Making Sense of Foreign Exchange Lingo

With every market comes a new vocabulary. While the stock, bond and other more “traditional” markets usually share some very basic vocabulary, the foreign exchange market has lingo all of its own.

Currency Pairs

The most confusing of foreign exchange lingo are the names assigned to individual currency pairs. Without first knowing the nicknames, understanding the rest can be quite difficult. The first word you should know defines a group, the majors. The “majors” are the eight major currency pairs on the foreign exchange market including the Euro, US Dollar, Japanese Yen, British Pound, Australian Dollar, Swiss Franc, and the Canadian Dollar. Foreign exchange brokers often offer thinner spreads on pairs made up of the “majors” since they are the most actively traded.

Individual currency pairs also have their own nicknames commonly used by traders. “Cable” is one of the most popular nicknames on the foreign exchange market and is assigned to the GBPUSD pair. The name became common due to the fact that quotes for the GBPUSD were transferred by cable from London to New York City. Other popular names are “fiber” for the EURUSD, “loonie” for the USDCAD, “Aussie” for AUDUSD, and “Kiwi” for the NZDUSD pair on the foreign exchange market.

You'll also hear on the foreign exchange market the use of the word “cross.” Cross describes a pair that does not include the US dollar. The AUDJPY would be a “cross currency pair.”

Units, Mini Lots, Lots and Contracts

Next, we have another very important element of the foreign exchange market: the size of each order. A unit, as commonly referred to by no-minimum foreign exchange brokers, is one piece of currency. One dollar is a unit. A lot refers to 100,000 units of currency, and a mini lot refers to 10,000 units of currency on the foreign exchange market. Contracts are a name assigned to lots on the foreign exchange futures market, where a contract for the right to buy a specific currency with another is written in the future.

The Spread

A number of brokers still push in their advertising that the foreign exchange market is commission free. While it is, in fact, commission free, foreign exchange brokers make money on the spread, or the difference between the bid or ask price.

For each pip in the spread on one lot, the broker earns 10 leading units. Thus, if you were to buy one lot GBPUSD at a 4 pip spread, the broker would earn 40 British Pounds. This is very important to understand, as the lack of commissions does not mean trades are free, and it actually means that as your lot size goes up, so does the cost of each trade. A 10 lot trade, for example, would cost a whopping 400 British Pounds or roughly $640.

While the forex market does have a learning curve, the market terminology itself is mostly standard from market to market. Words like market order, limit orders, or “quotes” are the same from bonds, to stocks, to currencies and futures.
Tim Ord
Ord Oracle

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