Glossary And Foreign Exchange Terms (Letter G-M)

Glossary And Foreign Exchange Terms (Letter G-M)

G

Gamma The rate of change of an option’s delta, or the sensitivity of the delta.

Gann percentage retracements The Gann theory focuses mostly on the eighths, along with retracements in thirds.

Gap The price gap between consecutive trading ranges (i.e., the low of the current range is higher than the high of the previous range).

Genetic algorithms Method used to optimize a neural network. Trial and error are applied to an evolution like system, which mimics natural selection for financial forecasting purposes.

GLOBEX An electronic trading system conceived in 1987 as an afterhours trading system and geared toward global futures trading; created through a joint venture of the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBT), and Reuters PLC.

Golden cross An intersection of two consecutive moving averages that move in the same direction and suggest that the currency will move in the same direction.

Gross Domestic Product The sum of all goods and services produced in the United States.

Gross National Product The sum of government expenditure, private investment, and personal consumption.

Gross National Product Implicit Deflator Deflator tool designed to adjust the Gross National Product for inflation. It is calculated by dividing the current dollar GNP figure by the constant dollar GNP figure.


H

Harami bar A “wait-and-see” two-day candlestick combination. It consists of two consecutive ranges having opposite directions, but it does not matter which one is first. The second day’s range results fall within the previous day’s body.

Head-and-shoulders A bearish reversal pattern that consists of a series of three consecutive rallies, such that the first and third rallies (the shoulders) have about the same height and the middle one (the head) is the highest. The rallies are based on the same support line, known as the neckline. When the neckline is broken, the price target is approximately equal in amplitude to the distance between the top of the head and the neckline.

Hedging A method used to minimize or eliminate the risk of exchange rate fluctuations.

High-low band A band created by two winding parallel lines above and below a short-term moving average that borders most price fluctuations. The moving average is based on the high and low prices. The resulting two moving averages define the edges of the band. A close above the upper band suggests a buying signal and a close below the lower band gives a selling signal.

Hoshi (star) A “wait-and see” two-day candlestick combination. It consists of a tiny body that appears the following day outside the original body. It is not important whether the star reaches the previous day’s shadows. The direction of the two consecutive ranges is also irrelevant.

Households survey Consists of the unemployment rate, the overall labor force, and the number of people employed.


I

Implied volatility Method of measuring volatility by considering the premiums currently trading in the market and calculating the figure based on the level of the option premium.

In-the-money (ITM) call A call whose present currency price is higher than the strike price.

In-the-money (ITM) put A put whose present currency price is lower than the strike price.

Industrial Production An economic indicator that consists of the total output of a nation’s plants, utilities, and mines.

Initiation margin A margin paid by the trading party in order to trade currency futures. A trader’s daily loss cannot exceed the size of this margin.

Interest rate risk Amount of mismatches and maturity gaps among transactions in the foreign exchange book.

International Fisher effect Theory holding that investors will hold assets denominated in depreciating currencies only to the extent that interest rates are sufficiently high to balance the expected currency losses.

International Monetary Market The major currency futures and options on currency futures market in the world. It is a division of the Chicago Mercantile Exchange in Chicago.

Intrinsic value The amount by which an option is in-the-money. In the case of a call, the intrinsic value equals the difference between the underlying currency price and the strike price. In the case of the put, the intrinsic value equals the difference between the strike price and the present currency price, when beneficial.

Inverse head-and-shoulders A bullish reversal pattern that consists of a series of three consecutive sell-offs. Among the three consecutive sell-offs, the shoulders have approximately the same amplitude, and the head is the lowest. The formation is based on a resistance line called the neckline. After the neckline is penetrated, the target is approximately equal in amplitude to the distance between the top of the head and the neckline.

Irikubi A bearish two-day candlestick combination. It consists of a modified atekubi bar. All the characteristics are the same, except that the second day’s closing high is marginally higher than the original day’s low.

Island reversal An isolated range or ranges that occur at the tip of a V-formation.

ISO codes Standardized currency codes developed by the International Organization for Standardization (ISO).


J

J-Curve theory Devaluation of a currency will trigger export gains in the long term, rather than the short term, because of previous contracts, existing inventories, and behavior modification.

Jittai Body of the candlestick (See Candlestick charts.)

Journal of Commerce Index Index that consists of the prices of 18 industrial materials and supplies used in the initial stages of manufacturing, building, and energy production. It is more sensitive than other indexes, as it was designed to signal changes in inflation prior to the other price indexes.


K

Kabuse (dark cloud cover) A bearish two-day candlestick combination. It consists of a second-day long black bar that opens above the high of the previous day’s blank bar and closes within the previous day’s range (in an uptrend).

Karakasa (hangman at the top, hammer at the bottom) A bearish candlestick at the top of the trend, bullish at the bottom of the trend. The candlestick can be either blank or black. The body of the candlestick is very small and only half the length of the shadow.

Kenuki (tweezers) A “wait-and-see” two-day candlestick combination. It consists of consecutive bars that have matching highs or lows. In a rising market, a tweezers top occurs when the highs match. The opposite is true for a tweezers bottom.

Key reversal day The daily price range on the bar chart of the reversal day fully engulfs the previous day’s range; also, the close is outside the preceding day’s range.

Kirikomi A bullish two-day candlestick combination. It consists of a blank marubozu bar that opens the second day lower (than the previous low of a long black line) and closes above the 50 percent level of the previous day’s range.

Knockin A plain vanilla option that does not exist until the trigger is reached. Knockout a plain vanilla option that goes away if the trigger is reached.

Koma (spinning tops) A reversal candlestick formation that consists of a short bar, either blank or black. This candlestick may also suggest lack of direction.


L

Larry Williams %R A version of the stochastics oscillator. It consists of the difference between the high price of a predetermined number of days and the current closing price; that difference in turn is divided by the total range. This oscillator is plotted on a reversed 0 to 100 scale. Therefore, the bullish reversal signals occur at under 80 percent and the bearish signals appear at above 20 percent. The interpretations are similar to those discussed under stochastics.

Leading Indicators Index An economic indicator designed to offer a six- to nine-month future outlook of economic performance. It consists of the following economic indicators: average workweek of production workers in manufacturing; average weekly claims for state unemployment; new orders for consumer goods and materials (adjusted for inflation); vendor performance (companies receiving slower deliveries from suppliers); contracts and orders for plant and equipment (adjusted for inflation); new building permits issued; change in manufacturers’ unfilled orders for durable goods; change in sensitive materials prices; index of stock prices; money supply, adjusted for inflation; and the index of consumer expectations.

Line chart The line connecting single prices for each of the time periods selected.

Linearly weighted moving average A moving average that assigns more weight to the more recent closings.

Long legged shadows’ doji A reversal candlestick formation that consists of a bar in which the opening and closing prices are equal.

Long straddle A compound option that consists of a long call and a long put on the same currency, at the same strike price, and with the same expiration dates. The maximum loss for the buyer is the sum of the premiums. The upside break-even point is the sum of the strike price and the premium on the straddle. The downside break-even point is the difference between the strike price and the premium on the straddle. The profit is unlimited.

Long strangle A compound option that consists of a long call and a long put on the same currency, at different strike prices, but with the same expiration dates. The profit is unlimited.


M

Ml Money supply measure that is composed of currency in circulation (outside the Treasury, the Fed, and depository institutions), traveler’s checks, demand deposits, and other checkable deposits [negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, etc.].

M2 Money supply measure that consists of Ml plus repurchase agreements, overnight Eurodollars, money market deposit accounts, savings and time deposits (in amounts under $100,000), and balances in general accounts.

M3 Money supply measure that is composed of M2 plus time deposits over $100,000, term Eurodollar deposits, and all balances in institutional money market mutual funds.

Margin The amount of money or collateral deposited by a customer with a broker, by a broker with a clearing member, or by a clearing member with the clearinghouse in order to insure the broker or clearinghouse against loss on outstanding futures positions.

Mark-to-market Daily cash flow system used by the U.S. futures exchanges to maintain a minimum level of margin equity for a specific currency future or option by calculating the profit and loss at the end of each trading day in each contract position resulting from the price fluctuation.

Matched sale-purchase agreements Daily operations executed by the Federal Reserve, in which the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within seven days). This arrangement amounts to a temporary drain of reserves.

Matching systems Electronic systems duplicating the traditional brokers’ market. A price shown by a bank is available to all traders.

Maturity date The date when a foreign exchange contract expires.

Merchandise Trade Balance An economic indicator that consists of the net difference between the exports and imports of a certain economy. The data includes food, raw materials and industrial supplies, consumer goods, autos, capital goods, and other merchandise.

Momentum An oscillator designed to measure the rate of price change, not the actual price level. This oscillator consists of the net difference between the current closing price and the oldest closing price from a predetermined period. The momentum is measured on an open scale around the zero line.

Moving average An average of a predetermined number of prices over a number of days, divided by the number of entries.

Moving average convergence-divergence (MACD) An oscillator that consists of two exponential moving averages (other inputs may be chosen by the trader as well) plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. A buying signal is generated when this intersection is upward, whereas a selling signal occurs when the intersection takes place on the downside.

Moving averages oscillator An oscillator in which the values of two consecutive moving averages are subtracted from each other (the larger number of days from the previous one) and the new values are plotted.

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