Explaining Financial Language
These days Forex trading is done mostly by robots. Expert advisors, or trading algorithms, buy and sellthousands of trades per minute to profit from the smallest moves in prices. Execution is so fast that any news has an impact. To avoid sudden spikes and surges in volatility, central bankers must use a specific language. Traders also use specific language when referring to trading in general. The idea of this article is to have a look at the wording used by central bankers and traders in order to properly understand the Forex market.
Central Banking Terminology
Central bankers use specific words when addressing questions. These words and expressions are either trade-related or refer to the economic situation. When a central banker is hawkish, it means they are talking the currency up. This is positive for the respective currency, and traders buy it as a result. A statement can be hawkish, and a press conference can as well. It is the way the central bank chooses to communicate. On the opposite side, a dovish statement will result in the market participants selling the currency.
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Central bank members are therefore grouped into “hawks” and “doves”. To give you an example, the Federal Open Market Committee (FOMC) releases its minutes every 6 weeks, 3 weeks after the last meeting. These minutes show how many hawks and how many doves are on the committee, and this makes the dollar move. If there are more hawks, the dollar will be bought, as this is a hawkish development. If there are more doves, sellers will prevail. When a central bank moves on rates, it either raises or lowers them. Raising rates is referred to as hiking them, while lowering rates is known as cutting them. Economic terminology must be known in order to understand fundamental analysis and what the central bankers are saying. Below are a few examples:
- Quantitative Easing (QE). This is a programme that ran/still runs in major economies in the world, the idea being to stimulate growth and create inflation. It is considered that a moderate inflation level is needed for sustained economic growth. A QE programme consists of the central bank buying its own government’s bonds.
- TLTROs. The term stands for Targeted Long-Term Refinancing Operations, which is a programme that still runs in the Eurozone. The European Central Bank (ECB) used various LTRO and TLTRO programmes to stimulate the Eurozone economies. Under such programmes, commercial banks can borrow money from the central bank at an extremely low (even negative!) interest rate.
- Tapering. When the central bank exits the quantitative easing programme, it is said that the tapering process has started. This is positive for the currency, as the easing stops and it is the equivalent of starting a tightening cycle. The only difference is that at this moment the central bank cannot raise its rates, as it is in unconventional monetary policy territory.
From a trader’s point of view, the language used is special too. A trader buys or sells a currency pair, but this has a different terminology among Forex traders. When buying a currency pair, the traders is going long, and the price of that currency pair should move to the upside. If this happens, a profit is made. On the other hand, if a trader is sells a currency pair, they are effectively going short. A move downward in that currency pair will result in a profit. Going long or short is the result of an analysis that has been made, which can be either technical or fundamental, or both. At the end of the analysis, if the trader goes long it means they are bullish and expect higher prices. When the trader goes short or sells a currency pair, they are being bearish. As you can see, there is a difference in the terminology used by the two counterparts, central banks and traders. A central banker cannot be bullish, it can only be hawkish. Similarly, a trader can be bearish, but only a central banker can be dovish. In reality, the two things are the same, only that a trader may give a recommendation, while a central bank is only allowed to give a hint regarding the future direction of the market. This is the minimum to be known from a trader’s point of view: long vs short, and the bullish/hawkish vs bearish/dovish. However, there are many other expressions, and we have covered some in previous articles.
Currencies have “nicknames” too: the Canadian Dollar is called the Loonie, the New Zealand Dollar is called the Kiwi, the Australian Dollar is called the Aussie, and the GBP/USD pair is called the Cable. So it might be that sometimes you’ll hear about a Forex trader being bullish on cable while bearish on the main Aussie pairs. In plain English, it means he/she buys the GBP/USD pair and sells the AUD/USD, buys the EUR/AUD, and so on.
Recommended Further Reading
- Volume and Slippage – the Value of a Pip and Execution Types
– Execution is important to every Forex trade, and this article deals with the difficulties in trading large volumes with little or no slippage.
- Basic Trading Styles – At Market or with Pending Orders
– Showing the possibilities a trader has; and explaining the advantages and disadvantages of trading at the market or with pending orders.
- Pending Orders Explained
– Different types of pending orders; how to set them; where to find them on the MetaTrader platform, and much more.
- Forex Market Participants
– Who participates in the Forex market; its structure and componence; and implications of different groups.
- Trading on a Demo Account
– Explaining why trading on a demo account before going onto a live one is essential for any serious trader.
- Types of Forex Charts
– How many types of Forex charts exist; how to interpret them; and advantages and disadvantages of each type, etc.
- Basics of Technical Analysis
– What technical analysis is; why it is important; and why traders use it. Advantages over fundamental analysis are also highlighted.
Other Educational Materials
- Explaining Financial Results. Intelligent Systems in Accounting, Finance and Management Hamscher, W., 1994. , 3(1), pp.1-19.
- decomposition of global linkages in financial markets over time. Forbes, K.J. and Chinn, M.D., 2004. A Review of economics and statistics, 86(3), pp.705-722.