Currency Trading Dictionary: Forex Trading Glossary C-D
Cable
Nickname for the Great Britain Pound.
Candlestick Charts
This is a form of price presentation similar to bar charts which is used to identify localized price patterns that represent market psychology that Japanese originated in the 1600s to analyze the price of rice contracts. As with bar charts, Candlestick charts use an open, high, low and close in which the high and low are plotted as a single vertical line while the range between the open and the close is plotted as a rectangle and is referred to as the body. The lines above and below the body are referred to as “shadows”. If the close is above the open, the body is white. If the close is below the open, the body is black.
Capital Account
Measures short and long-term movements of financial assets between countries.
Capital Risk Limit
Limits on the amount of trading capital that is risked.
Central Bank
Controls a country’s money supply and is responsible for monetary policy and the maintenance of financial stability within a country. The U.S. Federal Reserve Bank is an example of a central bank.
Channel
Used to identify price resistance or support areas for short-term profit taking and to initiate positions. Channels are formed by drawing a standard trendline with a parallel line. In the case of an uptrend the parallel line runs along price highs forming a channel; in the case of a downtrend the parallel line runs along price lows.
Channel Line
A line parallel to the standard trendline that shows potential areas of price resistance or support.
Chart-Based Stops
Signal when to exit a trade, often by a break in a trendline, moving average, or other key measure of support or resistance.
Closed Trades
The listing for the liquidation of open positions by either selling long positions or buying back to cover short positions.
Commercial Banks
Trade billions of dollars daily on behalf of their customers and for their own accounts.
Commission
Brokerage fees.
Comparative Relative Strength
This is a method of measuring the relative performance of one price against another. It is normally used to compare the performance of one price item against its index or to another item.
Congestion Area or Pattern
A sideways trading range with no follow through buying or selling. It is generally characterized by short, sharp movements in price that are then reversed in a choppy, volatile manner. These will often provide support or resistance once price has broken away from the pattern.
Consolidation
A leveling off of prices, often after a swift price move up or down. Consolidation is generally comprised of one of a range of price patterns such as triangles, flags or pennants representing a pause or correction in the current trend of the market.
Continuation Patterns
Price patterns associated with market pauses or price consolidations. Continuation patterns are created by sideways price action that often narrows as the market consolidates. Continuation patterns have names like their shapes; wedges, triangles or flags. (See Congestion Area of Pattern.)
Contract
A standard trading lot, typically 100,000 units of the base currency.
Coppock
Developed by Edwin Sedgwick Coppock in 1962 as a long-term price momentum indicator for the Dow Jones Industrial Average or any other index.
Correction
A retracement of the previous major trend. When prices climb or fall too far too fast, a market often retraces part of the trend move. This situation is described as a market correction. Often the degree of the retracement is measured utilizing a Fibonacci Ratio.
Corrective Wave
(Elliott Wave)
Corrective waves are those that form corrective patterns against the main direction of the trend. For example, wave 2 corrects wave 1 and wave 4 corrects wave 3. Once a 5-wave pattern has been completed there will be a simple, or complex, correction of the entire move that will develop as a single or multiple three-wave move. The numbered phase of A-B-C waves are also corrective.
Correlation Coefficient
This is a measurement of the relationship between two variables that varies between +1 (highly correlated) and -1 (highly uncorrelated).
Counter Trend
A minor trend move that runs against the direction of the underlying major trend.
Cover
To close out a foreign currency trading position.
Credit Spread
The difference in value of two options, where the premium of the option sold exceeds the cost of the option purchased.
Cross Rate
An exchange rate between two non-U.S. Dollar currencies. Popular cross rate currency pairs include EUR/GBP, EUR/JPY and AUD/CAD.
Cup and Handle
A period of accumulation observed as a price pattern on bar charts that lasts from seven to 65 weeks. The initial price pattern is the shape of a cup or shallow ‘U’. The handle typically lasts for just one or two weeks. The handle is a slight retracement of the last rally with low trading volume during the right-hand side of the formation.
Currency
Foreign Currency (see Currency Pairs). Paper money or banknotes. Also the section of a trading screen that provides currency reference information, such as the high and low prices for a trading day.
Currency Nicknames
Many currencies and currency pairs are referred to by shortened versions of their names, or by nicknames. Examples include: Sterling, Pound & Cable (for Great Britain Pound), Kiwi (for the New Zealand Dollar), Aussie & Looney (for the Australian Dollar), Euro (for the European Currency), Goose (for the Canadian Dollar), Swissie (for the Swiss Franc).
Currency Pairs
FX trading is always conducted using currency pairs, with one currency priced in terms of another. The first currency in the pair is called the base or traded currency; the second currency is called the pricing or quote currency.
Currency Prices
In FX, currencies are priced in pairs. The first currency shown in the pair is referred to as the base or traded currency, and the second is the pricing or quote currency.
Current Account
The net result of a country’s Trade Balance and its Services Account.
Curve-Fitting
The process during the development and testing of a mechanized system where rules are created that map every event in the historical data of a security. However, since these are not applied to a previously untested section of data history the risk is for losses to occur due to the failure to ensure the system’s rules are not generic. The rules are accurate in hindsight only.
Cycle
A repetitive wave form that attempts to measure the time measurements of price highs to price highs, price lows to price lows and price highs to price lows.
Daily Range
The difference between the high price and the low price during one day’s trading.
Dark Cloud and Piercing Line
(Candlestick Reversal Pattern)
The Piercing Line is a bullish reversal in a downtrend. During this trend a long black day develops following which price opens below the low of the black day and rallies to form a long white day. The close of the white day will be below the close of the black day but above the mid point.
The pattern suggests that the underlying bearishness may be overdone and a further move higher to breach the high of the white day will confirm further gains.
A Dark Cloud is the opposite of the Piercing Line. During an uptrend a long white day develops. The following day’s open will be above the high of the white day and price then declines in a long black day to close above the white day’s close but below the mid price.
The pattern suggests that the underlying bullishness may be overdone and a further move lower to breach the low of the black day will confirm further losses.
Day Trading
Trading positions are squared up by the end of the trading day. No positions are carried overnight.
Dead Cross
A Dead Cross is created when shorter moving average crosses below a longer moving average. This is generally considered a bearish signal.
Dealer
An individual or FX brokerage firm that risks its own capital, offering buy and sell quotes in a currency market. One that consistently makes two-way prices, providing both bids and offers.
Dealing Rates (Trade Entry)
The section on a trading screen that shows prices at which you can buy and sell currencies.
Debit Spread
Buying one option and selling another option, creating a spread position where the value of the long position exceeds the value of the short position.
Delta
The percentage amount by which the price of an option changes for every dollar move in the underlying instrument.
Derivatives
An over-the-counter (OTC) or exchange-traded financial contract whose value depends on the value of the underlying instrument. Some examples are futures contracts, stock options, equity indexes, and mortgage backed securities, and OTC Forex options.
Descending Triangle
A pattern of corrective trading that develops between two converging lines where the support line is horizontal and the resistance line is declining. This pattern is generally described as a continuation pattern but can also be a reversal pattern.
Detrend
The removal of the underlying trend in price. One method of detrending prices is to subtract price from its average and represent the result around a zero line.
Devaluation
When a Central Bank abandons the pegging of its currency to a fixed rate of exchange, resulting in a significant drop in its currency’s value (example: Argentine Peso 2002). Also used when a government actively promotes a dramatic decline in its country’s exchange rate (example: Japanese Yen 2001-2002).
Diagonal Triangle
(Elliott Wave)
This is a five-wave pattern in which the waves are constructed of three waves. The pattern emerges normally between two rising (or falling) converging lines, though they can be parallel. It is most commonly found in wave 5 positions, but can also occur in wave A or wave C. In classic technical analysis it is called a wedge.
Diffusion Index
A measurement of the percentage of individual cases that are positive when compared with the aggregate group. For example, the number of stocks within the S&P 500 that are above their 200 day moving average.
Divergence
Occurs when an oscillator line and prices move in opposite directions providing early warning of a possible trend reversal.
A Bullish Divergence is identified when price declines make new lows while the underlying momentum indicator (eg RSI or Stochastics) does not make new lows.
A Bearish Divergence is identified when price rallies make new highs while the underlying momentum indicator (eg RSI or Stochastics) does not make new highs.
The implication of momentum and price making divergences is important. It implies that the movement in price in one direction is slowing and highlights the risk for reversal. Divergence commonly occurs after a trend and therefore highlights potential for the trend to complete or reverse. It is important to ensure that other analysis confirms the possibility of a reversal.
Doji
(Candlestick)
A Doji occurs when the open and close are the same value (or very close). The length of the shadow is not important and interpretation will depend on the position and length of the shadows. They can occur at market reversals since they indicate a balance of buyers and sellers. (Indecision of buyers in an up trend, of sellers in a downtrend). By themselves single bars do not necessarily provide any indications but will contribute to a group that represent a candlestick pattern.
Doji Stars – Morning and Evening
(Candlestick Reversal Pattern)
The Morning Doji Star is a reversal in a downtrend. During a downtrend a long black day is formed. The next day is a short day with the open having gapped lower below the low of the black day but which also closes around the same level as the open. The next day price gaps open once again, but to above the high of the Doji Star and forms a white day.
The long black day in the downtrend fuels the underlying bearish sentiment. However, this is not continued on the day of the Doji Star and the gap higher again leaves many traders short and causes squaring of those positions.
The Evening Doji Star is a reversal in an uptrend. During an uptrend a long white day is formed. The next day is a short day with the open having gapped higher above the high of the white day but which also closes around the same level as the open. The next day price gaps open once again, but to below the low of the Doji Star and forms a black day.
The long white day in the downtrend fuels the underlying bullish sentiment. However, this is not continued on the day of the Doji Star and the gap lower again leaves many traders long and causes squaring of those positions.
Doji Star Up and Down
(Candlestick Reversal Patterns)
The Doji Star may be both bullish and bearish reversals. In a Bullish Doji Star a long black day develops in a downtrend. This is followed by a Doji Star that opens below the low of the black day and closes at, or around, the level of the open. The shadows of the star should not be long.
The fact that a Doji Star occurs in a downtrend signifies that the bearish sentiment is becoming weaker with traders uncertain of committing to a short position. A subsequent open above the high of the star would cause further short covering.
In a Bearish Doji Star a long white day develops in an uptrend. This is followed by a Doji Star that opens above the high of the white day and closes at, or around, the level of the open. The shadows of the star should not be long.
The fact that a Doji Star occurs in an uptrend signifies that the bullish sentiment is becoming weaker with traders uncertain of committing to a long position. A subsequent open below the low of the star would cause further long covering.
Dollar Risk Stop
Also referred to as a money management stop. It exits a trade at a pre-determined monetary loss.
Double Bottom
The opposite of a double top. When price declines once to a level then rebounds, and over a period of time once again declines to the same approximate level then rallies above the peak between the two troughs a double bottom is confirmed at the two equal price lows. This can be likened to the shape of a ‘W’. A target can be generated by measuring the distance from the lows to the peak and projecting this value upwards from the intervening peak.
Double-Smoothed
A price series that has been smoothed first by a mathematical algorithm such as an exponential moving average and then the output of the first smoothing is then smoothed a second time by a similar method.
Double Top
The opposite of a double bottom. When price rallies once to a level then rebounds, and over a period of time once again rallies to the same approximate level then declines below the trough between the two peaks a double top is confirmed at the two equal price highs. This can be likened to the shape of an ‘M’. A target can be generated by measuring the distance from the highs to the trough and projecting this value downwards from the intervening trough.
Double Zig-zag
(Elliott Wave)
This is an extended correction in which two ABC patterns occur with a Wave X separating them.
Dow Theory
Originated by Charles Dow, describes the action of price trends. Dow Theory is used by technical analysts to chart the direction of market prices.
Downtrend
Price movement characterized by a series of lower price highs and lower price lows.
Downtrend Line
Needs at least two descending price highs with a third for confirmation of the trendline.
Drawdown
The reduction in the equity of an account as a result of a losing trade or series of losing trades.
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