Terms of Business Glossary

An algorithm is a set of instructions to be followed in a step-by-step manner by a computer. Algorithmic trading is the use of algorithms to automatically open and close trades according to predefined parameters. For instance, an algorithm can be programmed to observe the overbought and oversold conditions of a given market and to automatically open and close positions when certain criteria are met.

Arbitrage is when traders take advantage of price inefficiencies between markets. If, for instance, you become aware that a certain asset is selling for a higher price on Market A than you are able to purchase it for on Market B, then buying it at the cheaper price and selling it on the more expensive market would be an example of arbitrage. In practise, arbitrage becomes harder to take advantage of the more interconnected markets become.

The global forex market is open 24/5 and is divided into three trading sessions in each day. These sessions refer to different regions of the globe as they open and close for business throughout every 24 hour period. The Asian session is the first to open after the weekend, it runs between 11 pm and 8 am GMT and includes countries such as New Zealand, Australia, Japan, China and Russia.

When trading, you will be presented with two prices for any asset that you're interested in, the bid price and the ask price. The ask price (also known as the offer price) is the lowest price at which sellers are willing to sell the asset in question. In short, if you are buying you will receive the ask price.

Your balance is the amount of money you have available in your trading account.

Currencies are quoted in pairs. The base currency is the first currency in any currency pair. For example, in the EURUSD pair the base currency is the Euro. The exchange rate tells you how much of the second currency in the pair you need in order to buy a single unit of the first currency. A EURUSD exchange rate of 1.14 means that you need to spend 1 dollar and 14 cents in order to purchase 1 Euro.

A bear market is a market that has consistently fallen in value. Sentiment in a bear market is negative, traders choose to sell the assets that they are holding, reasoning that further drops in price are imminent. Bear markets have a self-perpetuating nature as widespread selling inspires further selling. This occurs until the market in question becomes oversold and thus an attractive investment opportunity again.

Bearish sentiment is the negative sentiment surrounding an asset or entire market. Such sentiment is usually followed by widespread selling, which causes prices to fall and can lead to a bear market if the selling is sustained.

The bid/ask spread is the difference between the lowest price that sellers are willing to take in order to part with a certain security and the highest price that buyers are willing to pay for that same security. An easy way to remember this bid/ask dynamic is that if you are selling you will get the bid price, whereas if you are buying you will get the ask price.

As a trader you will be quoted two prices for any security that you are trading. The bid price is the highest price that buyers are willing to pay. The ask price is the lowest price that sellers are willing to receive in order to part with that same security. When selling you will receive the bid price.

Bollinger bands is a type of indicator used in technical analysis. It was developed by John Bollinger and is classified as a volatility indicator. Essentially, Bollinger bands compare current highs and lows to historical price action. Bollinger bands are calculated using a moving average line and two bands, each plotted one standard deviation above and one standard deviation below this moving average line. When the bands are far apart, volatility is considered to be high. When they move closer together and hug the moving average line, volatility is considered to be low. Many traders use Bollinger bands to indicate overbought and oversold conditions. If an asset's price consistently touches either the upper or lower band it is regarded a sign of being overbought or oversold, respectively, and thus likely to reverse.

A breakout occurs when a security's price suddenly breaks into new territory. The term is most commonly used to describe a positive move, where price action pushes through a known area of resistance, allowing the security to trade higher.

In finance, brokers bring buyers and sellers together, allowing them to trade between themselves, effectively making a market. Brokers receive commissions for each trade they broker or alternatively a mark-up on the bid/ask spread offered to clients.

Bull markets exist when prices consistently rise for a sustained period of time. Sentiment during bull markets is overwhelmingly positive, with traders purchasing assets in the hope that they will continue rising in value. Bull markets are often self-perpetuating and can be extremely vulnerable to the formation of bubbles as more traders flock to the same securities.

A bullish reversal takes place when an asset that has been falling reaches a bottom and then begins to trade higher again.

Bullish sentiment is essentially the positive sentiment that surrounds an individual asset or an entire market, causing traders to want to invest.

The Cable is the nickname that traders use to refer to the GBPUSD exchange rate. The name is taken from the cables that were laid between Great Britain and the United States in the mid 1800s, enabling GBPUSD exchange rates to be kept in sync between the two nations via telegraph.

Candlestick charts are by far the most popular chart type employed by traders the world over. They go back to 19th century Japanese traders, who used them to plot the fluctuating price of rice. Each candlestick represents the price action that has taken place in a given period of time, and includes that period's open, close, high and low prices. Candlesticks comprise a body (the rectangular part) and a wick (the lines extending above and below the body). The top and bottom of each rectangle represent the opening and closing prices, while the wicks above and below the body represent the highs and lows reached within the given period.

Carry trades take advantage of interest rate differences between currencies. Typically, a carry trade will involve selling a currency with a low interest rate on margin and using the proceeds to purchase a different currency with a higher interest rate.

A contract for difference is a type of financial instrument that allows traders to speculate on an asset without having to purchase it outright. Instead, CFD contracts allow you to trade the difference between the price when the trade was made and when it is finally closed. The derivative nature of CFDs allows for trades to be made on all sorts of underlying assets. HonorFx currently offers CFDs on FX, shares, indices, metals, futures, bonds and interest rates.

Chart patterns are formations of candles used in technical analysis to provide buy and sell signals. Technical analysts have managed to formalise a large number of such chart patterns and individual candlestick shapes, each representing a variety of underlying market conditions.

A closing order is an instruction for an open position to be closed when the price reaches a predefined level. A closing order will remain active until the conditions you have defined are met, in which case it will be filled and your trade will be closed.

The Consumer Price Index is an economic indicator that is usually released on a monthly basis. It tracks the changing value of goods and services purchased by consumers within a country. Inflation is closely related to the value of a country's currency as central banks can raise interest rates to counterbalance rising inflation. CPI is considered an important indicator by traders, as rising consumer prices are one of the most accurate indicators of inflation within a country. When a nation's CPI data comes in lower than expected, it is considered a good sign for the national currency.

Commission is a fee charged by a brokerage, usually on a per transaction basis.

Commodities generally come in two varieties, hard and soft. Hard commodities are those that are extracted from the ground, such as precious metals and crude oil. Soft commodities are those that are grown and harvested, such as coffee, sugar and wheat. For commodities to be tradable over an exchange, they must be certified as being of a standardised quality and quantity. In this way they can be considered as interchangeable with any other commodity of the same kind coming from another producer. This standardisation, also known as a “basis grade”, is essentially what allows commodities to be traded over modern exchanges.

All currencies are traded in pairs. This is because to buy Currency A, you are also effectively selling Currency B (i.e. the currency that you are using to purchase Currency A). The first currency in every pair is known as the base currency, the second currency in each pair is known as the quote currency. The exchange rate that you are given for a currency pair essentially tells you how much of the second currency (quote) you need in order to purchase a single unit of the first currency (base). So, a GBPUSD exchange rate of 1.30 tells you that you need to spend $1.30 in order to purchase £1.