Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are worldwide meeting places of buyers and sellers of an ever-expanding list of products that includes financial instruments such as U.S. Treasury bonds, stock indexes, and foreign currencies as well as traditional agricultural commodities, metals, and petroleum products. There is also active trading in options on futures contracts allowing option buyers to participate in futures markets with known risk.

Electronic information and communication technologies are providing new and better trading tools and new and more diverse trading opportunities. In some cases, entirely electronic markets function alongside open-outcry markets that have existed for more than a century and a half. Electronic order placement is increasingly commonplace. As such developments help make futures markets more useful to more people, it follows that they have become more widely and extensively used.

Notwithstanding the changes that have and are continuing to occur, the primary purpose of futures markets remains unchanged: To provide an efficient and effective mechanism for the management of price risks. By buying or selling futures contracts that establish a price now for a purchase or sale that will take place at a later time, individuals and businesses are able to achieve what amounts to insurance protection against adverse price changes. It is called hedging.

Simultaneously, other futures market participants are speculators. By buying or selling, depending on which direction they expect prices to move, they hope to profit from the very price changes that hedgers seek to avoid. The interaction of hedgers and speculators, each pursuing their own goals, helps to provide active, liquid, and competitive markets.

Speculative participation in futures trading has become increasingly attractive with the availability of alternative methods of participation. Whereas many futures traders continue to prefer to make their own trading decisions- what to buy and sell and when to buy and sell-others use the services of a professional trading advisor or avoid day-to-day trading responsibilities by establishing a fully managed trading account or by participating in a commodity pool that is similar in concept to a mutual fund.

For those individuals who fully understand and can afford the risks that are involved, the allocation of some portion of their investment capital-the portion that is truly risk capital-to futures speculation can provide a means of achieving greater portfolio diversification and a potentially higher overall rate of return on their investments. There are also a number of ways futures and options on futures can be used in combination with other investments to pursue larger profits or to limit risks.

Speculation in futures contracts, however, is clearly not appropriate for everyone. Just as it is possible to realize substantial profits in a short period of time, it is also possible to incur substantial losses in a short period of time. The possibility of large profits or losses in relation to the initial commitment of capital-including losses potentially larger than the initial commitment of capital-stems principally from the fact that futures trading is a highly leveraged form of speculation. Only a relatively small amount of money is required to participate in the price movements of assets having a much greater value. As we will illustrate, the leverage of futures trading can work for you when prices move the direction you anticipate or against you when prices move in the opposite direction.

The purpose of this booklet is not to suggest either that you should or shouldn't participate in futures trading. That is a decision you should make only after consultation with your broker or financial advisor and in light of your own financial situation and objectives.

The purpose of this booklet is not to suggest either that you should or shouldn't participate in futures trading. That is a decision you should make only after consultation with your broker or financial advisor and in light of your own financial situation and objectives.

• Information about the investment itself and the risks involved.
• How readily your investment or position can be liquidated when such action is necessary or desired.
• Who the other market participants are.
• Alternative methods of investing.
• How prices are arrived at.
• The costs of trading, including commission charges.
• How gains and losses are realized.
• What forms of regulation and investor protection exist.
• The experience, integrity and track record of your broker or advisor.
• The financial condition of the firm with which you are trading.

In sum, obtain the kinds of information you need to be an informed investor.

1. » What Is Foreign Exchange?
2. » Who Are The Participants In The FX Market?
3. » What Is Margin?
4. » What Are Commissions and Fees charged By AVS?
5. » What Does It Mean Having A 'Long' Or 'Short' Position?
6. » How Do I Manage Risk?
7. » About The Forex Trading System and Market
8. » Forex Charts and Signal

» What Is Foreign Exchange?

The Foreign Exchange trading market, also referred to as the "Forex" market, is the largest financial market in the world, with a daily average turnover of approximately US$1.3 trillion. Forex is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example EURO/USD or USD/CHF.

» Who Are The Participants In The FX Market?

The Forex market is called an 'Inter bank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

» What Is Margin?

Margin is required collateral for taking a Forex trading position. It allows traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. In the forex market leverage ranges from 1% to 2%, giving investors the high leverage needed to trade actively whereas equity market only provides leverage of 50% (double the buying power).

» What Does It Mean Having A 'Long' Or 'Short' Position?

A long position is one in which a forex trader buys a currency at one price and aims to sell it later at a higher price; the investor is benefiting from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate; the investor is benefiting from a declining market. The risk of having either long or short position will be the same.

» How Do I Manage Risk?

The most common risk management tools in forex online trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor's position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed. Please see Risk Statement.

» About The Forex Trading System and Market

Definition of FOREX (Foreign Exchange) Market The foreign exchange (currency or forex) market exists wherever one currency is traded for another. Forex market is the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market may only participate indirectly through forex brokers or market maker like AVS or banks.

» The Foreign Exchange Market

With international trade, the currency of one country must be exchanged for that of another for settlement of a transaction. Institutions and corporations in the international market place oftentimes need a certain currency to complete a deal, or to guard themselves from the effects of currency swings and rate changes. This system involving the exchange of different currencies has created the Foreign Exchange market, or FOREX, or FX and more correctly known as the Global Inter bank Currency Exchange Market.Like stocks, gold and real estate investments, Foreign Exchange has become a very important tool for the investment community. Forex trading provides certain additional advantages:

Margin System

You can enjoy the benefits of leverage on contracts up to fifty times your margin deposit. That is, with 1% of the absolute value of contracts, you can enter the largest marketplace in the world. As long as you are able to maintain your margin requirements on the full contract value, you can remain indefinitely in the market.

Maximum Liquidity

Being the largest market in the world with over $1.6 Trillion bought and sold daily, huge volume of transactions are readily executed and cleared. Unlike futures or the stock market, there is never a lack of buyers or sellers on the forex market. Therefore, it gives the investor the prerogative to open or close a position at will.

Attractive Pricing

Forex quotes are based on spot prices regardless of the transaction size. Prices are quoted on a net basis.

Effective Execution

Forex trade orders are executed and confirmed online or manually via a recorded phone call. Customers know immediately the rate at which the order is executed. Confirmed orders will always receive a single price execution.

Flexible Settlement

Forex system contracts opened can be rolled over daily for an indefinite period subject to roll-over fees.

Hedging Tool

Investors involved in international trade can minimize their currency exposure risks by using a Forex trading system.

Operation Of The Forex Market

The International Forex Market is a non-physical market and has no central exchange. The major participants in this foreign exchange trading market are Central Banks, prime multinational banks, large corporations, brokerage houses and individual investors. Forex agents offer various services to investors, including financial analysis, information gathering and market situation updates. Most transactions are conducted via the telephone or through online forex trading systems.

The high liquidity in the forex market is due to the enormous volume of transactions generated by the primary market called the "interbank market" where banks, large financial institutions, insurance companies and other large corporations deal with each other in huge quantities to manage their own currency risks. The secondary over-the-counter market, where retail clients participate in forex transactions, has benefited from this liquidity provided by the big institutions

The growth of the average daily volume of Forex trading has been phenomenal and is now currently trading currency to the tune of $1.6 trillion a day, having grown 50% in the last decade from an already large $1.0 trillion a day in 1992. It reached a high level in 2001 with approximately $2.2 trillion but adjusted back to the current $1.6 trillion by 2003. This was likely due to the birth of the single Euro currency in place of the then existing 12 European currencies.

The largest part of the largest financial market in the world consists overwhelmingly of speculation, in the form of spot forex trades (95%). The remaining 5% consists of companies swapping currencies back to their home currency to repatriate profits, forwards moves, and all other transactions.

The Traded Currencies

The six major currencies of Forex dominate the overall market share. 76% of all trades have both currencies in the currency pair as a major, and more than 98% of all trades involve at least one major.

Both of these figures are well beyond what would be expected if foreign currency trading were based solely on the majors' share of world GDP (74.5%), demonstrating the value the majors command abroad relative to other currencies. Another way thinking about the majors' predominance in the currency markets is to compare the rest of the world's economic output (25.5%), to the less than 2% share of Forex speculation that does not have a major on either side of the currency pair.

The most common currency pairs are EUR/USD (30%), USD/JPY (20%), GBP/USD (11%), and USD/CHF (5%), which together totals 66% (two-thirds) of all Forex spot trades.

The Dollar, Euro, Yen, and Pound are the most traded currencies. The six majors combine for a huge bulk of the trading transactions in a single day. Corporations and banks have known this for years, and have often used Forex for hedging purposes. With the increase in global trade, multinational corporations have likewise used the forex market to manage their risk in changes in currency rates.

Source: SGFS; Bank of International Settlements, Triennial Central Bank Survey

The frantic shouting and signaling of bids and offers on the trading floor of an open-outcry futures exchange undeniably convey an impression of chaos. The reality, however, is that chaos is what futures markets replaced. Prior to the establishment of central grain markets in the mid-nineteenth century, the nation's farmers carted their newly harvested crops over plank or dirt roads to major population and transportation centers each fall in search of buyers. This seasonal supply glut drove prices downward to giveaway levels and even to throwaway levels as corn, wheat and other crops often rotted in the streets or were dumped in rivers and lakes for lack of storage. Come spring, shortages frequently developed and foods made from corn and wheat became barely affordable luxuries.

Throughout the year, it was each buyer and seller for himself, with neither a place nor a mechanism for organized, competitive bidding. The first central markets were formed to meet that need. Eventually, contracts were entered into for forward as well as for spot (immediate) delivery. So-called forwards were the forerunners of present day futures contracts.

Spurred by the need to manage the price and interest rate risks that exist in every type of modern business, today's futures markets have also become major financial centers, without the existence of which even the U.S. Treasury or Federal Reserve System would be hard pressed to carry out their fiscal responsibilities. Current market participants are just as likely to be mortgage lenders, investment bankers and multinational corporations as farmers, grain merchants and exporters. Wherever there are hedgers who need to transfer price risks, there are speculators willing to selectively accept the risks in the pursuit of profit.

Futures prices, whether arrived at either through open outcry or by electronic matching of bids and offers, are immediately and continuously relayed around the world. A farmer in Nebraska, a merchant in Amsterdam, an importer in Tokyo and a speculator in Ohio have simultaneous and equal access to the latest market derived price quotations. Should they choose, they can establish a price level for future delivery-or for speculative purposes-simply by instructing their broker to buy or sell the appropriate contracts.

Images created by the fast-paced activity of a trading floor notwithstanding, regulated futures markets are more than ever a keystone of the world's most orderly, envied and intensely competitive marketing system.

Should you decide to trade in futures contracts or options, either for speculation or price risk management, your orders to buy or sell will be communicated through your brokerage firm to the trading floor for execution by a floor broker. If you are a buyer, the broker will seek a seller at the lowest available price. If you are a seller, the broker will seek a buyer at the highest available price. That's what the shouting and signaling is about. Electronic systems are designed to achieve the same outcome.

Whatever the method of trading, the person who takes the other side of your trade may be or may represent someone who is a commercial hedger or perhaps someone who is a public speculator. Or, quite possibly the other party may be an independent trader who is trading for his own account. In becoming acquainted with futures markets, it is useful to have at least a general understanding of who these various market participants are, what they are doing and why.

Hedgers

The details of hedging can be somewhat complex but the principle is simple. By buying or selling in the futures market now, individuals and firms are able to establish a known price level for something they intend to buy or sell later in the cash market. Buyers are thus able to protect themselves against-that is, hedge against-higher prices and sellers are able to hedge against lower prices. Hedgers can also use futures to lock in an acceptable margin between their purchase cost and their selling price. Consider this example.

A jewelry manufacturer will need to buy additional gold from its supplier in six months to produce jewelry that it is already offering in its catalog at a published price. An increase in the cost of gold could reduce or wipe out any profit margin. To minimize this risk, the manufacturer buys futures contracts for delivery of gold in six months at a price of $300 an ounce.

If, six months later, the cash market price of gold has risen to $320, the manufacturer will have to pay that amount to its supplier to acquire gold. But the $20 an ounce price increase will be offset by a $20 an ounce profit if the futures contract bought at a price of $300 is sold for $320.

The hedge, in affect, provided protection against an increase in the cost of gold. It locked in a cost of $300, regardless of what happened to the cash market price. Had the price of gold declined, the hedger would have incurred a loss on the futures position but this would have been offset by the lower cost of acquiring gold in the cash market.

The number and variety of hedging possibilities is practically limitless. A corporate treasurer who will need to borrow money at some future date can hedge against the possibility of rising interest rates. An investor can use stock index futures to hedge against an overall increase in stock prices if he anticipates buying stocks at some future time or against declining stock prices if he or anticipates selling stocks. A cattle feeder can hedge against lower livestock prices and a meat packer against higher livestock prices. An exporter who has contracted to ship commodities on a future date at a fixed price can hedge to lock in the cost of acquiring the commodities for shipment, much as the jewelry manufacturer did.

Whatever the hedging strategy, the common denominator is that hedgers are willing to give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.

Speculators

Were you to speculate in futures contracts by buying to profit from a price increase or selling to profit from a price decrease, the party taking the opposite side of your trade on any given occasion could possibly be a hedger or it might be another speculator, someone whose opinion about the probable direction and timing of prices differs from your own.

The arithmetic of speculation in futures contracts, including the opportunities it offers and the equally important risks it involves, will be discussed in detail later on. For now, suffice it to say that speculators put their money at risk in the hope of profiting from an anticipated price change.

Buying futures contracts with the hope of later being able to sell them at a higher price is known as "going long." Conversely, selling futures contracts with the hope of being able to buy back identical and offsetting futures contracts at a lower price is known as "going short." An attraction of futures trading is that it is equally as easy to profit from declining prices (by selling) as it is to profit from rising prices (by buying).

There are two types of futures contracts, those that provide for physical delivery of a particular commodity and those that call for an eventual cash settlement. The commodity itself is specifically defined, as is the month when delivery or settlement is to occur. A July futures contract, for example, provides for delivery or settlement in July.

It should be noted that even in the case of delivery-type futures contracts, very few actually result in delivery. Not many speculators want to take or make delivery of 5,000 bushels of grain or 40,000 pounds of pork. Rather, the vast majority of both speculators and hedgers choose to realize their gains or losses by buying or selling an offsetting futures contract prior to the delivery date.

Selling a contract that was previously purchased liquidates a futures position in exactly the same way that selling 100 shares of IBM stock liquidates an earlier purchase of 100 shares of IBM stock. Similarly, a futures contract that was initially sold can be liquidated by making an offsetting purchase. In either case, profit or loss is the difference between the buying price and the selling price, less transaction expenses.

Cash settlement futures contracts are precisely that, contracts that are settled in cash rather than by delivery at the time the contract expires. Stock index futures contracts, for example, are settled in cash on the basis of the index number at the close of the final day of trading. Delivery of the actual shares of stock that comprise the index would obviously be impractical.

Futures prices increase or decrease largely because of the myriad factors that influence buyers' and sellers' expectations about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).

As new supply and demand developments occur and as more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward. This process of reassessment of price discovery is continuous.

On any given day the price of a July futures contract will reflect the consensus of buyers' and sellers' current opinions about what the value of the commodity will be when the contract expires in July. As new or more accurate information becomes available or as expectations change, the July futures price may increase or decrease.

Competitive price discovery is a major economic function-and, indeed, a major economic benefit-of futures trading. Through this competition all available information about the future value of a commodity is continuously translated into the language of price, providing a dynamic barometer of supply and demand. Price "transparency" assures that everyone has access to the same information at the same time.

Gains and losses on futures contracts are not only calculated on a daily basis, they are also credited or debited to each market participant's brokerage account on a daily basis. Thus, if a speculator were to have a $500 profit as the result of a day's price changes, that amount would immediately be credited to his or her account and, unless required for other purposes, could be withdrawn. On the other hand, if the day's price changes resulted in a $500 loss, the account would be debited for that amount.

The process just described is known as daily cash settlement and it's an important feature of futures trading. As will be seen when margin requirements are discussed later, it is also the reason a customer who incurs a loss on a futures position may be called on to immediately deposit additional funds.

To say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. Perhaps more so than in any other form of speculation or investment, price changes in futures trading are highly leveraged. An understanding of this leverage-and how it can work to either your advantage or disadvantage-is absolutely essential to an understanding of futures trading.

As mentioned in the introduction, only a relatively small amount of money (known as margin) is required in order to buy or sell a futures contract. On a particular day, a margin deposit of only $2,500 might enable you to purchase or sell a futures contract on $100,000 worth of U.S. Treasury Bonds. Or for an initial margin deposit of about $15,000 you might buy or sell a contract covering common stocks currently worth $300,000. Or for around $4,000 you may be able to buy or sell a futures contract on 37,000 pounds of coffee currently worth $40,000. The smaller the margin in relation to the underlying value of the futures contract, the greater the leverage.

If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can yield large profits in relation to your initial margin deposit. But if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin deposit. Leverage is a two-edged sword.

For example, assume that in anticipation of rising stock prices you buy one June S&P 500 stock index futures contract at a time when the June index is trading at 1200. Also assume your initial margin requirement is $15,000. Since the value of the futures contract is $250 times the index, each one point change in the index represents a $250 gain or loss.

An increase of five percent in the index, from 1200 to 1260, would produce a $15,000 profit (60 X $250). Conversely, a 60 point decline would produce a $15,000 loss. In either case, an increase or decrease of only five percent in the index would, in this example, result in a gain or loss equal to 100 percent of the $15,000 initial margin deposit! That's the arithmetic of leverage.

Said another way, while buying (or selling) a futures contract provides the same dollars and cents profit potential as owning (or selling short) the actual commodity covered by the contract, low margin requirements sharply increase the percentage profit or loss potential.

Futures trading thus requires not only the necessary financial resources but also the necessary financial and emotional temperament. It can be one thing to have the value of your common stock portfolio decline by five percent but quite another, at least emotionally, to have that same five percent stock price decline wipe out 100 percent of your investment in futures contracts.

An absolute requisite for anyone considering trading in futures contracts-whether it's stock indexes or sugar, pork bellies or petroleum-is to clearly understand the concept of leverage. Calculate precisely the gain or loss that would result from any given change in the futures price of the contract you would be trading. If you can't afford the risk, or even if you're uncomfortable with the risk, the only sound advice is don't trade. Futures trading is not for everyone.

As is apparent from the preceding discussion, the arithmetic of leverage is the arithmetic of margins. An understanding of the different kinds of margins is essential to an understanding of futures trading.

If your previous investment experience has mainly involved common stocks, you know that the term margin-as used in connection with securities-has to do with the cash down payment and money borrowed from a broker to purchase stocks. But used in connection with futures trading, margin has an altogether different meaning and serves an altogether different purpose.

Rather than providing a down payment, the margin required to buy or sell a futures contract is a deposit of good faith money that can be drawn on by your brokerage firm to cover any day-to-day losses that you may incur in the course of futures trading. It is much like money held in an escrow account. When you liquidate a futures position, your margin deposit is refunded to you, plus any undistributed profits or minus any uncollected losses on the trade.

Minimum margin requirements for a particular futures contract at a particular time are set by the exchange on which the contract is traded. They are typically five to 10 percent of the value of the futures contract. Exchanges continuously monitor market conditions and risks and, as necessary, raise or reduce their margin requirements. An increase in market volatility and the range of daily price movements is frequently a reason for raising margins.

Note that the exchanges' minimum margin requirements are exactly that: minimums that exchange-member brokerage firms must charge. Individual firms may have margin requirements higher than the exchange minimums.

There are two margin-related terms you should know: Initial margin and Maintenance margin.

Initial margin (sometimes called original margin) is the sum of money that you must de posit at the outset with the brokerage firm for each futures contract to be bought or sold. On any day that profits accrue to your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your brokerage account.

If and when the funds remaining in your account are reduced by losses to below a certain level-known as the maintenance margin level-your broker will require that you deposit additional funds to bring the balance back to the level of the initial margin. Or you may be asked for additional margin if the exchange or your brokerage firm raises its margin requirements. Requests for additional margin are known as margin calls.

Assume, for example, that the initial margin needed to buy or sell a particular futures contract is $2,000 and that the maintenance margin is $1,500. Should losses on open positions reduce the funds remaining in your trading account to $1,400 (an amount less than the maintenance requirement), you will receive a margin call for the $600 needed to restore your account to $2,000.

Before trading in futures contracts, be sure you understand your particular brokerage firm's Margin Agreement and how and when the firm expects margin calls to be met. Some firms may require only that you mail a personal check. Others may insist you wire transfer funds from your bank or provide same-day or next-day delivery of a certified or cashier's check. If margin calls are not met in the prescribed time and form, the brokerage firm can protect itself by liquidating your open positions at the available market price (possibly resulting in an unsecured loss for which you would be liable).

Even if you should decide to participate in futures trading in a way that doesn't involve having to make day-to-day trading decisions about what and when to buy or sell (such as having a managed account or investing in a commodity pool), it is nonetheless useful to understand the dollars and cents of how futures trading gains and losses are realized. If you intend to trade your own account, such an understanding is essential.

Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. Here are brief descriptions and illustrations of the most basic strategies.

Buying (Going Long) to Profit from an Expected Price Increase

Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying futures con tracts. If correct in forecasting the direction and timing of the price change, the futures contract can be sold later for the higher price, thereby yielding a profit.1 If the price declines rather than increases, the trade will result in a loss. Because of leverage, losses as well as gains may be larger than the initial margin deposit.

For example, assume it's now January. The July crude oil futures price is presently quoted at $15 a barrel and over the coming month you expect the price to increase. You decide to deposit the required initial margin of $2,000 and buy one July crude oil futures contract. Further assume that by April the July crude oil futures price has risen to $16 a barrel and you decide to take your profit by selling. Since each contract is for 1,000 barrels, your $1 a barrel profit would be $1,000 less transaction costs.

1 For simplicity, examples do not take into account commissions and other transaction costs. These costs are important. You should be sure you understand them.

Suppose, instead, that rather than rising to $16 a barrel, the July crude oil price by April has declined to $14 and that, to avoid the possibility of further loss, you elect to sell the contract at that price. On the 1,000 barrel contract your loss would come to $1,000 plus transaction costs.

Note that if at any time the loss on the open position had reduced funds in your margin account to below the maintenance margin level, you would have received a margin call for whatever sum was needed to restore your account to the amount of the initial margin requirement.

Selling (Going Short) to Profit from an Expected Price Decrease

The only way going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as you expect, the price does decline, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price. Margin requirements for selling a futures contract are the same as for buying a futures contract, and daily profits or losses are credited or debited to the account in the same way.

For example, suppose it's August and between now and year end you expect the overall level of stock prices to decline. The S&P 500 Stock Index is currently at 1200. You deposit an initial margin of $15,000 and sell one December S&P 500 futures contract at 1200. Each one point change in the index results in a $250 per contract profit or loss. A decline of 100 points by November would thus yield a profit, before transaction costs, of $25,000 in roughly three months time. A gain of this magnitude on less than a 10 percent change in the index level is an illustration of leverage working to your advantage.

Assume stock prices, as measured by the S&P 500, increase rather than decrease and by the time you decide to liquidate the position in November (by making an offsetting purchase), the index has risen to 1300, the outcome would be as follows:

A loss of this magnitude ($25,000, which is far in excess of your $15,000 initial margin deposit) on less than a 10 percent change in the index level is an illustration of leverage working to your disadvantage. It's the other edge of the sword.

Spreads

While most speculative futures transactions involve a simple purchase of futures contracts to profit from an expected price increase-or an equally simple sale to profit from an expected price decrease-numerous other possible strategies exist. Spreads are one example.

A spread involves buying one futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.

As an illustration, assume it's now November, that the March wheat futures price is presently $3.50 a bushel and the May wheat futures price is presently $3.55 a bushel, a difference of 5¢. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts should widen to become greater than 5¢. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).

Assume time and events prove you right and that, by February, the March futures price has risen to $3.60 and the May futures price is $3.75, a difference of 15¢. By liquidating both contracts at this time, you can realize a net gain of 10¢ a bushel. Since each contract is 5,000 bushels, the net gain is $500.

Had the spread (i.e., the price difference) narrowed by 10¢ a bushel rather than widened by 10¢ a bushel, the transactions just illustrated would have resulted in a loss of $500.

Virtually unlimited numbers and types of spread possibilities exist, as do many other, even more complex futures trading strategies. These are beyond the scope of an introductory booklet and should be considered only by someone who clearly understands the risk/ reward arithmetic involved.

Now that you have an overview of what futures markets are, why they exist and how they work, the next step is to consider various ways in which you may be able to participate in futures trading. There are a number of alternatives and the only best alternative-if you decide to participate at all-is whichever one is best for you. In addition to describing several possibilities, the pages that follow suggest questions you should ask and information you should obtain before making a decision. Also discussed is the opening of a futures trading account, the regulatory safeguards provided participants in futures markets, and methods for resolving disputes, should they arise.

Deciding How to Participate

At the risk of oversimplification, choosing a method of participation is largely a matter of deciding how directly and extensively you, personally, want to be involved in making trading decisions and managing your account. Many futures traders prefer to do their own research and analysis and make their own decisions about what and when to buy and sell. That is, they manage their own futures trades in much the same way they may manage their own stock portfolios. Others choose to rely on or at least consider the recommendations of a brokerage firm or account executive. Some purchase independent trading advice. Others would rather have someone else be responsible for trading their account and therefore delegate trading authority to their broker or a trading advisor. Still others purchase an interest in a commodity trading pool.

There's no formula for deciding. Your decision should, however, take into account such things as your knowledge of and any previous experience in futures trading, how much time and attention you are able to devote to trading, the amount of capital you can afford to commit to futures and your individual temperament and tolerance for risk. The importance of the latter cannot be overemphasized. Some individuals thrive on being directly involved in the fast pace of futures trading. Others are unable, reluctant or lack the time to make the immediate decisions that are frequently required. Some recognize and accept the fact that futures trading all but inevitably involves having some losing trades. Others lack the necessary disposition or discipline to acknowledge that they were wrong on a particular occasion and liquidate the position.

Many experienced traders thus suggest that, of all the things you need to know before trading in futures contracts, one of the most important is to know yourself. This can help you make the right decision about whether to participate at all and, if so, in what way.

In no event should you participate in futures trading unless the capital you would commit is risk capital. That is, capital which, in pursuit of larger profits, you can afford to lose. It should be capital over and above that needed for necessities, emergencies, savings and achieving your long-term investment objectives. You should also understand that, because of the leverage involved in futures, the profit and loss fluctuations may be wider than in most types of investment activity and you may be required to cover deficiencies due to losses over and above what you had expected to commit to futures.

Trade Your Own Account

This involves opening your individual trading account and-with or without the recommendations of a brokerage firm or an independent Commodity Trading Advisor-making your own trading decisions. You will also be responsible for assuring that adequate funds are on deposit with the brokerage firm for margin purposes, and that additional funds are promptly provided as needed.

Most major brokerage firms have departments or even separate divisions to serve clients who want to allocate some portion of their investment capital to futures trading. Some firms specialize exclusively in futures trading.

No matter what type of investment you are considering, begin by obtaining as much information as possible about that particular investment. The more you know in advance, the less likely there will be surprises later on. Moreover, even among futures contracts, there are important differences which-because they can affect your investment results-should be taken into account in making your investment decisions. Specifically, be certain you understand such things as:

The Contract Unit

Futures contracts specify such things as the unit of trading and contract size (such as 5,000 bushels of grain, 40,000 pounds of livestock, or 100 troy ounces of gold). Foreign currency futures specify the number of marks, francs or pesos. U.S. Treasury obligation futures are in terms of instruments having a stated face value (such as $100,000 or $1 million) at maturity. Stock index futures contracts that call for cash settlement rather than delivery are based on a given index number times a specified dollar multiple. Whatever the yardstick, it's important to know precisely what it is you would be buying or selling, and the quantity you would be buying or selling.

Order Placement

Nothing is more important in futures trading than clearly communicating with your brokerage firm about what you want to buy or sell, when you want to buy or sell, and any other conditions or limitations you may want to attach to your order. For example, if you want to buy or sell immediately at the best available price, whatever that happens to be, this is known simply as a "market" order. But there are many other types of orders that give the broker specific instructions about when and/ or at what price to execute a purchase or sale. Your order instructions can specify not only when and at what price you are willing to establish a futures position but also include instructions about when and at what price, if possible, you want to liquidate the position. You also need to let the broker know whether you intend for an order to be a "day" order (valid for that day only) or an "open" order (one that remains in effect until such time as it can be executed according to your instructions). Ask the brokerage firm youre dealing with whether it can provide you with a written glossary of the various types of orders it and the exchanges can accept. Some firms offer recordkeeping books and online resources that can be handy for tracking your orders, executions, and open positions. Finally, be sure you have a full understanding of your firm's order entry procedures.

How Prices are Quoted

Futures prices are usually quoted the same way prices are quoted in the cash market; in dollars, cents, and sometimes fractions of a cent, per bushel, pound or ounce; in points and percentages of a point for financial instruments; and in terms of an index number, for stock index contracts. Be certain you understand the price quotation system for the particular futures contract you are considering.

Minimum Price Changes

Exchanges establish the minimum amount that the price can fluctuate upward or downward. This is known as the "tick." For example, each tick for grain is 1/4¢ per bushel. On a 5,000 bushel futures contract, that's $12.50.

On a gold futures contract, the tick is 10¢ per ounce, which on a 100 ounce contract is $10. You'll want to familiarize yourself with the minimum price fluctuation-the tick size-for whatever futures contracts you plan to trade. You'll need to know how a price change of any given amount will affect the value of the contract.

Daily Price Limits

Exchanges establish daily price limits for trading in futures contracts. The limits are stated in terms of the previous day's closing price plus or minus so many cents or dollars per trading unit. Once a futures price has increased by its daily limit, there can be no trading at any higher price until the next day of trading. Conversely, once a futures price has declined by its daily limit, there can be no trading at any lower price until the next day of trading. Thus, if the daily limit for a particular grain is currently 20¢ a bushel and the previous day's settlement was $3, there can not be trading during the current day at any price below $2.80 or above $3.20. The price is allowed to increase or decrease by the limit amount each day.

For some contracts, daily price limits are eliminated during the month in which the contract expires. Because prices can become particularly volatile during the expiration month (also called the "delivery" or "spot" month), persons lacking experience in futures trading may wish to liquidate their positions prior to that time. Or, at the very least, trade cautiously and with an understanding of the risks that may be involved.

Daily price limits set by the exchanges are subject to change. They can be either increased or decreased. Because of daily price limits, there may be occasions when it is not possible to liquidate an existing futures position at will. In this event, possible alternative strategies should be discussed with a broker.

Position Limits

Although the average trader is unlikely to ever approach them, the exchanges and the CFTC establish limits on the maximum speculative position that any one person can have at one time in any one futures contract. The purpose is to prevent one buyer or seller from being able to exert undue influence on the price in either the establishment or liquidation of positions. Position limits are stated in number of contracts or total units of the commodity. The easiest way to obtain the types of information just discussed is from your broker or from the exchange where the contract is traded.

Anyone buying or selling futures contracts should clearly understand that any given transaction may result in a loss. The loss may exceed not only the amount of the initial margin but also the entire amount deposited in the account or more. Moreover, while there are a number of steps that can be taken in an effort to limit the size of possible losses, there can be no guarantees these steps will prove effective. Well-informed futures traders should be familiar with available risk management possibilities.

Choosing a Futures Contract

Just as different common stocks or different bonds may involve different degrees of probable risk and reward at a particular time, so may different futures contracts. The market for one commodity may, at present, be highly volatile, perhaps because of supply-demand uncertainties which-depending on future developments-could suddenly propel prices sharply higher or sharply lower. The market for some other commodity may currently be less volatile, with greater likelihood that prices will fluctuate in a narrower range. You should be able to evaluate and choose the futures contracts that appear-based on present information-most likely to meet your objectives, your willingness to accept risk and your expectations as to when the anticipated price change will occur.

Keep in mind, however, that neither past nor present price behavior provides assurance of what will occur in the future. Prices that have been relatively stable may become highly volatile (which is why many individuals and firms choose to hedge against the possibility of future price changes).

Liquidity

There can be no ironclad assurance that, at all times, a liquid market will exist for offsetting a futures contract that you have previously bought or sold. This could be the case, if a futures price has increased or decreased by the maximum allowable daily limit and there is no one presently willing to buy the futures contract you want to sell or sell the futures contract you want to buy.

Even on a day-to-day basis, some contracts and some delivery months tend to be more actively traded and liquid than others. Two useful indicators of liquidity are the volume of trading and the open interest (the number of open futures positions still remaining to be liquidated by an offsetting trade or satisfied by delivery). These figures are usually reported in newspapers that carry futures quotations. The information is also available from your broker or advisor and from online market reporting services and exchange web sites.

Stop Orders

A stop order is an order, placed with your broker, to buy or sell a particular futures contract at the market price if and when the price reaches a specified level. Stop orders are often used by futures traders in an effort to limit the amount they might lose if the futures price moves against their position. For example, were you to purchase a crude oil futures contract at $15 a barrel and wished to limit your loss to $1 a barrel, you might place a stop order to sell an offsetting contract if the price should fall to $14 a barrel. If and when the market reaches whatever price you specify, a stop order becomes an order to execute the desired trade at the best price immediately obtainable.

There can be no guarantee, however, that it will be possible under all market conditions to execute the order at the price specified. In an active, volatile market, the market price may be declining (or rising) so rapidly that there is no opportunity to liquidate your position at the stop price you have designated. Under these circumstances, the broker's only obligation is to execute your order at the best price that is available.

In the event prices have risen or fallen by the maximum daily limit, and there is presently no trading in the contract (known as a "lock limit" market), it may not be possible to execute your order at any price. In addition, although it happens infrequently, it is possible that markets may be lock limit for more than one day, resulting in substantial losses to futures traders who may find it impossible to liquidate losing futures positions.

Subject to the kinds of limitations just discussed, stop orders can nonetheless provide a useful tool for the futures trader who seeks to limit his losses. Far more often than not, it will be possible for the broker to execute a stop order at or near the specified price.

In addition to providing a way to limit losses, stop orders can also be employed to protect profits. For instance, if you have bought crude oil futures at $15 a barrel and the price is now at $19 a barrel, you might wish to place a stop order to sell if and when the price declines to $18. This (again subject to the described limitations of stop orders) could protect $3 of your existing $4 profit while still allowing you to benefit from any continued increase in price.

Spreads

As previously discussed, spreads involve the purchase of one futures contract and the sale of a different futures contract in the hope of profiting from a widening or narrowing of the price difference. Because gains and losses occur only as the result of a change in the price difference-rather than as a result of a change in the overall level of futures prices-spreads are often considered more conservative and less risky than having an outright long or short futures position. In general, as long as you are trading the same number of futures contracts, this may be the case.

It should be recognized, though, that the loss from a spread can be as great as-or even greater than-that which might be incurred by having an outright futures position. An adverse widening or narrowing of the spread during a particular time period may exceed the change in the overall level of futures prices, and it is possible to experience losses on both of the futures contracts involved (that is, on both legs of the spread).

What are known as put and call options are traded on most active futures contracts. The principal attraction of buying options is that they make it possible to speculate on increasing or decreasing futures prices with a known and limited risk. The most that the buyer of an option can lose is the cost of purchasing the option (known as the option "premium") plus transaction costs.

Options can be most easily understood when call options and put options are considered separately, because they are totally separate and distinct. Buying or selling a call in no way involves a put, and buying or selling a put in no way involves a call.

Buying Call Options

The buyer of a call option acquires the right, but not the obligation, to purchase (go long) a particular futures contract at a specified price at any time during the life of the option. Each option specifies the futures contract which may be purchased (known as the "underlying" futures contract) and the price at which it can be purchased (known as the "exercise" or "strike" price).

A March Treasury bond 92 call option would convey the right to buy one March U.S. Treasury bond futures contract at a price of $92,000 at any time during the life of the option.

One reason for buying call options is to profit from an anticipated increase in the underlying futures price. A call option buyer will realize a net profit if, upon exercise, the underlying futures price is above the option exercise price by more than the premium paid for the option. Or a profit can be realized if, prior to expiration, the option rights can be sold for more than they cost.

Example: You expect lower interest rates to result in higher bond prices (interest rates and bond prices move inversely). To profit if you are right, you buy a June T-bond 90 call. Assume the premium you pay is $2,000.

If, at the expiration of the option (in May) the June T-bond futures price is 93, you can realize a gain of three (that's $3,000) by exercising or selling the option that was purchased at 90. Since you paid $2,000 for the option, your net profit is $1,000 less transaction costs.

As mentioned, the most that an option buyer can lose is the option premium plus transaction costs. Thus, in the preceding example, the most you could have lost-no matter how wrong you might have been about the direction and timing of interest rates and bond prices-would have been the $2,000 premium you paid for the option plus transaction costs. In contrast, if you had an outright long position in the underlying futures contract your potential loss would be unlimited.

It should be pointed out, however, that while an option buyer has a limited risk (the loss of the option premium), his profit potential is reduced by the amount of the premium. In the example, the option buyer realized a net profit of $1,000. For someone with an outright long position in the June T-bond futures contract, an increase in the futures price from 90 to 93 would have yielded a net profit of $3,000 less transaction costs.

Although an option buyer cannot lose more than the premium paid for the option, he can lose the entire amount of the premium. This will be the case if an option held until expiration is not worthwhile to exercise.

Buying Put Options

Whereas a call option conveys the right to purchase (go long) a particular futures contract at a specified price, a put option conveys the right to sell (go short) a particular futures contract at a specified price. Put options can be purchased to profit from an anticipated price decrease. As in the case of call options, the most that a put option buyer can lose, if he is wrong about the direction or timing of the price change, is the option premium plus transaction costs.

Example: Expecting a decline in the price of gold, you pay a premium of $1,000 to purchase an April 300 gold put option. The option gives you the right to sell a 100 ounce gold futures contract for $300 an ounce.

Assume that, at expiration, the April futures price has-as you expected- declined to $280 an ounce. The option giving you the right to sell at $300 can thus be sold or exercised at a gain of $20 an ounce. On 100 ounces, that's $2,000. After subtracting $1,000 paid for the option, your net profit comes to $1,000.

Had you been wrong about the direction or timing of a change in the gold futures price, the most you could have lost would have been the $1,000 premium paid for the option plus transaction costs. However, you could have lost the entire premium.

How Option Premiums are Determined

Option premiums are determined the same way futures prices are determined, through active competition between buyers and sellers. Three major variables influence the premium for a given option:

• The option's exercise price, or more specifically, the relationship between the exercise price and the current price of the underlying futures contract. All else being equal, an option that is already worthwhile to exercise (known as an "in-the-money" option) commands a higher premium than an option that is not yet worthwhile to exercise (an "out-of-the-money" option). For example, if a gold contract is currently selling at $290 an ounce, a put option conveying the right to sell gold at $310 an ounce is more valuable than a put option that conveys the right to sell gold at only $280 an ounce.
• The length of time remaining until expiration. All else being equal, an option with a long period of time remaining until expiration commands a higher premium than an option with a short period of time remaining until expiration because it has more time in which to become profitable. Said another way, an option is an eroding asset; its time value declines as it approaches expiration.
• The volatility of the underlying futures contract. All else being equal, the greater the volatility the higher the option premium. In a volatile market, the option stands a greater chance of becoming profitable.

Selling Options

At this point, you might well ask, who sells the options that option buyers purchase? The answer is that options are sold by other market participants known as option writers, or grantors. Their sole reason for writing options is to earn the premium paid by the option buyer. If the option expires without being exercised (which is what the option writer hopes will happen), the writer retains the full amount of the premium.

It should be emphasized and clearly recognized, however, that unlike an option buyer who has a limited risk (the loss of the option premium), the writer of an option has unlimited risk. His loss, except to the extent offset by the premium received when the option was written, will be whatever amount the option is "in-the-money" at the time of expiration. Simply said, any profit realized by an option buyer represents a loss for the option seller. And, it's worth saying again, there is no limit on how large this loss can be!

The foregoing is, at most, a brief and incomplete discussion of a complex topic. Options trading has its own vocabulary and its own arithmetic. If you wish to consider trading in options on futures contracts, you should discuss the possibility with your broker and read and thoroughly understand the risk disclosure statement which he is required to provide. In addition, have your broker provide you with educational and other literature prepared by the exchanges on which options are traded. Or contact the exchange directly. A number of excellent publications are available, including Options on Futures Contracts: An Introduction, which can be obtained by calling NFA's Information Center toll-free at (800) 621-3570 or by visiting NFA's web site at http://www.nfa.futures.org/

1. » What Is Limit Order?
2. » What Is Limit Order?
3. » What Is A Position Order?
4. » What are other types of order?
5. » Can I Place A Trade Via E-Mail?
6. » What Is Margin?
7. » What Does It Mean Have A 'Long' Or 'Short' Position?
8. » What About Terms Like "Bid/Ask", "Spread", And "Rollover"?

» What Is Limit Order?

A limit order is an order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 112.00/05, then a limit order to buy USD would be at a price below 112.05. (ie 111.50).

» What Is A Stop Loss Order?

A stop loss order is an order type whereby an open online forex trading position is automatically liquidated at a specific price. As an example, if an investor is long USD/YEN at 112.35, they might wish to put in a stop loss order for 111.75, which would limit losses should the dollar depreciate, possibly below 111.75.

» What Is A Position Order?

Position orders are directly related to individual positions. These forex currency trading orders are only active for as long as the position remains open and can be a stop loss or limit order.

» What are other types of order?

Market Order

A market order does not specify a price, it is executed at the best possible price available. A market order can keep the customer from "chasing" a market.

Limit Order

The limit order is an order to buy or sell at a designated price. Limit Orders to buy are placed below the current price while limit orders to sell are placed above the current price. Even though you may see the market touch a limit price several times, this does not guarantee or earn the customer a fill at that price. In most instances, the market must trade BETTER than the limit price for the customer to get a fill.

Stop Order:

Stop orders can be used for three purposes:

1. to minimize a loss on a long or short position
2. to protect a profit on an existing long or short position, or
3. to initiate a new long or short position.

A buy stop order is placed above the current market and is elected only when the market trades at or above, or is bid at or above, the stop price. A sell stop order is placed below the current market and is elected only when the market trades at or below, or is offered at or below, the stop price. Once the stop order is elected, the order is treated like a market order and will be filled at the best possible price.

Important Please Note:

The information contained in this document is of opinion only and does not guarantee any profit. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.

» What Is Margin?

Margin is essentially collateral for a position. It allows forex traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. In the equity markets, the usual margin allowed is 50%, which means an investor has double the buying power. In the forex market leverage ranges from 1% to 2%, giving investors the high leverage needed to trade actively.

» What Does It Mean Have A 'Long' Or 'Short' Position?

In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every FX position requires an investor to go long in one currency and short the other.

» What About Terms Like "Bid/Ask", "Spread", And "Rollover"?

See basic terms below. Please visit our extended glossary at www.avscarter.com/glossary for detailed definitions of all Forex and Trading related terms

Call Option

The buyer of a call option acquires the right but not the obligation to purchase a particular futures contract at a stated price on or before a particular date.

Commission

A fee charged by a broker to a customer for performance of a specific duty, such as the buying or selling of futures contracts.

Futures Contract

A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity.

Hedging

The practice of offsetting the price risk inherent in any cash market position by taking the opposite position in the futures market. Hedgers use the market to protect their businesses from adverse price changes.

Leverage

The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Liquidity (Liquid Market)

A broadly traded market where buying and selling can be accomplished with small price changes and bid and offer price spreads are narrow.

Long

One who has bought futures contracts or owns a cash commodity.

Margin

An amount of money deposited by both buyers and sellers of futures contracts and by sellers of option contracts to ensure performance of the terms of the contract (the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade). Margin in futures is not a down payment, as in securities, but rather a performance bond.

Offset

To take a second futures or options position opposite to the initial or opening position.

Option Contract

A contract which gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity at a specific price within a specified period of time. The seller of the option has the obligation to sell the commodity or futures contract or buy it from the option buyer at the exercise price if the option is exercised.

Option Premium

The price a buyer pays for an option. Premiums are arrived at through open competition between buyers and sellers on the trading floor of the exchange.

Position Limit

The maximum number of speculative futures contracts one can hold as determined by the Commodity Futures Trading Commission and/or the exchange where the contract is traded.

Price Limit

The maximum advance or decline from the previous day's settlement price permitted for a futures contract in one trading session.

Put Option

An option that gives the option buyer the right but not the obligation to sell the underlying futures contract at a particular price on or before a particular date.

Short

One who has sold futures contracts or the cash commodity.

Speculator

One who tries to profit from buying and selling futures and options contracts by anticipating future price movements.

Spot

Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

Spreading

The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset.

Strike Price

The price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract.

Note:

The Commodity Futures Trading Commission requires that brokers provide their customers with specific risk disclosure statements prior to the opening of an account. This brochure is in no way intended to serve as a substitute for those statements.

Technical analysis is the examination of past price movements to forecast future price direction. Technical analysts are sometimes referred to as "chartists" because they rely almost exclusively on charts for their analysis.

Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given commodity/security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume and/or open interest figures with their study of price action.

Money managers, traders and investors who find ways to outperform the market must also remain flexible and innovative. A method that works today does not mean it will work tomorrow.

The Beginning of Technical Analysis

At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years.

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, market strategist, technical analysts, fundamental analysts and many others. It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

A technician believes that it is possible to identify a trend, and market turning points, invest or trade based on the trend and make money as the trend, or turning points unfolds. Because technical analysis can be applied to many different timeframes, it is possible to spot both short-term and long-term trends.

The IBM chart below illustrates a view on the nature of the trend. The broad trend is up, but it is also interspersed with trading ranges. In between the trading ranges are smaller up trends within the larger uptrend. The uptrend is renewed when the stock or commodity breaks above the trading range. A downtrend begins when the stock or commodity breaks below the low of the previous trading range.

Random Walk Theory:

The basic "random walk premise" is that price movements are totally random. Prices move at random and adjust to new information as it comes available. The adjustment to this new information is so fast that it is virtually impossible to profit from it. Furthermore, news and events are also random and trying to predict these (fundamental analysis) is also a lesson in futility. While there are some good points to be gleaned from the random walk theory, it appears to be a bit dated and does not accurately reflect the current investment climate. Random walk theory was introduced over 25 years ago when institutions dominated the market. These institutions had superior access to resources and the individual was at the mercy of the large brokerage houses for quality research. With the advent of online trading, power and influence are shifting from the institutions to the individual. Resources are now widely available to all at minimal cost, if not free. Not only can individuals access information, but the internet ensures that everyone will receive it almost instantaneously. They also have access to real time data and can trade like the pros. With the availability of real time data and almost instant executions, individuals can act on information like never before.

» General Chart Analysis:

Pattern analysis may seem straightforward, but it is by no means an easy task. Schabacker states: ?The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures and recalling what they generally forecast. Any general chart is a combination of countless different patterns, some being continuation patterns and some reversal patterns, and its accurate analysis depends upon constant study, long experience and knowledge of all the fine points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each other, to appraise the entire picture in the light of its most minute and composite details as well as in the recognition of any certain and memorized formula.

To name just a few there are; Double tops and bottoms, Head and Shoulder tops and bottoms, Wedges, Flags, Triangles, Channels, Gaps (four types), Key Reversals, Island reversals, and more. There are also Candlestick charts which provide a different way of looking at, and analyzing, the same basic price data, open, high, low, and close. A few other tools used on charts are Trend Lines, Support and Resistance areas, percentage retracements, Fibonacci retracements, Time cycles, Elliot Wave Theory Analysis, Gann Analysis, and more. Technical Indicator Analysis:

» There are many ways to crunch the numbers and endless combinations. Here is a list of some of the more popular     Technical Indicators:

• Accumulation Distribution
• Advance-Decline lines and ratios
• Arms Index (TRIN)
• Bollinger Bands
• Commodity Channel Index
• Moving Averages (of various types)
• Moving Average Convergence Divergence
• McClellan Osc
• Momentum
• On Balance Volume
• Parabolic SAR
• Relative Strength Index (RSI)
• Stochastic (fast and slow)
• Volatility

Markets move on anticipation, and often reverse on realization! A twist on the old stock market adage buys the rumor, sell the news.

Trade the expectation, reverse on the realization

Fundamental Analysis

Aside from technical analysis, another primary approach to analyzing currency market fluctuations is called fundamental analysis. Fundamental analysis is the examination of economic indicators, asset markets and political considerations when evaluating a nation's currency in terms of another. The key to fundamental analysis is to gather and interpret this information and act before the information is incorporated into the currency price. The lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.

Here some major fundamental factors that can affect currency prices:

1. Decisions on interest rates made by central banks such as the US Federal Reserve or the European Central bank (ECB) monthly.
2. Quarterly GDP figures. Only preliminary national GDP figures generally have the effect of changing market sentiment.
3. Market sentiment data. Market expectations are formed from one week to two days before the event. Participants become well positioned based on expectations. If the figures are not a surprise, profit taking is often the only result.
4. Political Events. National elections, the September 11th attacks, and the war in Iraq are examples of events that have affected currency values.
5. Major indices. Inflation indices, Institute of Supply Management (ISM) in the US and the Purchasing Management Index (PMI) in Europe are also carefully followed by traders.
6. National industrial production figures.
7. US no farm payrolls (indicating new jobs created), Michigan sentiment figures in the US, the western German business climate or IFO index, and the Tankan quarterly survey in Japan

There are times that governments through their Central Banks stand in the way of market forces impacting their currencies, and hence, intervene to keep currencies from deviating markedly from undesired levels. Currency interventions have a notable and oftentimes temporary impact on FX markets. A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in concerted intervention in which it collaborates with other central banks for a much more pronounced effect. Alternatively, some countries can manage to move their currencies, merely by hinting, or threatening to intervene.

» Central Banks

Board of Governors of the Federal Reserve System http://www.federalreserve.gov/ Bank Of England http://www.bankofengland.co.uk/ European Central Bank http://www.ecb.int/ Bank Of Japan http://www.boj.or.jp/en/index.htm Reserve Bank Of Australia http://www.rba.gov.au/ Banque de France http://www.banque-france.fr/gb/home.htm Bank Of Canada http://www.bankofcanada.ca/en/ Deutsche Bundesbank http://www.bundesbank.de/index.en.php Swiss National Bank http://www.snb.ch/e/index3.html

This booklet ends where it began, with the statement that it is not our intention to suggest either that you should or should not participate in futures markets. Low margins, high leverage, frequently volatile prices, and the continuing needs of hedgers to manage the price uncertainties inherent in their business create opportunities to realize potentially substantial profits. But for each such opportunity, there is commensurate risk. Futures trading, as stated at the outset, is not for everyone.

Hopefully, the preceding pages have helped to provide a better understanding of the opportunities and the risks alike, as well as an understanding of what futures markets are, how they work, who uses them, alternative methods of participation and the vital economic function that futures markets perform.

In no way, it should be emphasized, should anything discussed herein be considered trading advice or recommendations. That should be provided by your broker or advisor. Similarly, your broker or advisor-as well as the exchanges where futures contracts are traded-are your best sources for additional, more detailed information about futures trading.

» Risk Statement:

Effects of Leveraged Trading

The risk of loss in leveraged foreign exchange trading can be substantial. You may sustain losses in excess of your initial margin funds. Placing contingent orders, such as "stop-loss" or "stop-limit" orders, will not necessarily limit losses to the intended amounts. Market conditions may make it impossible to execute such orders. You may be called upon at short notice to deposit additional margin funds. If the required funds are not provided within the prescribed time, your position may be liquidated. You will remain liable for any resulting deficit in your account. You should therefore carefully consider whether such trading is suitable in light of your own financial position and investment objectives.

Off-Exchange Transactions

Spot Forex Transactions are not conducted on organized futures exchanges. The firm with which you deal may be acting as your counter party to the transaction. It may be difficult or impossible to liquidate an existing position, to assess the value, to determine a fair price or to assess the exposure to risk. For these reasons, these transactions may involve increased risks

Market Opinions Expressed By Representative

Any opinions expressed by representatives of the firm as to the future direction of prices of specific currencies do not necessarily represent those of the Company, and are not guaranteed in any way. In no event shall AVS CARTER with either of the group company have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party as a result of the information provided on the site, or any delays, inaccuracies, errors in or omissions of information

» - A -

Accrual -
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.

Actualize -
The underlying assets or instruments which are traded in the cash market.

Adjustable Peg -
Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency , often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.

Adjustment -
Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

Agent Bank -
(1) A bank acting for a foreign bank. (2) 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 Demand -
Total 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 risk -
Size of exposure of a bank to a single customer for both spot and forward contracts.

Aggregate Supply -
Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

Agio -
Difference 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.

Appreciation -
Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage -
The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage channel -
The range of prices within which there will be no possibility to arbitrage between the cash and futures market.

Around -
Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation -
Dividing instrument funds among markets to achieve diversification or maximum return.

Ask -
The price at which the currency or instrument is offered.

Asset -
In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal.

At best -
An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better -
An order to deal at a specific rate or better.

Authorized Dealer -
A financial institution or bank authorized to deal in foreign exchange.

» - B -

Back Office -
Settlement and related processes.

Backwardation -
Term referring to the amount that the spot price exceeds the forward price.

Balance of Payments -
A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Band -
The range in which a currency is permitted to move. A system used in the ERM.

Bank line -
Line of credit granted by a bank to a customer, also known as a " line".

Bank Rate -
The rate at which a central bank is prepared to lend money to its domestic banking system.

Base currency -
United States Dollars. The currency to which each transaction shall be converted at the close of each position.

Basis -
The difference between the cash price and futures price.

Basis point -
For most currencies, denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%). For such currencies as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.

Basis trading -
Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basket -
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear market -
A prolonged period of generally falling prices.

Bear -
An investor who believes that prices are going to fall.

Bid -
The price at which a buyer has offered to purchase the currency or instrument.

Book -
The summary of currency positions held by a dealer, desk, or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the close of the day, e.g. from London to New York.

Bretton Woods -
The 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.

Broker -
Brings buyers and sellers together for a commission paid by the initiator of the transaction. Brokers do not take market positions.

Bull market -
A prolonged period of generally rising prices.

Bull -
An investor who believes that prices are going to rise.

Bundesbank -
Central Bank of Germany.

Buying Rate - Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

» - C -

Cable -
A term used in the foreign exchange market for the US Dollar/British Pound rate.

Capital Risk -
The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.

Carry -
The interest cost of financing securities or other financial instruments held.

Cash Delivery -
Same day settlement.

Cash Delivery -
Same day settlement.

Cash market -
The market in the actual financial instrument on which a futures or options contract is based.

Cash and Carry -
The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

Cash Settlement -
A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central Bank -
A nations main regulatory bank. Traditionally, its primary responsibility is development and implementation of monetary policy.

Central Rate -
Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.

Chartist -
An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Clean float -
An exchange rate that is not materially effected by official intervention.

Closed position -
A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission -
The fee that a broker may charge clients for dealing on their behalf.

Confirmation -
A memorandum to the other party describing all the relevant details of the transaction.

Contract -
An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

Conversion Account -
A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.

Conversion -
The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion arbitrage -
A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

Convertible currency -
A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey -
Slang for the Danish krone.

Correspondent Bank -
The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Counterparty -
The other organisation or party with whom the exchange deal is being transacted.

Countervalue -
Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country risk -
The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organisations generate country risk tables.

Cover -
(1) To take out a forward foreign exchange contract. (2) To close out a short position by buying currency or securities which have been sold.

Covered Arbitrage -
Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin -
The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

Crawling peg -
A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with certain economic or market indicators.

Credit Risk -
Risk of loss that may arise on outstanding contracts should a counter party default on its obligations.

Cross deal -
A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross rates -
Rates between two currencies, neither of which is the US Dollar.

Current Account -
The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

» - D -

Day trader -
Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Deal date -
The date on which a transaction is agreed upon.

Deal Ticket -
The primary method of recording the basic information relating to a transaction.

Dealer -
One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts.

Deflator -
Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Delivery date -
The date of maturity of the contract, when the exchange of the currencies is made This date is more commonly known as the value date in the FX or Money markets.

Delivery Risk -
A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Depreciation -
A fall in the value of a currency due to market forces rather than due to official action.

Desk -
Term referring to a group dealing with a specific currency or currencies.

Details -
All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.

Devaluation -
Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Direct quotation -
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

» - E -

Easing -
Modest decline in price.

Economic Indicator -
A statistics which indicates current economic growth rates and trends such as retail sales and employment.

ECU -
European Currency Unit.

EDI -
Electronic Data Interchange.

Effective Exchange Rate -
An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

EFT -
Electronic Fund Transfer.

EMS -
European Monetary System.

European Monetary System -
A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

Exchange control -
Rules used to preserve or protect the value of a countries currency.

Exotic -
A less broadly traded currency.

Exposure -
In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate. There are three primary types of exposure:

1. Economic: The change in future earning power and cash flow arising from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
2. Transnational: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or could have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
3. 1.Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of subsidiaries and affiliates known as accounting exposure.

» - F -

Fast market -
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.

Fed Fund Rate -
The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

Fed -
The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Reserve System -
The central banking system in the United States.

Fill or Kill -
An order which must be entered for trading, normally in a pit three times, if not filled is immediately canceled.

Fisher Effect -
The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fixed exchange rate -
Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible exchange rate -
Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating exchange rate -
An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

FOMC -
Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.

Foreign Exchange -
The purchase or sale of a currency against sale or purchase of another.

Forex -
Term commonly used when referring to the foreign exchange market.

Forex Club -
Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of Association Cambiste International.

Forex Signals -
A software or service designed to broadcast buy/sell recommendations to a subscriber base.

Forward margins -
Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Operations -
Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright -
A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Rate -
Forward rates are quoted in terms of forward points , which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefor the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.

Free Reserves -
Total reserves held by a bank less the reserves required by the authority.

Front Office -
The activities carried out by the dealer , normal trading activities.

Fundamentals -
The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

FX -
Foreign Exchange.

» - G -

G7 -
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

G10 -
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gap -
A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Going long -
The purchase of a stock, commodity, or currency for investment or speculation.

Going short -
The selling of a currency or instrument not owned by the seller.

Gold Standard -
The original system for supporting the value of currency issued. The was that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Good until canceled -
An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

Grid -
Fixed margin within which exchange rates are allowed to fluctuate.

Gross Domestic Product -
Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross National Product -
Gross domestic product plus " factor income from abroad" - income earned from investment or work abroad.

- H -

Hard currency -
Any one of the major world currencies that is well traded and easily converted into other currencies.

Head and Shoulders -
A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedge -
The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

Hedged position -
One open buy position and one open sell position in the same currency.

Hit the bid -
Acceptance of purchasing at the offer or selling at the bid.

» - I -

IMF -
International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM -
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatilityA measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Implied Rates -
The interest rate determined by calculating the difference between spot and forward rates.

Indicative quote -
A market-maker's price which is not firm.

Inflation -
Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial margin -
The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-bank rates -
The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Interest Arbitrage -
Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest parity -
One currency is in interest parity with another when the difference in the interest rates is equalized by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

Interest rate Swaps -
An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Internationalization -
Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention -
Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

» - K -

Kiwi -
Slang for the New Zealand dollar.

» - L -

Leading Indicators -
Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Liability -
In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Limit order -
A request to deal as a buyer or seller for a foreign currency transaction at a specified price, or at a better price, if obtainable.

Liquidation -
Any transaction that offsets or closes out a previously established position.

Liquidity -
The ability of a market to accept large transactions.

» - M -

Maintenance margin -
The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.

Make a market -
A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float -
When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin call -
A claim by one's broker or dealer for additional good faith performance monies usually issued when an investor's account suffers adverse price movements.

Margin -
The amount of money or collateral that must be, in the first instance, provided or thereafter, maintained, to ensure against losses on open contracts. Initial must be placed before a trade is entered into. Maintenance or Variation margin must be added to initial to maintain against losses on open positions. Sometimes herein the amount that needs to be present to establish or thereafter maintained is sometimes herein referred to as necessary margin.

Mark to market -
The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market maker -
A market maker is a person or firm authorized to create and maintain a market in an instrument.

Market order -
An order to buy or sell a financial instrument immediately at the best possible price.

Micro economics -
The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-price or middle rate -
The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Minimum price fluctuation -
The smallest increment of market price movement possible in a given futures contract.

Monetary Base -
Currency in circulation plus banks' required and excess deposits at the central bank.

Moving Average -
A way of smoothing a set of data, widely used in price time series.

» - N -

Net Position -
The amount of currency bought or sold which have not yet been offset by opposite transactions.

» - O -

Odd Lot -
A non standard amount for a transaction.

Offer -
The price at which a seller is willing to sell. The best offer is the lowest such price available.

Offset -
The closing-out or liquidation of a futures position.

Off-shore -
The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Overnight limit -
Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

Overnight -
A deal from today until the next business day.

» - P -

Parity -
(1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency.

Parities -
The value of one currency in terms of another.

Pegged -
A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pip -
One unit of price change in the bid/ask price of a currency. For most currencies, it denotes the fourth decimal place in an exchange rate and represents 1/100 of one percent (.01%).

Position -
The netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short ( more currency sold than bought).

Profit Taking -
The unwinding of a position to realize profits.

» - Q -

Quote -
An indicative price. The price quoted for information purposes but not to deal.

» - R -

Rally -
A recovery in price after a period of decline.

Range -
The difference between the highest and lowest price of a future recorded during a given trading session.

Rate -
(1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution.

Reaction -
A decline in prices following an advance.

Reciprocal currency -
A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Resistance Point or Level -
A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.

Revaluation -
Increase in the exchange rate of a currency as a result of official action.

Revaluation rate -
The rate for any period or currency which is used to revalue a position or book.

Risk management -
The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Risk Position -
An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Rollover -
An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Round trip -
Buying and selling of a specified amount of currency.

» - S -

Same day transaction -
A transaction that matures on the day the transaction takes place.

Selling rate -
Rate at which a bank is willing to sell foreign currency.

Settlement date -
The date upon which foreign exchange contracts settle.

Settlement Risk -
Where a payment is made to a counter party before the counter value payment has been made. The risk is that the counter party's payment will not be received.

Short sale -
The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term interest rates -
Normally the 90 day rate.

Sidelined -
A major currency that is lightly traded due to major market interest being in another currency pair.

Slippage -
Refers to the negative (or depreciating) pip value between where a stop loss order becomes a market order and where that market order may be filled.

Soft Market -
More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot -
(1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot next -
The overnight swap from the spot date to the next business day.

Spot price/rate -
The price at which the currency is currently trading in the spot market.

Spread -
(l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Square -
Purchase and sales are in balance and thus the dealer has no open position.

Squawk Box -
A speaker connected to a phone often used in broker trading desks.

Squeeze -
Action by a central bank to reduce supply in order to increase the price of money.

Stable market -
An active market which can absorb large sale or purchases of currency without major moves.

Standard -
A term referring to certain normal amounts and maturities for dealing.

Sterilization -
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling -
British pound, otherwise known as cable.

Stocky -
Market slang for Swedish Krona.

Stop-Loss order -
Order to buy or sell at the best available price when a given price threshold has been reached.

Support levels -
When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further down ward movement. See resistance point.

Swap price -
A price as a differential between two dates of the swap.

Swap -
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.

Swissy -
Market slang for Swiss Franc.

» - T -

Technical Correction -
An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Thin market -
A 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 Dollars -
A 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.

Tick -
A minimum change in price, up or down.

Today/Tomorrow -
Simultaneous 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 date -
The date on which a trade occurs.

Tradeable amount -
Smallest transaction size acceptable.

Transaction date -
The date on which a trade occurs.

Transaction -
The buying or selling of currencies resulting from the execution of an order.

Two Tier market -
A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two-Way quotation -
When a dealer quotes both buying and selling rates for foreign exchange transactions.

» - U -

Uncovered -
Another term for an open position.

Under-valuation -
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

Up tick -
A transaction executed at a price greater than the previous transaction.

» - V -

Value 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 Spot -
Normally settlement for two working days from today. See value date.

Volatility -
A measure of the amount by which an asset price is expected to fluctuate over a given period.

Vostro Account -
A 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.

» - W -

Wash trade -
A matched deal which produces neither a gain nor a loss.

Whipsaw -
Term for where a trader takes a position, then has to move against it triggering stop loss limits and liquidation of positions, then having to move in the original direction. Normally occurs in volatile markets.

Working day -
A 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).