In order to be able to profit from market moves and become successful at forex trading, certain forex terms has to be understood. Otherwise an investor would not be able to interpret if a specific economic data, monetary policy event or speech by a central bank member is going to be positive or negative for a currency.
Employment, growth and inflation are the macroeconomic terms that you are going to encounter on daily basis during your forex trading journey. Since central bank monetary policies are revolving around natural rate of employment, inflation target and economic growth, markets are rattled very often by release of those three economic indicators or by the comments and speeches from central bankers on these three indicators. However, looking at weekly economic calendar, one cannot see term ‘inflation’. Rather the terminology on an economic calendar that refers to inflation is Consumer Price Index (CPI). Likewise, GDP refers to economic growth; unemployment rate, earnings and unemployment claims relate to employment.
Country Specific Terms for Inflation and Employment
Different countries could express certain economic terms in different ways as some central banks give more weight to certain economic indicators compared to others. For example, in the United States, there are four important sets of data on employment which are Non-Farm Employment Change, Unemployment Rate, Average Hourly Earnings and Unemployment Claims of which first three indicators are released bimonthly and the last one is out on Thursday of every week.
On inflation, there are three sets of critical monthly data from the United States; PCE Price Index, CPI and PPI. PCE refers to Personal Consumption Expenditures and Federal Reserve Bank uses PCE Price Index for inflation targeting. Fed conducts monetary policy to bring PCE Price Index at or around 2.00 per cent. CPI is Consumer Price Index which involves different basket of consumer goods with different weights compared to PCE Price Index. Last but not least, PPI is Producer Price Index which is considered as a cost indicator that is incurred by producers and will be passed on to consumers in the future.
On the other hand, three important sets of employment data are released from the United Kingdom; Unemployment Rate, Average Earnings Index and Claimant Count Change. Average Earnings Index is equivalent to earnings indicator from the US but differs in a significant way; it is calculated as three month moving average while the US’s Average Hourly Earnings indicator represents monthly change in hourly earnings that businesses pay for labor.
Claimant Count represents number of applicants for unemployment benefits over a month and equals to the Unemployment Claims from the US however as you might have already realized with a major difference; Claimant Count is monthly basis while Unemployment Claims are published every week.
Even though all those economic indicators are pertaining to the same phenomenon, they are expressed using different terminology. A trader must be able to distinguish the difference and know the specific currency that will be affected when those economic data are released. Besides, knowing what an economic indicator actually represents and the importance of the indicator for a central bank would enable traders to predict the magnitude of the influence on the related currency.
Forex Trading Jargon
Trading has its own special vocabulary just like other disciplines such as Computer Science, Sociology, etc… has its own. Following expressions are used by both market participants and central bankers very frequently and understanding their meaning will improve your financial literacy and make you a more profitable trader.
Long and Short
When a trader buys a currency pair or another financial instrument with the expectation that value of the pair is going to raise that trader is called being long. For example, when you buy EUR/USD, you are long EUR/USD. Contrarily, being short indicates that the trader sold the pair with the intention of profiting in the case price of the pair falls.
Bullish and Bearish
A trader who predicts that a pair’s value will go up over time and buys the pair, (or takes long position), is said to be bullish. Contrarily, a trader who predicts that a pair’s value will decline and sells the pair (or takes short position) is said to be bearish. For example, one can have a bullish view on USD and buy USD versus another currency. On the other hand, when a trader has a bearish view on USD, he/she is expected to sell USD.
Hawkish and Dovish
A central bank or member of a central bank is said to have a hawkish monetary policy stance, if she / he touts risks of high inflation and supports hiking rates. On the other hand, a central bank or a member is called to be dovish, if he/she is more worried about weak economic growth and supports lowering interest rates.
Nicknames for Pairs and Currencies
Some pairs and currencies may be called different than their informal names on media, internet and books of which the most popular ones are being as following;
USD = Greenback
EUR/USD = Fiber
GBP/USD = Cable
AUD = Aussie
CAD = Loonie
NZD = Kiwi
Fed = Federal Reserve Bank
FOMC = Federal Open Market Committee, monetary policy-setting body within Federal Reserve Bank
ECB = European Central Bank
BoE = Bank of England
MPC = Monetary Policy Committee of Bank of England
BoJ = Bank of Japan
SNB = Swiss National Bank
RBA = Reserve Bank of Australia
RBNZ = Reserve Bank of New Zealand
PBoC = People’s Bank of China
Buba = Bundesbank
Don’t be surprised if a high profile market analyst says on TV that he/she is bullish on Greenback because of the hawkish policy stance of Fed or she / he recommends short position on Cable due to a weaker than expected employment report from the United Kingdom.