Currency Terms and Definitions Glossary

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Annualized

Extrapolates the behavior of an element (such as volatility) from a certain time period to a full year.

Ask

The price at which sellers offer currencies to buyers.

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Base currency

Usually the currency of the home market in which a trader or investor is buying or selling.

Bid

The price at which buyers offer to buy currencies from sellers.

Currency

A medium of exchange of value to define by reference to the geographical location of the authorities responsible for it. A currency is represented by a three-character ISO code.

Currency market

See foreign exchange market.

Currency pair

Exchange rate relationship between two currencies, where one currency is expressed in terms of the other. For example, USD-EUR (US dollar against Euro) is a currency pair.

Customizable Currency Converter

A version of the 164 Currency Converter that you can customize for your personal use. The Customizable Currency Converter allows you to insert your own HTML headers and footers to change the appearance of the Currencies Converter and its results.

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Decision-support tool

Any tool that provides an unbiased second opinion and reliable support throughout an investor's or trader's decision-making process. A decision-support tool enables effective risk managment, thereby increasing the profit potential (higher exposure at lower relative risk, more consistent return). It enhances overall trading performance, enabling financial institutions to improve their customer service, and increases trading volume. It reduces the complexity in the trading room and allows better use of financial resources.

• investors and traders who trade small to large volumes in the foreign exchange markets daily
• professionals who do business internationally and who want to minimize foreign exchange risk due to currency price fluctuations

Directional quality

The percentage of forecasts in the right direction.

Dollar rate

The exchange rate of a foreign currency as quoted against the US dollar (USD). Some currencies are typically only quoted against the US dollar, such as the Algerian dinar (DZD) and the Andorran franc (ADF). The exchange rate of the Algerian dinar against the Andorran franc is thus computed from DZD-USD and ADF-USD.

Exchange rate

The number of one currency needed to buy another.

Exchange rate risk

The potential loss that could be incurred from a movement in bid/ask prices, or exchange rates. For traders, risk is measured by the open currency position.

Exposure

The risk which an investor accepts when buying and selling in foreign currency-hedged financial instruments.

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Filtering data

Some data may be "bad," stemming from such causes as a market maker incorrectly typing a price, or entering the correct price but in the wrong format. All data used by OANDA is filtered using its own sophisticated algorithms.

Financial institution

An organization primarily established to offer and perform financial services. Examples of financial institutions include brokerages and banks.

Forecast

A statistical analysis of the markets whereby a percentage chance is assigned to a given price movement occurring. A forecast of the foreign exchange markets is similar to a weather report in that both assign a probability to the occurence of an identified market or climatic change. 

Forecasting services

Financial services that provide professional traders and investors with an unbiased second opinion and reliable support throughout the financial decision-making process. Any professional with international business relations can use the forecasting services to reduce there foreign exchange risks due to currency price fluctuations and get up-to-date information anytime.

Foreign exchange

Transactions which cause a change in a foreign currency position of a financial institution. Also known as FX or forex.

Foreign exchange market

A condition or area where buyers and sellers are in contact to buy and sell foreign currencies. Foreign exchange markets exist wherever and whenever currencies are bought and sold, and are not necessarily confined to cities.

FX or forex

An abbreviation for foreign exchange.

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Hedging

A transaction strategy used by traders and investors in foreign exchange to protect an investment or portfolio against currency price fluctuations. A current sale or purchase is offset by contracting to purchase or sell at a specified future date in order to defer a profit or loss on the current sale or purchase. In this way risk due to currency price fluctuations is effectively reduced.

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Interbank prices

Currency prices that reflect market rates among financial institutions for transactions typically over US $1 million. Interbank prices are different from retail prices.

ISO

The International Standards Organization, a worldwide standard-setting body. We use ISO 4217 currency codes in all of our services.

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Long position

A market position where a trader has bought a currency she previously did not own. A long position is normally expressed in terms of the base currency.

Market

The city to whose financial institutions a Trading Model is constrained. Trading Models follow and act upon the price quotes originating from these banks and financial institutions. The market of a given Trading Model simply maintains differences in opening and closing times in order to ensure that Trading Models only trade when the market is open and its recommendations can be followed. Trading Model markets exist for a number of the world's financial capitols.

Market maker

A financial institution or individual making consistent buy and sell quotations in a selection currencies. A market maker must hold or have ready access to the amounts quoted, that is carry an inventory.

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OANDA

A company created to make personal and business transactions that utilize foreign currencies easier for Internet users.

Open position

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same date.

Overbought

Situation where price movement has risen 150% faster or stronger than normal, rising too far in response to net buying. A price movement that becomes overbought is expected to soon make a contrarian move. In other words, the price of the currency pair is expected to soon fall.

Oversold

Situation where price movement has fallen 150% faster or stronger than normal, declining too far in response to net selling. A price movement that becomes oversold is expected to soon make a contrarian move. In other words, the price of the currency pair is expected to soon rise.

Portfolio

A selection of securities held by an investor or financial institution. Portfolios are designed primarily to spread investment risk.

Price movement

The change in the price of a currency over a specified time period.

Price point or pip

One basis point: 0.0001.

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Registration

Creating an online account with OANDA. For details, see Summary of Services.

Relative strength

Indicates the forecasted price movements for each of the eight currencies in the Currency Ranking service due to expected medium-term rate fluctuations. The relative strength for each currency is computed from a correlation between a Trading Model-generated forecast and the currency's price history. The strength of each currency can range from a minimum -1.0 to a maximum +1.0. We use Trading Models 40, 60, and 70 to compute relative strengths every hour on the hour, 365 days a year.

Retail prices

Currency prices which reflect commissions and special charges that a bank or exchange agency demands to convert currencies for noncorporate customers. These commissions and special charges vary among countries, banks, and exchange agencies. Please inquire at your local bank or travel agency, or consult available travel guides for more information on specific commissions and special charges which may be charged for converting currencies.

Risk

The potential loss that an investor accepts when she makes an investment. Risk can also be defined statistically as the annualized standard deviation of returns. See exchange rate risk.

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Short position

A market position where a trader has sold a currency he does not previously own. A short position is normally expressed in terms of the base currency.

Spread

The difference between the bid and the ask of a currency price.

Stop-buy

A buy order for a currency price that is above the current "market," or current price, that becomes a market order when the specified price is reached. Stop-buys are used by traders to establish positions in markets which they perceive to be rising in value.

Stop-loss

A price specified by a trader at which he closes his position (buys or sells currencies to exit the market) to ensure that in case of a loss (prices which don't move in the expected direction) he is able to keep his loss in line with his risk profile.

Supplier

See vendor.

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Time horizon

The period of time over which a forecast (such as a Directional Forecast or a Trading Recommendation) of the foreign exchange markets is made. Traders generally look at forecasts over several time horizons before making a trading decision. Typical time horizons presented by OANDA for its financial services are:

• one day (24 hours)
• five days
• three weeks
• three months

Trading Model

A sophisticated software program that provides expert buy/sell recommendations for trading currencies on the foreign exchange markets. A Trading Model, based on its evaluation of historical analyses and forecasts and your trading profile, makes recommendations about currency positions. It makes recommendations by anticipating fluctuations in the foreign exchange markets and capitalizing on these movements.

Trading Recommendations

A Trading Recommendation is the latest position of a Trading Model for a given market and one or more currency pairs. Trading Models are constantly reacting to the market as they receive each new price quote from live data suppliers.

Vendor or supplier

An financial organization which collects, packages, and distributes up-to-the-minute price quotes from banks and other financial institutions.

Volatility

A measure by which an exchange rate is expected to fluctuate or has fluctuated over a given period. Volatility figures are often expressed as a percentage per annum.