Learn the Lingo (FX - spot)

I always found the foreign exchange market to be one of the simpler markets for guys "getting started." That being said, I've also found it to be one of the hardest to trade profitably. I'm guessing this primer will be relatively short because of the relatively straight-forward nature of foreign exchange spot trading. FX trading is a 24hour market and has both OTC and electronic markets. I'm going to go over the spot trading stuff here. I'll do FX derivatives another day.

First we should go over how these things are quoted. Let's say you're trading "dollar-yen." That means you're trading USDJPY. The quote is 123.12 or "one twenty-three spot one-two." Most people will just quote the decimal and say it's trading at "twelve." If I buy USDJPY that means I'm buying dollars and selling yen. The way I was taught to remember this is that YOU'RE ALWAYS BUYING THE LEAD CURRENCY. So buying USDCLP means you buy USD and sell CLP (Chilean Peso, if you're interested).

It is also worth noting that USDJPY is the same as USD/JPY and it means the yen per dollar (because some idiot in FX space apparently never took math or physics and never got the whole units/units thing down making it confusing for the rest of us). If you can quote the currencies properly and you understand how moves in currencies effect your net position, then you're set for the FX markets, really.

Pips - the small two marks on the fx quote. For USDJPY it's the part after the decimal, but for things like NZDUSD it is just the last two digits of the decimal (NZD is quoted at 0.7832).

Big figure - the third digit is often considered a "big figure." A big figure in yen is actually one yen. A big figure in NZD (New Zealand Dollar) is the third decimal point.

G7 - the set of most liquid developed country currencies: USD, JPY, EUR, GBP, CHF, CAD, AUD.

EM - emerging markets. Prime example is ZAR (Sourth African Rand). EM currencies tend to have higher interest rates than non-EM currencies, but they are also more volatile.

Cable - A catchy name for GBPUSD. Named for the cable that connects the US to Great Britain under the Atlantic.

Kiwi - A catchy name for NZD (yes, New Zealanders are often called Kiwis).

cross - a cross currency is a pair of currencies that is not so commonly quoted. Most things in the US market are quoted against USD. Thus something like AUDNZD ("Aussie-Kiwi") would be considered a cross or a cross-currency rate.

basket - a basket of currencies just refers to a set of currencies that people might look at together.

Vol - volatility. How much stuff moves around, measured in standard deviations. Vol is either looked at via historical standard deviation or implied from foreign exchange option.

Central Bank - Central banks are one of the main reasons currencies move. If a central bank intervenes in how a currency is trading, it can mean serious repercussions for the price. Central banks are the governing powers over rates and fx in a country.

Appreciation - a currency appreciates when it is worth more. Note that yen appreciates when USDJPY goes down. So if USDJPY goes from 123 to 122, the yen has appreciated. For NZDUSD, however, the NZD appreciates when the number goes from .7833 to .7892, an upward move.

Depreciation - the opposite of appreciation. If yen is appreciating when USDJPY goes from 123 to 122, then the dollar is depreciating. It's worth noting here that the dollar could be appreciating against a "basket" of currencies, but still depreciating with respect to a particular currency. For example, dollar could appreciate against everything except yen if yen just appreciates even more.

Carry - the concept of carry in all trading is the same: you make money when nothing happens. In currencies, carry trading refers to trading long a high interest rate currency and short a low interest rate currency. The popular carry trade as of this writing is JPYNZD. Japan has 0% interest rate and New Zealand has 8%. Thus, by selling JPYNZD, one is long New Zealand dollars and short Japanese yen. One borrows at approximately 0% and receives 8% interest (you receive and pay interest in all currency trades and in every currency trade you are effectively borrowing in one currency and investing in another). This makes money as long as there isn't volatility in the currency in the wrong direction.

Peg - some currencies are pegged. Being pegged means the central bank buys and sells its currency to keep the exchange rate the same. Most pegs are against the dollar, but very few currencies are still pegged. It is mostly used to minimize volatility of the currency and to ensure the currency does not appreciate, which promotes exporter businesses.

Managed - managed currencies are like pegged currencies, but the central bank only intervenes when certain things happen. Some are managed to stay within a band, some are managed to not move more than a certain percentage in a day, etc.

Guess that's all I have off the top of my head. As always, feel free to comment, ask questions, add something, etc.