The term CFD stands for contract for difference which is a type of trading and a popular gateway for investors to enter the financial markets. They are offered by brokers for common instruments like forex, commodities, and spot metals. CFDs are a form of derivative trading. As in, they derive their value from the movement of an underlying asset. They allow traders to trade price movements without owning the underlying asset.

Engaging in a Contract – When traders choose to trade CFDs, they are engaging in a contract between themselves and the broker. The trader is the “buyer” and the broker is the “seller”. Both parties agree to a contract that speculates on the price of an asset in market conditions.

CFD traders can avoid some of the disadvantages and costs of traditional trading, by not owning the underlying asset.

Derivative trading is when traders speculate on the future price action of an asset via the buying or selling of derivative contracts with the aim of achieving enhanced gains when compared with buying the underlying asset outright. Derivative trading has grown in popularity since the 1980s, and investors can now trade derivatives on a range of financial markets including stocks, currencies, and commodities.

Traders can also use derivatives for hedging purposes to alleviate risk against an existing position. With derivatives, traders can go short and profit from falling asset prices. Therefore, they can use derivatives to hedge against any existing long positions.

Indices trading refers to taking a position in a stock index. A stock index measures the performance of several different companies. Indices trading can be a way to get exposure to an entire sector or economy at one time, without having to open positions on lots of different shares.

How are stock market indices calculated?

Most stock market indices are calculated according to the market capitalization of their component companies. This method gives greater weighting to larger cap companies, which means their performance will affect an index’s value more than lower cap companies.

However, some popular indices – including the Dow Jones Industrial Average (DJIA) – are price-weighted. This method gives greater weighting to companies with higher share prices, meaning that changes in their values will have a greater effect on the current price of an index.

What are the most common indices traded?

DJIA (Wall Street) – measures the value of the 30 largest blue-chip stocks in the US
S&P 500 (US 500) – tracks the value of 500 large cap companies in the US.
NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
DAX (Germany 40) – tracks the performance of the 40 largest companies listed on the Frankfurt Stock Exchange
FTSE 100 – measures the performance of 100 blue-chip companies listed on the London Stock Exchange.

What creates volatility in the indices?

An index’s price can be affected by a range of factors. This can include:

Economic news – investor sentiment, central bank announcements, payroll reports or other economic events can affect underlying volatility, which can cause an index’s price to move.

Company financial results – individual company profits and losses will cause share prices to increase or decrease, which can affect an index’s price.

Company announcements – changes to company leadership or possible mergers will likely affect share prices, which can have either a positive or negative effect on an index’s price.

Changes to an index’s composition – weighted indices can see their prices shift when companies are added or removed, as traders adjust their positions to account for the new composition.

Commodity prices – various commodities will affect different indices’ prices. For example, 15% of the shares listed on the FTSE 100 are commodity stocks, which means any fluctuations in the commodity market could affect the index’s price.

What is The Difference between KYC and AML?

Broadly speaking, AML refers to all efforts involved in preventing money laundering, such as stopping criminals from becoming customers and monitoring transactions for suspicious activity.

KYC refers to customer identification and screening, and ensuring you understand their risk to your business. In this way, KYC compliance helps prevent money laundering as well as fraud.

Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used as well as the hour between 5pm and 6pm EST when the market rolls over to the next day.

The following are considered major News Events

ADP Non-Farm Employment Change Report
BOE Interest Rate Decision
Consumer Price Index (PPI) Report
ECB Interest Rate Decision
Expenditures (PCE) Price Index m/m Report
Fed Interest Rate Decision
Gross Domestic Product (GDP) q/q Report
ISM Manufacturing PMI Report
ISM Services PMI Report
Non-Farm Payroll (NFP) Report
Retail Sales Report
Producer Price Index (PPI) Report
University of Michigan Consumer Sentiment (MCSI) Report