Introduction to the Forex Market: A Comprehensive Guide to Mastering the Basics of Forex Trading

1.What is the Forex Market?
2.Basic Knowledge of Forex Trading
3.Basic Trading Methods
4.Key Participants in the Forex Market
5.How to Start Forex Trading
6.Practical Trading Recommendations
7.Risks and Opportunities in the Forex Market
8.Opportunities: The Attraction of the Forex Market
9.FAQ

What is the Forex Market?

The Forex market, also known as the foreign exchange market, is a global and decentralized currency exchange market. Unlike centralized exchanges such as the New York Stock Exchange, the Forex market does not have a single entity or institution that provides unified currency quotes. This decentralized nature allows each Forex broker to offer different quotes, providing market participants with greater flexibility and trading opportunities.

As the world’s largest financial market, the Forex market has a daily trading volume exceeding $7.5 trillion, making it unparalleled by other financial markets. Its high liquidity ensures that there are always buyers and sellers ready to trade at any given moment. This efficiency allows for fast trade execution and low transaction costs, typically with narrow spreads, enabling investors to profit from small price movements.

The Forex market operates as an “Over-the-Counter” (OTC) market, where trading takes place through the banking networks of major financial centers worldwide rather than on a centralized exchange. Advances in internet technology have further enhanced trading efficiency, with real-time exchange rate updates creating more opportunities for traders.

Moreover, the Forex market plays a crucial role in supporting the global economy, facilitating currency exchange for individuals, businesses, and financial institutions while allowing for capital appreciation and risk management through exchange rate fluctuations. Its global reach, high liquidity, and diverse trading mechanisms make the Forex market an indispensable part of today’s financial system.

Key Features of the Forex Market

The Forex market has become one of the most popular financial markets worldwide, primarily due to its unique characteristics. These features not only enhance market flexibility and efficiency but also create more trading opportunities and potential profits for investors.

  1. Global Reach and 24-Hour Operation

    The Forex market is a truly global market, covering major financial centers across Asia, Europe, and the Americas. Trading begins on Monday morning with the Sydney session and continues uninterrupted until the New York session closes on Friday night. This around-the-clock operation allows traders from different time zones to participate at their convenience. The market’s global nature and continuous operation make it one of the most flexible investment choices, catering to the needs of investors across different regions.

    Currency Market Winter Time (Nov-Mar) Summer Time (Apr-Oct)
    Asian Session
    NZD Wellington 04:00-12:00 05:00-13:00
    AUD Sydney 06:00-14:00 07:00-15:00
    JPY Tokyo 08:00-14:30 08:00-14:30
    HKD Hong Kong 09:00-16:00 09:00-16:00
    European Session
    EUR Frankfurt 14:00-22:00 14:00-22:00
    GBP London 16:30-00:30 15:30-23:30
    American Session
    USD New York 21:20-04:00 20:20-03:00
  2. High Liquidity

    The forex market has the highest liquidity globally, which means that currency pair transactions can be executed quickly at any time. With a daily trading volume exceeding $7.5 trillion, the market remains highly active, allowing investors to execute trades at lower costs while minimizing the impact of market slippage or price fluctuations. High liquidity not only enhances capital efficiency but also reduces trading risks.

  3. Flexibility of Leverage Trading

    The forex market offers investors the opportunity for leveraged trading, enabling them to engage in larger transactions even with a smaller capital base. Leverage trading can effectively amplify investment returns, but it also carries higher risks. Therefore, investors must use it cautiously and implement proper risk management strategies. Choosing a professional and regulated trading platform, such as Saxo Bank, can help investors better balance returns and risks.

  4. Transparency of Information and Technical Support

    The forex market is highly regarded for its transparency of information. Market prices and trading data are almost instantly accessible, providing investors with accurate trading references. At the same time, numerous technical analysis tools and indicators are available to help investors predict market trends and develop strategies. Selecting a reliable forex trading platform can further ensure the transparency and reliability of transactions.

  5. Diverse Trading Strategies

    The flexibility of the forex market is also reflected in its diverse trading strategies, catering to different types of investors. Whether long-term investors who prefer holding positions for extended periods or intraday traders focusing on short-term fluctuations, the forex market offers suitable strategies for everyone. Additionally, the forex market provides derivative instruments such as options and futures, enabling investors to engage in arbitrage trading or risk management, fulfilling diverse investment needs.

These characteristics of the forex market make it a highly flexible, efficient, and opportunity-rich market, attracting traders from around the world. Whether seeking stable returns or aiming for high-risk, high-reward opportunities, investors can find suitable prospects in the forex market.

Basic Knowledge of Forex Trading

What is a Currency Pair

In the forex market, the core trading format is the “currency pair.” A currency pair represents the value relationship between two currencies, such as EUR/USD (Euro/US Dollar) or GBP/USD (British Pound/US Dollar). These combinations reflect the exchange rate fluctuations between the base currency and the quote currency, forming the foundation of all transactions in the forex market.

基礎貨幣 → Base Currency
報價貨幣 → Quote Currency

In a currency pair, the currency on the left is called the base currency, while the currency on the right is called the quote currency. For example, in the EUR/USD (Euro/US Dollar) pair, a quote of 1.35361 means that one euro can be exchanged for 1.35361 US dollars. If the euro appreciates, the quote for this currency pair will rise; if the US dollar appreciates, the quote will fall.

The uniqueness of the forex market lies in the fact that investors are simultaneously buying one currency while selling another. Therefore, the price fluctuation of a currency pair represents the relative changes in the economies, policies, and market conditions of the two countries involved. This relative trading mechanism is not only the core operational principle of the forex market but also provides investors with diverse trading opportunities.

Currency pairs are generally classified into three types:

  • Major currency pairs: Such as EUR/USD (Euro/US Dollar) and USD/JPY (US Dollar/Japanese Yen). These pairs involve the US dollar and have the highest trading volume and liquidity.
  • Cross currency pairs: Such as EUR/GBP (Euro/British Pound). These pairs do not include the US dollar but still have significant market participation.
  • Exotic currency pairs: Such as USD/ZAR (US Dollar/South African Rand). These involve emerging market currencies, have higher volatility, and are suitable for traders with a higher risk appetite.

Overall, currency pair trading is the core of the forex market. Investors analyze exchange rate fluctuations to achieve capital appreciation and risk management. A deep understanding of currency pair characteristics is a fundamental requirement for successful forex market participation.

The Concepts of Spread and Leverage

In the forex market, spread and leverage are two important concepts that traders must understand in depth, as they relate to transaction costs and capital efficiency. These concepts directly impact traders’ strategies and are closely linked to potential returns and risk management.

  1. Spread: Measuring Transaction Costs

Spread refers to the difference between the buying price (Ask) and the selling price (Bid), reflecting the cost traders need to pay when entering the market. In the forex market, spread is one of the primary revenue sources for brokers.

Spread Calculation Method:
For example, if the buying price of GBP/USD (British Pound/US Dollar) is 1.3065 and the selling price is 1.3063, the difference between the two is 0.0002, which equals 2 pips.

Impact of Spread:
The smaller the spread, the lower the transaction cost, which is particularly beneficial for short-term traders. Conversely, a larger spread increases transaction costs and has a greater impact on trading outcomes. For example, when going long on GBP/USD, you can only make a profit if the market price rises above the buying price plus the spread. Similarly, when going short, the price must fall below the selling price minus the spread to generate a profit.

The spread in the forex market is usually influenced by market liquidity and the currency pair being traded. Major currency pairs (such as EUR/USD) typically have lower spreads due to their high liquidity, while exotic currency pairs tend to have wider spreads.

  1. Leverage: A Tool for Amplified Trading

Leverage is a key feature of the forex market that allows investors to control larger trade sizes with a smaller amount of capital, achieving the effect of amplifying returns. However, while leverage increases profit potential, it also raises risks, so it must be used with caution.

How Leverage Works:
If a broker offers 20:1 leverage, this means that an investor can control 20 units of capital with just 1 unit of their own funds. For example, if an investor wants to buy 40,000 units of EUR/USD (Euro/US Dollar), they only need to deposit 2,000 euros as margin to open the position.

2000歐元保證金 → €2,000 Margin

20倍槓桿 → 20x Leverage

進行4萬歐元投資 → €40,000 Investment

Impact of Leverage:
Leverage can significantly improve capital efficiency but also increases potential losses. Therefore, investors must implement strict risk management strategies when using leverage to prevent capital losses caused by market fluctuations.

Leverage and spread are among the core mechanisms of the forex market. For investors, understanding and flexibly applying these two concepts can not only effectively reduce trading costs but also enhance capital efficiency, leading to better trading outcomes. However, investors should always be mindful of balancing returns and risks to ensure the safety of their funds.

Basic Trading Methods

In the forex market, choosing the right trading method is the foundation for developing an effective investment strategy. Different trading methods are suitable for different types of investors. Whether you are a beginner or an experienced trader, you need to select an appropriate approach based on your risk tolerance and capital size.

The following section introduces four major forex trading methods to help you gain a deeper understanding of their characteristics, advantages, and application scenarios.

外匯交易方式有哪些? → What are the forex trading methods?

外匯交易者 → Forex Trader

現貨外匯 → Spot Forex

遠期外匯 → Forward Forex

期貨外匯 → Futures Forex

外匯保證金交易 → Forex Margin Trading

1.Spot Forex

Spot Forex, also known as immediate forex, is one of the most fundamental trading methods, where investors directly buy or sell foreign currency cash or deposits through banks or other financial institutions.

Advantages:

  • Simple operation, and after paying transaction fees, physical foreign currency can be obtained.
  • Suitable for individuals with daily foreign exchange needs.

Disadvantages:

  • Higher transaction costs.
  • Trading hours are limited to bank operating hours.
  • The variety of currencies available for trading is limited.

Example:
If you expect the US dollar to appreciate, you can use New Taiwan dollars to buy US dollars and exchange them back into New Taiwan dollars after the exchange rate rises to earn a profit from the rate difference. This approach usually requires referring to the spot exchange rate or cash exchange rate provided by banks.

2.Forward Forex

Forward Forex is a trading method where two parties agree on a specific exchange rate and settlement date for a future transaction, commonly used for hedging exchange rate risks. This type of transaction is particularly suitable for import/export companies or investors planning large capital allocations.

Advantages:

  • Allows locking in the exchange rate in advance, effectively avoiding future exchange rate fluctuations.

Disadvantages:

  • Fixed contract terms result in lower flexibility.

Application Scenario:
If a company expects to pay $500,000 for imported goods in three months, it can use forward forex trading to lock in the current exchange rate, preventing cost increases due to exchange rate appreciation.

Forward forex transactions are further categorized into:

  • Deliverable Forward (DF):Requires actual currency settlement.
  • Non-Deliverable Forward (NDF):Only the exchange rate difference is settled without actual currency delivery.

3.Forex Futures

Forex Futures is a standardized contract traded on a futures exchange, specifying the settlement date, contract amount, and exchange rate. Compared to forward forex, forex futures offer higher liquidity and transparency, making them suitable for investors with market experience.

Advantages:

  • Standardized contracts with high transparency and liquidity.
  • Suitable for short-term speculators.

Disadvantages:

  • Fixed settlement dates.
  • Higher trading risks.

Trading Example:
If you anticipate the Euro will appreciate in the future, you can buy Euro futures and sell them after the price increases to earn a profit from the price difference.

4.Forex Margin Trading

Forex Margin Trading is a trading method that utilizes leverage to amplify capital operations, allowing investors to control large amounts of capital with a small margin deposit. This approach offers high flexibility, but both risk and profit potential are amplified.

Advantages:

  • High leverage ratios significantly enhance capital efficiency.
  • Suitable for short-term traders.

Disadvantages:

  • High leverage comes with high risks, requiring careful capital management.

Example:
If a trading platform offers 200:1 leverage, you only need to deposit $200 as margin to trade up to $40,000. However, market movements against your position can quickly lead to capital losses, making risk management crucial.

Risk Management Recommendations:

  • Set reasonable stop-loss points to ensure capital safety.
  • Choose a regulated trading platformto reduce trading risks.

Key Participants in the Forex Market

The forex market is the largest financial market in the world, with participants ranging from various organizations to individual traders of different scales and types. Each category of participants plays a unique role in the market and has distinct objectives, collectively forming the structure of forex market operations. Their actions not only impact market liquidity but also directly or indirectly influence exchange rate movements.

The following section introduces the key participants in the forex market and their functions.

Major Participants in the Forex Market

The forex market is the largest financial market in the world, involving participants of different scales and types. Each category of participants plays a unique role and serves different purposes, collectively forming the structure of forex market operations. Their actions influence market liquidity and directly or indirectly affect exchange rate trends. The following section introduces the major participants in the forex market and their functions.

1. Central Banks and Government Institutions

Central banks and government institutions are the most influential participants in the forex market. They are responsible for implementing monetary policies and stabilizing exchange rate fluctuations.

Monetary Policy Regulation:

Central banks control inflation and economic growth by adjusting interest rates and other monetary tools. For example, increasing interest rates can attract foreign capital inflows, leading to domestic currency appreciation. Conversely, lowering interest rates can devalue the currency to stimulate exports and economic growth.

Market Intervention:

When exchange rates fluctuate excessively, central banks may directly buy or sell foreign exchange to stabilize the national currency. For instance, in 2015, the Swiss National Bank (SNB) removed the exchange rate cap on the Swiss franc against the euro, causing a sharp appreciation of the franc, which became a significant event in the forex market.

2. Commercial Banks and Investment Banks

Commercial banks and investment banks are among the core participants in the forex market, providing liquidity and executing large-scale transactions.

Cross-Border Fund Settlement:

Commercial banks handle currency settlement needs for enterprises engaged in international trade, ensuring the smooth flow of capital across different countries.

Market Making:

As market makers, commercial banks provide both buy and sell quotes in the market, helping maintain market stability.

Large-Scale Speculative Trading:

Many investment banks have professional forex trading teams that engage in high-frequency or strategic speculative trading, profiting from exchange rate fluctuations.

3. Hedge Funds and Institutional Investors

Hedge funds and other large institutional investors are often regarded as “major players” in the forex market. These participants execute high-risk, high-reward investment strategies based on global economic trends and technical analysis.

Market Influence:

With substantial capital and highly active trading styles, hedge funds can cause significant short-term fluctuations in exchange rates.

Strategy Implementation:

They often use strategies such as arbitrage, hedging, and speculation to navigate market volatility. For example, when predicting economic growth in a specific country, they may increase long positions in that country’s currency.

4. Retail Traders

Advancements in technology have made it easier for individual investors to participate in the forex market. While retail traders conduct smaller transactions per trade, their large numbers make them an essential part of the forex market.

Growth of the Retail Market:

Forex brokers offer leveraged trading and user-friendly trading platforms (such as MetaTrader), enabling retail traders to enter the market with small amounts of capital.

Beginner Trading Tips:

  • Choose a regulated brokerto ensure fund security.
  • Start with demo tradingto familiarize yourself with market operations before investing real money.
  • Implement risk management strategies, such as setting stop-loss points.

5. Brokers and Trading Platforms

Brokers serve as intermediaries, connecting retail traders with the interbank market. Their primary role is to provide market quotes and trading tools.

Market Connectivity:

Forex brokers route retail traders’ orders into the interbank market, ensuring smooth execution of trades.

Trading Technology Support:

Popular trading platforms such as MetaTrader and cTrader provide traders with:

  • Technical analysis tools
  • EA trading (automated trading) capabilities
  • Efficient trade execution environments

How to Start Forex Trading

The forex market, as the most liquid financial market globally, attracts countless investors. However, for beginners entering the forex market, understanding how to start trading is crucial. From opening an account to developing a trading strategy, every step requires careful preparation. Below are three key steps to help you enter the forex market steadily.

Step 1: Apply for a Forex Trading Account

The first step in starting forex trading is to open a forex account. This serves as the foundation for all trading activities, as only through a forex account can you participate in currency buying and selling.

Account Opening Requirements

To apply for a forex trading account, the basic required documents include:

  • Identification document(e.g., National ID)
  • Secondary document(e.g., Passport, Driver’s License, or Health Insurance Card)
  • Bank account statement or debit card

Once you have gathered these documents, you can choose to open an account through a physical bank or via an online forex broker platform. During the application process, it is recommended to select a regulated and reputable broker, as this not only ensures fund security but also provides professional trading support.

After completing the account setup, you will receive login credentials for a forex trading platform, officially stepping into the world of forex trading.

Step 2: Master Forex Market Analysis Techniques

The forex market is highly volatile, with numerous factors influencing currency prices. Therefore, learning market analysis is essential before trading.

Forex Market Analysis Methods

Forex market analysis mainly falls into two categories:

Fundamental Analysis:

  • Focuses on macroeconomic data (such as GDP, unemployment rate, interest rates) and international political events.
  • Example: Changes in the Federal Reserve’s interest rate policycan directly affect the movement of the US dollar.

Technical Analysis:

  • Based on historical price trends and technical indicators (such as moving averages, RSI).
  • Helps traders determine the best timing for buying or selling.

Regardless of the analysis method you choose, continuous learning and practice are necessary. It is recommended to start with free online resources (such as blogs and tutorial videos) to gradually familiarize yourself with the forex market’s mechanics. If you wish to gain a more structured understanding, enrolling in professional forex training courses can significantly enhance your investment skills and market judgment.

Step 3: Develop a Trading Strategy and Execute Trades

After acquiring basic knowledge, the next step is to apply it in practice. A well-defined trading strategy helps you remain rational in the forex market and avoid impulsive decisions.

How to Develop an Effective Trading Strategy

  • Set trading goals:Define your risk-reward ratio and allocate capital wisely based on your fund size.
  • Choose suitable trading instruments:For beginners, it is advisable to start with highly liquid and less volatile major currency pairs (such as EUR/USD or USD/JPY).
  • Risk management:Set stop-loss and take-profit levels to ensure that even if the market moves against your position, your losses remain controlled.

Practical Trading Recommendations

At the early stages of trading, it is advisable to practice with a demo account to familiarize yourself with the trading platform and its functions. Additionally, always adhere to your trading plan and avoid making impulsive decisions influenced by emotions.

Key Considerations for Forex Margin Trading

In the forex market, margin trading is a highly popular method, especially in Contract for Difference (CFD) trading. Due to its low capital requirements and flexible operation, margin trading attracts a large number of traders. Through margin trading, investors can find profit opportunities whether the market rises or falls, thereby maximizing capital efficiency.

Additionally, modern forex trading platforms have streamlined account opening procedures, with most platforms supporting online applications, enabling traders to start trading within minutes and quickly enter the forex market.

However, selecting a reliable and regulated forex margin CFD trading platform is crucial to ensuring fund security and fair trading conditions. Forex trading is strictly regulated worldwide, with oversight provided by authoritative regulatory bodies to offer investors legal and financial protection.

Below are some globally recognized forex regulatory agencies:

  • Financial Conduct Authority (FCA) – United Kingdom
  • Australian Securities and Investments Commission (ASIC) – Australia
  • National Futures Association (NFA) – United States
  • Markets in Financial Instruments Directive (MiFID) – European Union
  • Cyprus Securities and Exchange Commission (CySEC) – Cyprus

Choosing a trading platform regulated by these authoritative bodies can significantly reduce investment risks while ensuring a transparent and fair trading environment. For beginners in forex investment, this is a crucial step in establishing a safe trading foundation.

Globally renowned forex trading platforms include Ultima Markets, Vantage, IC Markets, and Exness.

The author personally uses Ultima Markets for trading and is therefore most familiar with it. Below is an introduction to Ultima Markets.

Ultima Markets Overview

Ultima Markets is a forex trading platform under Viapac Group, a well-known Australian real estate company. It is regulated by CySEC (Cyprus Securities and Exchange Commission), ASIC (Australian Securities and Investments Commission), and FSC (Mauritius Financial Services Commission).

The platform allows trading in over 60 forex currency pairs, as well as gold, silver, US stocks, stock indices, and cryptocurrencies.

If you are not yet ready to trade with real funds, demo trading is an excellent option. Ultima Markets offers a free demo account that simulates real market conditions, allowing you to practice trading without using actual funds or taking on real financial risks.

With a demo account, you can:

  • Familiarize yourself with the forex trading platform’s interface and functionalities.
  • Test your trading strategies and make necessary adjustments.
  • Gain confidence in a risk-free environment to prepare for live trading.

Through demo trading, you can develop an understanding of market dynamics, improve your sensitivity to market fluctuations, and establish a solid foundation for future real trading.

Risks and Opportunities in the Forex Market

In the forex market, investors face both high-return opportunities and potential risks. As the world’s largest financial market, it attracts various investors, but its high liquidity, 24-hour trading cycle, and dynamic environment make risk management a crucial factor for success. Below, we will explore the sources of forex market risks, strategies for risk management, and how to seize opportunities while tackling challenges.

Risks: Challenges That Cannot Be Ignored

The main risks in the forex market stem from market volatility, high leverage, economic and political uncertainty, and broker credit risks. Here is a detailed analysis of these risks:

  1. Market Volatility

The forex market is known for its high volatility, with exchange rates fluctuating due to currency supply and demand, economic data releases, and geopolitical events. These fluctuations can be sudden and substantial. For example, a sudden economic data release or a central bank policy change may cause rapid price swings, increasing trading risks.

Risk Management Strategies:

  • Stay updated with market news and major economic indicatorsthat impact exchange rates.
  • Use technical analysis toolsin combination with fundamental analysis to anticipate potential price movements.
  1. The Double-Edged Sword of High Leverage

Leverage is a major attraction for forex traders, but it is also a potential risk. While leverage amplifies profits, it also magnifies losses, particularly when the market moves against a trader’s expectations.

Risk Management Strategies:

  • Select an appropriate leverage ratio based on your risk tolerance(e.g., 1:10 or 1:50).
  • Set reasonable stop-loss levelsfor each trade to prevent small fluctuations from causing significant losses.
  1. Political and Economic Risks

Geopolitical events, election outcomes, and central bank policy changes can significantly impact forex markets. For example, when a new president takes office in 2025, market expectations for that country’s future monetary policies may directly influence its currency exchange rate.

Risk Management Strategies:

  • Gain an in-depth understanding of political and economic factors affecting exchange ratesand closely monitor central bank policies.
  • Adjust trading strategies based on news eventsby reducing position sizes or pausing trades during periods of high volatility.
  1. Broker Credit Risk

Choosing an unregulated broker can lead to fund security issues, including potential fraud or withdrawal difficulties.

Risk Management Strategies:

  • Only trade with brokers regulated by reputable financial authorities(such as FCA, ASIC) to ensure transparency and fund security.
  • Conduct due diligencebefore opening an account by researching broker background, user reviews, and regulatory certificates.

Opportunities: The Attraction of the Forex Market

Despite the challenges, the forex market presents numerous opportunities that make it appealing to investors.

  1. High Liquidity: Instant Capital Flow

With a daily trading volume exceeding $7 trillion, the forex market is one of the most liquid markets in the world. Investors can execute trades at almost any time, ensuring quick order execution and smooth capital entry and exit.

  1. Profit from Both Rising and Falling Markets

Unlike traditional markets, forex trading allows investors to profit in both bullish and bearish conditions by going long (buying) or short (selling). This flexibility makes forex trading highly attractive.

  1. Diverse Trading Instruments

The forex market is not limited to currency pairs; it also includes gold, crude oil, stock indices, and other Contracts for Difference (CFDs), catering to investors with different risk preferences and trading styles.

  1. Using Technical Analysis to Capture Trends

With abundant historical data, forex traders can apply technical analysis tools (such as trend lines, MACD, RSI indicators) alongside fundamental analysis to identify ideal entry and exit points.

FAQ

Q: How is pip value calculated?

A:

For major currency pairs (e.g., EUR/USD, GBP/USD, which are typically quoted to four decimal places):

  • Assume you are trading 1 standard lot (100,000 units)in EUR/USD.
  • A 1 pip movementin EUR/USD is 0001.

Formula for pip value:

Pip Value=1Exchange Rate×100,000\text{Pip Value} = \frac{1}{\text{Exchange Rate}} \times 100,000Pip Value=Exchange Rate1×100,000

If EUR/USD is trading at 1.1000, the calculation would be:

11.1000×100,000=90.91 USD\frac{1}{1.1000} \times 100,000 = 90.91 \text{ USD}1.10001×100,000=90.91 USD

This means a 1 pip movement in EUR/USD results in a gain or loss of $90.91 per standard lot.

For JPY currency pairs (e.g., USD/JPY), which are quoted to two decimal places, 1 pip equals 0.01.

For 1 standard lot (100,000 units) of USD/JPY at an exchange rate of 110.00:

1110.00×100,000=9.09 USD\frac{1}{110.00} \times 100,000 = 9.09 \text{ USD}110.001×100,000=9.09 USD

Thus, a 1 pip movement in USD/JPY affects $9.09 per standard lot.

Q: How do I read forex bid and ask prices?

A:

In forex trading:

  • Bid Price:The price the market is willing to pay for a currency (the price at which you sell).
  • Ask Price:The price the market is willing to sell a currency for (the price at which you buy).
  • Spread:The difference between the bid and ask price, representing your transaction cost.

Example:

If EUR/USD is quoted as:

  • Bid Price:1000
  • Ask Price:1002

Then:

  • If you buy EUR/USD, you pay the ask price (1.1002).
  • If you sell EUR/USD, you receive the bid price (1.1000).

The spread is 2 pips (1.1002 – 1.1000).

Q: Is a higher forex reserve always better?

A:

A high foreign exchange reserve is not always beneficial—its impact depends on multiple factors:

  • Economic Stability & Credibility:
  • Sufficient reserves help stabilize the national currencyand handle financial fluctuations.
  • However, excessively high reservesmight mean capital is not being efficiently utilized and incurs management costs.
  • Risk Management:
  • Large reserves help protect against financial crisesand unexpected international payment needs.
  • However, excess reservesmay limit domestic economic investment

Conclusion: The ideal scenario is to maintain sufficient forex reserves for stability while ensuring capital is efficiently utilized.

Q: Do I need to pay tax on forex trading profits?

A:

In Taiwan, forex trading profits are taxable, with tax treatment depending on the nature of the income:

  • Capital Gains Tax:
  • Personal forex trading(e.g., spot forex) is generally not subject to a specific capital gains tax.
  • However, if trading activity is frequent or speculative, it may be classified as business income.
  • Business Income Tax:
  • If you regularlyengage in forex trading or operate it as a business, your profits may be classified as business income and subject to taxation.
  • Tax Filing:
  • Profits from forex trading must be reported when filing income tax.
  • Depending on the nature of income, capital gains or business income taxes may apply.

Recommendation: Consult a tax professional to ensure compliance with tax regulations.

Glossary

Get started or expand your knowledge of trading at any level with a wealth of financial industry terms and definitions that you won’t find anywhere else.

Bookmarked Trading Term(s)

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  • AMM (Automated Money Market)

    A decentralized system that uses algorithms to automatically manage liquidity and trading in financial markets without traditional market makers.

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  • APR (Annual Percentage Rate)

    The yearly interest rate a trader pays on borrowed funds or e arns on investments, excluding compounding.

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  • APY (Annual Percentage Yield)

    The yearly interest rate a trader earns, including compounding, which reflects the real return on an investment.

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  • Asymmetric Cryptography

    A security method using two different keys (public and private) to encrypt and decrypt data, ensuring secure transactions.

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  • Asymmetric Encryption

    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.

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  • Atomic Swap

    A direct peer-to-peer exchange of different cryptocurrencies without the need for intermediaries, reducing counterparty risk.

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  • Balance Of Trade

    The value of a country's exports minus its imports.

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  • Bar Chart

    A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar; the opening price, which is marked with a horizontal line to the left of the bar; and the closing price, which is marked with a horizontal line to the right of the bar.

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  • Barrier Level

    A certain price of great importance included in the structure of a Barrier Option. If a Barrier Level price is reached, the terms of a specific Barrier Option call for a series of events to occur.

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  • Barrier Option

    Any number of different option structures (such as knock-in, knock-out, no touch, double-no-touch-DNT) that attaches great importance to a specific price trading. In a no-touch barrier, a large defined payout is awarded to the buyer of the option by the seller if the strike price is not 'touched' before expiry. This creates an incentive for the option seller to drive prices through the strike level and creates an incentive for the option buyer to defend the strike level.

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  • Base Currency

    The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF (U.S. Dollar/Swiss Franc) rate equals 1.6215, then one USD is worth CHF 1.6215. In the forex market, the US dollar is normally considered the base currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro and the Australian dollar.

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  • Cable

    The GBP/USD (Great British Pound/U.S. Dollar) pair. Cable earned its nickname because the rate was originally transmitted to the US via a transatlantic cable beginning in the mid 1800s when the GBP was the currency of international trade.

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  • Cad

    The Canadian dollar, also known as Loonie or Funds.

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  • Call Option

    A currency trade which exploits the interest rate difference between two countries. By selling a currency with a low rate of interest and buying a currency with a high rate of interest, the trader will receive the interest difference between the two countries while this trade is open.

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  • Canadian Ivey Purchasing Managers (Cipm) Index

    A monthly gauge of Canadian business sentiment issued by the Richard Ivey Business School.

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  • Candlestick Chart

    A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

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  • Day Trader

    Speculators who take positions in commodities and then liquidate those positions prior to the close of the same trading day.

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  • Day Trading

    Making an open and close trade in the same product in one day.

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  • Deal

    A term that denotes a trade done at the current market price. It is a live trade as opposed to an order.

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  • Dealer

    An individual or firm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

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  • Dealing Spread

    The difference between the buying and selling price of a contract.

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  • Ecb

    European Central Bank, the central bank for the countries using the euro.

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  • Economic Indicator

    A government-issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

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  • End Of Day Order (eod)

    An order to buy or sell at a specified price that remains open until the end of the trading day.

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  • Est/Edt

    The time zone of New York City, which stands for United States Eastern Standard Time/Eastern Daylight time.

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  • Estx50

    A name for the Euronext 50 index.

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  • Factory Orders

    The dollar level of new orders for both durable and nondurable goods. This report is more in depth than the durable goods report which is released earlier in the month.

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  • Fed

    The Federal Reserve Bank, the central bank of the United States, or the FOMC (Federal Open Market Committee), the policy-setting committee of the Federal Reserve.

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  • Fed Officials

    Refers to members of the Board of Governors of the Federal Reserve or regional Federal Reserve Bank Presidents.

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  • Figure/The Figure

    Refers to the price quotation of '00' in a price such as 00-03 (1.2600-03) and would be read as 'figure-three.' If someone sells at 1.2600, traders would say 'the figure was given' or 'the figure was hit.

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  • Fill

    When an order has been fully executed.

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  • G7

    Group of 7 Nations - United States, Japan, Germany, United Kingdom, France, Italy and Canada.

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  • G8

    Group of 8 - G7 nations plus Russia.

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  • Gap Gapping

    A quick market move in which prices skip several levels without any trades occurring. Gaps usually follow economic data or news announcements.

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  • Gearing (Also Known As Leverage)

    Gearing refers to trading a notional value that is greater than the amount of capital a trader is required to hold in his or her trading account. It is expressed as a percentage or a fraction.

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  • Ger30

    An index of the top 30 companies (by market capitalization) listed on the German stock exchange – another name for the DAX.

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  • Handle

    Every 100 pips in the FX market starting with 000.

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  • Hawk/Hawkish

    A country's monetary policymakers are referred to as hawkish when they believe that higher interest rates are needed, usually to combat inflation or restrain rapid economic growth or both.

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  • Hedge

    A position or combination of positions that reduces the risk of your primary position.

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  • Hit The Bid

    To sell at the current market bid.

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  • Hk50/Hkhi

    Names for the Hong Kong Hang Seng index.

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  • Illiquid

    Little volume being traded in the market; a lack of liquidity often creates choppy market conditions. 

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  • Imm

    The IMM, or International Monetary Market, is a part of the Chicago Mercantile Exchange (CME) that deals with trading currency and interest rate futures and options.

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  • Imm Futures

    A traditional futures contract based on major currencies against the US dollar. IMM futures are traded on the floor of the Chicago Mercantile Exchange.

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  • Imm Session

    8:00am - 3:00pm New York.

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  • Indu

    Abbreviation for the Dow Jones Industrial Average.

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  • Japanese Economy Watchers Survey

    Measures the mood of businesses that directly service consumers such as waiters, drivers and beauticians. Readings above 50 generally signal improvements in sentiment.

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  • Japanese Machine Tool Orders

    Measures the total value of new orders placed with machine tool manufacturers. Machine tool orders are a measure of the demand for companies that make machines, a leading indicator of future industrial production. Strong data generally signals that manufacturing is improving and that the economy is in an expansion phase.

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  • Jpn225

    A name for the NEKKEI index.

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  • Keep The Powder Dry

    To limit your trades due to inclement trading conditions. In either choppy or extremely narrow markets, it may be better to stay on the sidelines until a clear opportunity arises.

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  • Kiwi

    Nickname for NZD/USD (New Zealand Dollar/U.S. Dollar).

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  • Knock-Ins

    Option strategy that requires the underlying product to trade at a certain price before a previously bought option becomes active. Knock-ins are used to reduce premium costs of the underlying option and can trigger hedging activities once an option is activated.

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  • Knock-Outs

    Option that nullifies a previously bought option if the underlying product trades a certain level. When a knock-out level is traded, the underlying option ceases to exist and any hedging may have to be unwound.

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  • Last Dealing Day

    The last day you may trade a particular product.

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  • Last Dealing Time

    The last time you may trade a particular product.

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  • Leading Indicators

    Statistics that are considered to predict future economic activity.

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  • Level

    A price zone or particular price that is significant from a technical standpoint or based on reported orders/option interest.

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  • Leverage

    Also known as margin, this is the percentage or fractional increase you can trade from the amount of capital you have available. It allows traders to trade notional values far higher than the capital they have. For example, leverage of 100:1 means you can trade a notional value 100 times greater than the capital in your trading account.*

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  • Macro

    The longest-term trader who bases their trade decisions on fundamental analysis. A macro trade’s holding period can last anywhere from around six months to multiple years.

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  • Manufacturing Production

    Measures the total output of the manufacturing aspect of the Industrial Production figures. This data only measures the 13 sub-sectors that relate directly to manufacturing. Manufacturing makes up approximately 80% of total Industrial Production.

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  • Market Call

    A request from a broker or dealer for additional funds or other collateral on a position that has moved against the customer.

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  • Market Maker

    A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial product.

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  • Market Order

    An order to buy or sell at the current price.

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  • Nas100

    An abbreviation for the NASDAQ 100 index.

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  • Net Position

    The amount of currency bought or sold which has not yet been offset by opposite transactions.

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  • New York Session

    8:00am – 5:00pm (New York time).

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  • No Touch

    An option that pays a fixed amount to the holder if the market never touches the predetermined Barrier Level.

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  • Nya.X

    Symbol for NYSE Composite index.

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  • Offer (Also Known As The Ask Price)

    The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Offer. The Offer price is also known as the Ask. The Ask represents the price at which a trader can buy the base currency, which is shown to the right in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs. 

    In CFD trading, the Ask represents the price a trader can buy the product. For example, in the quote for UK OIL 111.13/111.16, the product quoted is UK OIL and the ask price is £111.16 for one unit of the underlying market.

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  • Offered

    If a market is said to be trading offered, it means a pair is attracting heavy selling interest, or offers.

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  • Offsetting Transaction

    A trade that cancels or offsets some or all of the market risk of an open position.

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  • On Top

    Attempting to sell at the current market order price.

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  • One Cancels The Other Order (oco)

    A designation for two orders whereby if one part of the two orders is executed, then the other is automatically cancelled.

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  • Paid

    Refers to the offer side of the market dealing.

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  • Pair

    The forex quoting convention of matching one currency against the other.

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  • Paneled

    A very heavy round of selling.

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  • Parabolic

    A market that moves a great distance in a very short period of time, frequently moving in an accelerating fashion that resembles one half of a parabola. Parabolic moves can be either up or down.

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  • Partial Fill

    When only part of an order has been executed.

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  • Quantitative Easing

    When a central bank injects money into an economy with the aim of stimulating growth.

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  • Quarterly Cfds

    When a central bank injects money into an economy with the aim of stimulating growth.

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  • Quote

    An indicative market price, normally used for information purposes only.

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  • Rally

    A recovery in price after a period of decline.

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  • Range

    When a price is trading between a defined high and low, moving within these two boundaries without breaking out from them.

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  • Rate

    The price of one currency in terms of another, typically used for dealing purposes.

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  • Rba

    Reserve Bank of Australia, the central bank of Australia.

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  • Rbnz

    Reserve Bank of New Zealand, the central bank of New Zealand.

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  • Sec

    The Securities and Exchange Commission.

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  • Sector

    A group of securities that operate in a similar industry.

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  • Sell

    Taking a short position in expectation that the market is going to go down.

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  • Settlement

    The process by which a trade is entered into the books, recording the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

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  • Shga.X

    Symbol for the Shanghai A index

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  • Takeover

    Assuming control of a company by buying its stock.

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  • Technical Analysis

    The process by which charts of past price patterns are studied for clues as to the direction of future price movements.

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  • Technicians/techs

    Traders who base their trading decisions on technical or charts analysis.

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  • Ten (10) Yr

    US government-issued debt which is repayable in ten years. For example, a US 10-year note.

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  • Thin

    A illiquid, slippery or choppy market environment. A light-volume market that produces erratic trading conditions.

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  • Ugly

    Describing unforgiving market conditions that can be violent and quick.

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  • Uk Average Earnings Including Bonus/ Excluding Bonus

    Measures the average wage including/excluding bonuses paid to employees. This is measured quarter-on-quarter (QoQ) from the previous year.

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  • Uk Claimant Count Rate

    Measures the number of people claiming unemployment benefits. The claimant count figures tend to be lower than the unemployment data since not all of the unemployed are eligible for benefits.

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  • Uk Hbos House Price Index

    Measures the relative level of UK house prices for an indication of trends in the UK real estate sector and their implication for the overall economic outlook. This index is the longest monthly data series of any UK housing index, published by the largest UK mortgage lender (Halifax Building Society/Bank of Scotland).

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  • Uk Jobless Claims Change

    Measures the change in the number of people claiming unemployment benefits over the previous month.

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  • Value Date

    Also known as the maturity date, it is the date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward.

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  • Variation Margin

    Funds traders must hold in their accounts to have the required margin necessary to cope with market fluctuations.

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  • Vix Or Volatility Index

    Shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."

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  • Volatility

    Referring to active markets that often present trade opportunities.

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  • Wedge Chart Pattern

    Chart formation that shows a narrowing price range over time, where price highs in an ascending wedge decrease incrementally, or in a descending wedge, price declines are incrementally smaller. Ascending wedges typically conclude with a downside breakout and descending wedges typically terminate with upside breakouts.

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  • Whipsaw

    Slang for a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

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  • Wholesale Price

    Measures the changes in prices paid by retailers for finished goods. Inflationary pressures typically show earlier than the headline retail.

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  • Working Order

    Where a limit order has been requested but not yet filled.

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  • Wsj

    Acronym for The Wall Street Journal.

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  • Xag/Usd

    Symbol for Silver Index.

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  • Xau/Usd

    Symbol for Gold Index.

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  • Xax.X

    Symbol for AMEX Composite Index.

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  • YER

    Yemeni Rial. The currency of Yemen. It is subdivided into 100 fils.

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  • Yemeni Rial

    See YER.

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  • Yen

    See JPY.

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  • Yield

    Yield is the return on an investment and is usually expressed as a percentage.

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  • Yuan Renminbi

    See CNY

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  • ZAR

    Rand. The currency of South Africa. It is subdivided into 100 cents.

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  • ZMW

    Zambian Kwacha. The currency of Zambia. It is subdivided into 100 Ngwee.

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  • ZWL

    Zimbabwe Dollar. The currency of Zimbabwe. It is subdivided into 100 cents.

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  • Zambian Kwacha

    See ZMW.

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  • ZigZag

    A technical indicator that draws tops and bottoms - filtering out noise.

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  • Zimbabwe Dollar

    See ZWL.

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    Bookmarked Trading Term(s)

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