Forex Signals Glossary

Below you can find some common terms used in my forex signals and technical analysis, and also some general terms to help you navigate the forex lingo:

ATR (Average True Range) - The Average True Range, or ATR, is an indicator that is used to help gauge the volatility of a given currency pair on any timeframe. Many traders use this information to help determine their stop size. For example, if  the EUR/USD shows an ATR of 0.0031 on the 60 minute charts then a day trader might use a stop-loss of 31 pips (before spread). This would help to weed out any natural "whip-saw" motion of the currency pair and protect your original trade idea. Advanced: the average/default period for ATR is 14, meaning it takes into account the last 14 candlesticks on the timeframe you are looking at.

bearish outlook - means that traders think the pair is over-valued and will decrease in the future. For example, if the GBP/USD had a bearish outlook you would expect its price to decline in the future. (see also: bullish)

bearish reversal - A bearish reversal generally takes place when a pair meets the top of its channel or other resistance after an upward trend, reverses direction and then proceeds to decline in price. Several techniques are used to detect bearish reversals, including overbought oscillators, resistance areas and bearish reversal candlesticks.

broker - the broker is the third-party that mediates the buying and selling of currencies. For example, if you want to buy euros you don't fly to Europe and visit a bank there - you get an account through a broker who purchases those euros on your behalf. Usually brokers charge a small fee, either a commission or a spread.

bullish outlook - means that traders think the pair is unde-valued and will increase in the future. For example, if the AUD/USD had a bullish outlook you would expect its price to increase in the future. (see also: bearish)

bullish reversal - A bullish reversal generally takes place when a pair meets the bottom of its channel or other support after a downward trend, reverses direction and then proceeds to increase in price. Several techniques are used to detect bullish reversals, including oversold oscillators, support areas and bullish reversal candlesticks.

breakout (also called a break)- a "break" or "breakout" occurs when an inportant level of support/resistance has been broken and the pair may be starting a new trend. For example, if the the level at 1.4000 had been providing resistance (meaning the price action had been restrained to below this level)  to the EUR/USD pair for the past several months then many traders would  be looking to sell at this level. However if a sustained break above 1.4000 took place a new trend might be in place and a breakout trade, in this case going long above 1.4000, might be entered. In the case of a break many traders consider the broken level to have switched its direction of pressure, meaning a former level of support is now a resistance level and a former level of resistance would be a new support level.

breakout trade - a breakout trade is a trade entered based on the assumption that the break of an important support/resistance level means a new trend has taken hold of the currency. See break for further information and trade example.

Cable - nickname for the GBP or British pound

candlesticks - the most popular method of viewing currency charts as traders can very quickly get a lot of information about the currency pair, including highs, lows, open and close prices. Generally candlesticks are two colors with one color meaning it is a bullish candlestick (close price is above its open price) and the other color a bearish candlestick (close price is below its open price)

candlestick signals - if you think about what a candlestick is - the visual representation of where hundreds or even millions of traders think the currency pair is headed - entire trading systems have been developed that study the meanings of various candlestick patterns and what they mean for forecasting the direction of markets. Candlestick signals are used by traders to predict price movement, entry/exit points, trend reversals and more.

channel - two parallel lines on a chart that contain current price action. The channel top should connect at least two highs on the currency charts and the channel bottom should connect at least two lows on the charts. Channel tops are used as resistance (areas where a bearish reversal might take place) and channel bottoms are used as support (areas where a bullish reversal might take place) by traders. Generally speaking the larger the time frame the more reliable channel support/resistance are. Also it is generally considered less-risky to trade in the direction of the overall trend of a channel (so if overall trend is bullish you would only look for buying opportunities at channel bottom and ignore channel tops).

confirmation signal - used by traders to confirm the direction of their trade with the goal of reducing the amount of risk you take on a given trade. Different traders prefer different tools as confirmation signals - candlesticks, technical indicators, news events

consolidation pattern - certain chart patterns (examples are the pennant, the flag and the broadening formations) that indicate a market is consolidating its position. Consolidation periods are thought to indicate periods of indecision among traders for the direction of a pair as traders take profit more often on shorter ranges. Consolidation patterns are important to recognize because frequently a pair can explosively leave a pattern, leading to solid profits for the well-positioned trader with good money management.

crosses - crosses are basically pairs that do not include the USD.  For example, the GBP/JPY and EUR/JPY are both popular crosses. The GBP/JPY is a cross of the GBP/USD and the USD/JPY.

dips - a dip is a drop in the price action of a currency. Traders frequently wait for dips to buy in uptrend markets or in overbought markets.

doji - candlestick signal that could possibly signal a reversal in the direction of the price. Can be bullish or bearish, and ideally have the same close/open price with long wicks on either end.

dollar - the US currency and the main currency of forex markets. Also called the greenback.

ECB - the European Central Bank, or ECB, is one of the most influential banks in currency markets only behind the US Fed. The ECB controls the monetary policy for all member-states of the eurozone. Esablished by the European Union and based in Germany.

entry order - an order to enter the markets at a specified price. Entry orders can be executed while traders are away from their computer, for taking profit, limited losses and for a variety of other purposes. Many traders use entry orders to remove the emotional aspect of trading.

euro - the monetary unit of the member states of the European Union, including Germany, France, Spain, etc.

event-risk - Also known as news events. Term used to describe a possible change in the fundamental analysis of a pair. For example, a rate change decision by the Fed or ECB is a very high event-risk as it has the ability to make markets significantly move. Even traders who do not trade the news must be aware of significant event risks. Markets typically tend to have poor liquidity just before a major event-risk and are susceptible to "whip-saw"

interest rate - are the major fundamental driving-factor in the exchange rate of currencies. In layman's terms the interest rate is the amount of money a government will give to you just for holding their currency. Governments change interest rates to drive invesmtent in their countries and also to control inflation. Typically currencies with higher interest rates tend to do better against currencies with weaker interest rates. News regarding possible interest rate changes can drastically effect markets in the short- and long-term.

Fed (see Federal Reserve) 

Federal Reserve - the Federal Reserve, or Fed, is the central bank of the United States. It is in charge or monetary policy, including interest rate decisions and its meetings are watched closely by traders for any hint of an interest rate change.

forex signals - used by traders to help determine when and where to enter and exit markets. 

fundamental analysis - fundamental analysis is the analysis of a currencies main driving economic factors (such as interest rate, inflation, unemployment data, manufacturing data, etc.) with the goal of determining the future exchange rate of a given currency. Trading news events is a form of fundamental analysis.

greenback - nickname for the US dollar.

indicators - see technical indicators

kiwi - nickname for the New Zealand dollar.

lagging indicator  - an indicator that basically tells you which way the trend is already going. For example, a moving average will tell you the average price of a pair over the past number of specified time frames, but won't tell you by itself when a possible reversal might occur. Another way to think of lagging indicators is that they are reactionary and only reflect what has already happened.

leading indicator - indicators that attempt to predict future price action. Most fundamental analysis attempts to use leading indicators such as news, central bank meeting minutes and various economic data to attempt to ascertain the future direction of a currency. Oscillators also are leading indicators that attempt to identify possible reversals in price action.

limit (or take-profit order) - an entry order used to close your position for a profit at a specified price point. Usually used in conjection with a stop-loss entry order to limit your losses if the currency moves against your position.

long position - a position in anticipation of a currency pair gaining value. For example, if a trader expects the euro to gain value against the US dollar then that trader could "go long" or enter a long position on the EUR/USD pair (which is technically buying euros and selling US dollars at the same time). Opposite of a short position.

long squeeze - a bearish scenario where a high percentage of traders are long in a currency pair when the market begins to move against them. Since most traders use stop-loss entry orders to limit losses or will close out positions if they move against them too much long squeezes can accelerate as stops are tripped to cover losses. Also since most of the traders are already long their buying power may be limited as the pair moves against them, further accelerating the bearish move. For example, lets say 80% of speculative traders are long the EUR/USD pair. If the pair starts moving downward on heavy bank selling then two things happen: a) traders are unable to buy further as they are already long, and b) as their stop-loss orders get tripped the pair will accelerate downward.

market order - an order place at the current market price. Also known as an "At best price" order.

news (aka "trading the news") - see fundamental analysis

oscillator - a type of technical indicator that typically "oscillates" between 0 and 100 and lets traders know when a pair is oversold or overbought. For example the RSI, or Relative Strength Index, uses the change from one closing price to the next to tell you when a pair is oversold or overbought. Other common oscillators are the stochastic and parabolic SAR though there are many, many more.

overbought - a market condition when a pair has been heavily bought. Many traders will look to go short in an overbought market as they believe other traders will have to go short to cover their longs and take profit, driving the price down.  Most frequently "overbought" conditions are detected with an oscillator.

oversold - a market condition when a pair has been heavily sold. Many traders will look to go long in an oversold market as they believe other traders will have to go long to cover their shorts and take profit, driving the price up.  Most frequently "oversold" conditions are detected with an oscillator.

pip - the smallest amount by which a currency pair can change (though many brokers now offer fractional pips). Usually equivalent to $0.0001 for US dollar-related pairs. So for example if the EUR/USD goes from 1.4000 to 1.4015 that is a positive change of 15 pips.

pound - The British unit of currency. Also known as cable.

rally - opposite of a dip. When a currency pair increases in value. Traders frequently wait for rallies to sell in downtrend markets or in oversold markets.

range - an area between support and resistance where a pair's price action is confined. For example if the EUR/USD is said to be "ranging between 1.4000-1.4100" then 1.4000 is pair support and 1.4100 is resistance and the pair is expected to remain between these areas for the time being. Many traders develop specific trading strategies for range-bound markets.

range trade - a trade meant to profit off of the up an down motion of a currency pair's range.

resistance - an area that is expected to limit any pair's upward motion. For example if 1.4100 is said to be EUR/USD resistance this means that if the pair rises then that area is expected to "resist" any attempts to rise higher than 1.4100. Many areas look for signals of a bearish reversal near resistance areas.

retracement - when a pair's price action retraces its previous movement. For example if a pair rises 100 pips and then falls 50 pips it could be said that the pair "rose 100 pips then had a 50% retracement"

RSI (Relative Strength Index) - an oscillator that uses the change from one closing price to the next to tell you when a pair is oversold or overbought. Default ranges between 0 and 100, with a value less than 30 meaning "highly oversold" and more than 70 meaning "highly overbought"

short position - a position in anticipation of a currency pair losing value. For example, if a trader expects the euro to lose value against the US dollar then that trader could "go short" or enter a short position on the EUR/USD pair (which is technically selling euros and buying US dollars at the same time). Opposite of a long position.

short squeeze - a bullish scenario where a high percentage of traders are short in a currency pair when the market begins to move against them. Since most traders use stop-loss entry orders to limit losses or will close out positions if they move against them too much short squeezes can accelerate as stops are tripped to cover losses. Also since most of the traders are already short their buying power may be limited as the pair moves against them, further accelerating the bullish move. For example, lets say 80% of speculative traders are short the AUD/USD pair. If the pair starts moving upward on heavy bank buying then two things happen: a) traders are unable to sell  further as they are already short, and b) as their stop-loss orders get tripped the pair will accelerate upward.

spread - the amount between your brokers sell and buy price. For example if your broker will allow you to sell the EUR/USD at 1.4000 and buy at 1.4003 then your spread is the difference, or 3 pips. Your broker keeps the difference as a fee.

support - an area where traders generally expect price action to remain above. For example if support for the GBP/USD is said to be at 1.3800 then if the price drops to this level traders might expect the pair to remain above this level or even to bounce off of it. Many traders look to buy near support levels.

stop-loss - an entry order used to limit losses on a position. For example, if you enter a position at 0.9500 and have a stop-loss entry at 0.9600 then you are saying you are only willing to risk 100 pips on the trade.

take-profit order - also known as a limit order.

technical analysis - analysis based on charts. Typically uses a combination of technical indicators and candlestick analysis

technical indicator - a technical analysis tool that compiles data from charts for you to interpret. For example, moving averages, RSI, Stochastics, MACD, etc. are all technical indicators.

tp - shorthand for "take-profit", which is another term for a limit order.

trendline - a support or resistance line drawn by connecting the tops or the bottoms of price action. Trendlines are basically support and resistance areas that aren't horizontal and are typical in heavily trending pairs.