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Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.
1. Exchange traded currencies
In the case of an organized exchange like the Chicago Mercantile exchange (CME) in the US, standardized currency contract sizes that represent a certain monetary value are traded in the International money market (IMM). A central clearing house organizes matching of transactions between counter-parties. There are various disadvantages to trading currency futures as outlined in the chapter Advantages of trading FX.
2. Forex market
In comparison the over the counter market is traded around the world by a multitude of participants and price quality, reputation and trading conditions determine who a participant wishes to trade with. It is probably the most competitive market in the world and brokers like ACM must insure they live up to the highest standards of service and be compliant with market standards and practices if they want to acquire new customers and retain their existing ones. In 1998 a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion per day. In comparison, currency futures turnover was estimated at USD 12 billion.
Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation's currency, the British pound is less widely traded in the market than several others. As shown in the graph underneath, the United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent.

AccrualThe apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.ActualizeThe underlying assets or instruments which are traded in the cash market.Adjustable PegAn exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency. The official rate may be changed from time to time.AdjustmentOfficial action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.Agent BankA bank acting for a foreign bank.In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.Aggregate DemandTotal demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.Aggregate RiskTotal amount of exposure a bank has with a customer for both spot and forward contracts.Aggregate SupplyTotal supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.AgioDifference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.AggressorA trader dealing on an existing price in the market.AppreciationA currency is said to 'appreciate' when it strengthens in price in response to market demand.Describes a currency strengthening in response to market demand rather than by official action.ArbitrageProfiting from differences in the price of a single currency pair that is traded on more than one market.Arbitrage ChannelThe range of prices within which there will be no possibility to arbitrage between the cash and futures market.AroundUsed in quoting forward "premium/discount". "Five-five around" would mean five points on either side of the present spot value.Ask PriceSometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote - e.g. EUR/USD 1.1965 / 68 - means that one euro can be bought for 1.1968 US dollars.AssetAn item having commercial or exchange value.Asset LocationDividing instrument funds among markets to achieve diversification or maximum return.At BestAn instruction given to a dealer to buy or sell at the best rate that is currently available in the market.At or BetterAn order to deal at a specific rate or better.Authorized DealerA financial institution or bank authorized to deal in foreign exchange.Average Rate OptionA contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an "Asian option".Back OfficeThe office location, or department, where the processing of financial transactions takes place.Balance of TradeThe value of a country's exports minus its imports.Bank NotesPaper issued by the central bank, redeemable as money and considered to be full legal tender.Bank RateThe rate at which a central bank is prepared to lend money to its domestic banking system.Bar ChartA type of chart used in Technical Analysis. Each time division on the chart is displayed as a vertical bar which show the following information - the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.Base CurrencyIn terms of foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.Bear MarketAn extended period of general price decline in an individual security, an asset, or a market.Bid Priceis the price a trader can sell currencies. The Bid Price is shown on the left side of a quote - e.g. EUR/USD 1.1923 / 68 - means that one euro can be sold for 1.1923 US dollars.Bid/Ask Spreadis the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.Big FigureThe first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 108.05/10 the big figure is 108. EUR/USD price of .8325/28 the big figure is .83Bretton WoodsThe site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.BrokerAn agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.Bull MarketA market which is on a consistent upward trend.BundesbankCentral Bank of Germany.Buy On MarginThe process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.Buy Limit OrderAn order to execute a transaction at a specified price (the limit) or lower.Candlestick ChartA chart that displays the daily trading price range (open, high, low and close). A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).Central BankA bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.ChartistA person who attempts to predict prices by analyzing past price movements as recorded on a chart.Closing a PositionThe process of selling or buying a foreign exchange position resulting in the liquidation (squaring up) of the position.CommissionThe fee that a broker may charge clients for dealing on their behalf.Cross CurrencyA currency pair that does not include US dollars - e.g. EUR/GBP.CurrencyMoney issued by a government. Coins and paper money. It is a form of money used as a unit of exchange within a country.Currency PairTwo currencies involved in a Forex transaction - e.g. EUR/USD.Currency RiskThe risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.Day TradeA trade opened and closed on the same trading day.Day TradingRefers to a style or type of trading where trade positions are opened and closed during the same day.Day TraderA trader who buys and sells on the basis of small short-term price movements.DealerAn individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.DepreciationA fall in the value of a currency due to market forces.DeskTerm referring to a group dealing with a specific currency or currencies.DevalutionThe act by a government to reduce the external value of its currency.Direct QuotationQuoting in fixed units of foreign currency against variable amounts of the domestic currency.Discretionary AccountAn account in which the customer permits a trading institution to act on the customer's behalf in buying and selling currency pairs. The institution has discretion as to the choice of currency pairs, prices, and timing-subject to any limitations specified in the agreement.Economic IndicatorA statistical report issued by governments or academic institutions indicating economic conditions within a country.Euro (EUR)The single currency of the European Economic and Monetary Union (EMU) introduced in January 1999. This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.European Central Bank (ECU)The Central Bank for the new European Monetary Union.ExecutionThe Process of completing an order or deal.First In First Out (FIFO)refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.Foreign Exchange (Forex, FX)Simultaneously buying one currency and selling another.Fundamental AnalysisAnalysis of political and economic conditions that can affect currency prices.Leverage or MarginThe ratio of the value of a transaction to the required deposit. A common margin for Forex trading is 100:1 - you can trade currency worth 100 times the amount of your deposit.Limit OrderAn order to buy or sell when the price reaches a specified level.LotThe size of a Forex transaction. Standard lots are worth about 100,000 US dollars.Major CurrencyThe euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies.Minor CurrencyThe Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.Offer (Ask)The rate at which a dealer is willing to sell a currency.Offsetting transactionA trade with which serves to cancel or offset some or all of the market risk of an open position.One Cancels the Other (OCO)Two orders placed simultaneously with instructions to cancel the second order on execution of the first.A designation for two orders whereby one part of the two orders is executed the other is automatically cancelled.Open OrderAn order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.Open PositionAn active trade that has not been closed.An active trade with corresponding unrealized Profit and Loss, which has not been offset by an equal and opposite deal.OrderA customer's instructions to buy or sell currencies.Over the Counter (OTC)Used to describe any transaction that is not conducted over an exchange.Overnight PositionTrader's long or short position in a currency at the end of a trading day.Pips or PointsThe smallest unit a currency can be traded in.The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001.Political RiskExposure to changes in governmental policy which will have an adverse effect on an investor's position.PriceThe price at which the underlying currency can be bought or sold.Price TransparencyThe ability of all market participants to "see" or deal at the same price.Describes quotes to which every market participant has equal access.Principle ValueThe original amount invested by the client.Profit /Loss or "P/L" or Gain/LossThe actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.Quote CurrencyThe second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency.RallyA recovery in price after a period of decline.RangeThe difference between the highest and lowest price of a future recorded during a given trading session.RatePrice at which a currency can be purchased or sold against another currency.The price of one currency in terms of another, typically used for dealing purposes.ResistancePrice level at which technical analysts note persistent selling of a currency.A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.RevaluationDaily calculation of potential profits or losses on open positions based on the difference between the settlement price of the previous trading day and the current trading day.An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of "Devaluation".Risk (Forex Risk)The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced.Exposure to uncertain change, most often used with a negative connotation of adverse change.Risk ManagementThe employment of financial analysis and use of trading techniques to reduce and/or control exposure to financial risk.Rollover (Roll-Over)The process of extending the settlement value date on an open position forward to the next valid value date.SettlementThe process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.Short PositionAn investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.Spot MarketMarket where people buy and sell actual financial instruments (currencies) for two-day delivery.Spot PriceThe current market price of a currency that normally settles in 2 business days (1 day for Dollar/Canada).The current market price. Settlement of spot transactions usually occurs within two business days.SpreadThis point or pip difference between the bid and ask price of a currency pair.SquarePurchase and sales are in balance and thus the dealer has no open position.Squawk BoxA speaker connected to a phone often used in broker trading desks.SqueezeAction by a central bank to reduce supply in order to increase the price of money.The difference between the bid and offer prices.Stable MarketAn active market which can absorb large sale or purchases of currency without major moves.StandardA term referring to certain normal amounts and maturities for dealing.SterilizationCentral Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.Sterling (The Pound - GBP)Another term for the British currency, "The Pound".StopAn order to buy or to sell a currency when the currency's price reaches or passes a specified level.Stop Loss OrderOrder to buy or sell when a given price is reached or passed to liquidate part or all of an existing position.Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.Support LevelsA price at which a currency or the currency market will receive considerable buying pressure.A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of "resistance".SwapA transaction which moves the maturity date of an open position to a future date.The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.Swap PriceA price as a differential between two dates of the swap.SwissMarket slang for Swiss Franc.Take Profit OrderA customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.Technical AnalysisAnalysis of historical market data to predict future movements in the market.Technical CorrectionAn adjustment to price not based on market sentiment but technical factors such as volume and charting.Thin MarketA market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.Thursday/Friday DollarsA US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.TickThe smallest possible change in a price, either up or down.Today/TomorrowSimultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.Tomorrow Next (Tom Next)Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.Trade DateThe date on which a trade occurs.Tradeable AmountSmallest transaction size acceptable.TransactionThe buying or selling of currencies resulting from the execution of an order.Transaction CostThe cost of a Forex transaction - typically the spread between bid and ask prices.Transaction DateThe date on which a trade occurs.TurnoverThe total volume of all executed transactions in a given time period.Two Tier MarketA dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.Two-Way PriceA quote in the foreign exchange market that indicates a bid and an offer.Two-Way QuotationWhen a dealer quotes both buying and selling rates for foreign exchange transactions.UncoveredOpen position.Under-ValuationAn exchange rate is normally considered to be undervalued when it is below its purchasing power parity.Unrealized Gain/LossThe theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.UptickA new price quote at a price higher than the preceding quote.A transaction executed at a price greater than the previous transaction.Uptick RuleIn the US, a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.US Prime RateThe interest rate at which US banks will lend to their prime corporate customers.US TreasuryThe United States Department of the Treasury is the government department responsible for issuing all Treasury bonds, notes, and bills.Value DataThe maturity date of the currency for settlement, usually two business days (one day for Canada) after the trade has occurred.Value DateThe 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. Value Date is also known as "maturity" date.For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.Value SpotNormally settlement for two working days from today. See value date.Variation MarginFunds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis.Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.Volatility (VOL)Statistical measure of the change in price of a financial currency pair over a given time period.A statistical measure of a market's price movements over time.A measure of the amount by which an asset price is expected to fluctuate over a given period.Vostro AccountA local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.Wash TradeA matched deal which produces neither a gain nor a loss.WhipsawSlang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.Withholding TaxIncome tax withheld from employees' wages and paid directly to the government by the employer.Working DayA day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both financial centre's are open for business (all relevant currency centers in the case of a cross are open).YardA slang word used in the currency industry meaning "billion".XA Nasdaq stock symbol specifying that it is a mutual fund.Z-ScoreA statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy

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