Market Structure & Explainers

Currency intervention is direct central bank action to influence the FX value of a currency. Verbal first, then actual selling or buying. BoJ is the most active practitioner.

Dovish describes a central bank stance that prioritises growth and employment, favouring lower rates. Hawkish prioritises inflation control, favouring higher rates.

A narrative shift is the change in the dominant story the market is pricing. It moves price faster than the underlying data because positioning chases the new narrative.

Momentum is the tendency of assets that have risen to keep rising and those that have fallen to keep falling. The empirical foundation of trend-following strategies.

Mean reversion is the tendency of prices to return to a statistical average after extreme moves. Works in ranges and counter-trend, fails in strong trends.

A divergence occurs when price makes a new extreme but an indicator (RSI, MACD, momentum) fails to confirm. Reliable as a warning, weak as a trade signal.

A regime shift is a durable transition between macro states (risk-on to risk-off, low to high inflation, abundant to scarce liquidity). The largest moves happen at shifts.

A consistency rule caps the share of total profit that can come from a single trading day, preventing one large trade from dominating the profit. The rule that voids many payouts.

A scaling rule lets a profitable funded trader grow their account balance after hitting profit milestones, usually monthly. The mechanism behind ‘unlimited scaling’.

NDD (No Dealing Desk) brokers route orders to liquidity providers. Market makers take the other side themselves. The difference is structural and decides execution quality.

The FIFO rule requires CFTC-regulated brokers to close the oldest open position first when a closing order is placed. It prevents partial hedging on US forex accounts.

Negative balance protection prevents a retail trader owing money to the broker after a gap or flash crash exceeds account equity. Required by FCA and ESMA.

Segregated funds means client deposits are held in bank accounts separate from the broker’s operating capital. The first line of defence in broker insolvency.

Tier-1 regulators (FCA, ASIC, NFA, FINMA) enforce client-money rules and best execution. Offshore regulators (SVG, Vanuatu, Seychelles) do not.

A-book brokers hedge client orders externally with liquidity providers. B-book brokers internalise them. Most retail brokers run a hybrid model.

The position sizing formula converts a target risk percentage and a stop distance into a position size. The single most important calculation in trading.

Drawdown is the current decline from a peak. Max drawdown is the worst decline ever recorded. The recovery percentage rises faster than the drawdown does.

Risk per trade is the percentage of account balance lost if a stop hits. The conventional 1 percent rule keeps a strategy alive through any normal losing streak.

An R-multiple expresses trade profit as a multiple of the risk taken (1R = the stop distance in money terms). The clean way to compare trades across instruments.

An OCO (One Cancels the Other) order pairs a take profit and a stop loss so that when one fills, the other is cancelled automatically.

A trailing stop moves with price in the favourable direction only, locking in profit while letting the trade run. ATR and structure are the two common methods.

A take profit ladder closes portions of a position at successive target levels. The standard structure is TP1 (1R), TP2 (2R) and TP3 with a trailing runner.

A stop loss is an order that closes a position when price reaches an adverse level, capping the loss. The cornerstone of survivable risk management.

Retail sentiment indicators like the Daily Sentiment Index measure how bullish or bearish small traders are. Extreme readings are reliably contrarian.

ISM PMI and S and P Global PMI are competing US activity surveys. They sample different respondents, report different sub-indices, and often disagree at turning points.

The Commitments of Traders report shows futures positioning by trader category. The Legacy and Disaggregated reports each tell a different positioning story.

The put-call ratio is the volume of put options divided by call volume. Used as a contrary sentiment gauge: extreme readings often precede reversals.

A breadth thrust is a sharp acceleration in market participation, signalling capitulation buying. Zweig and Whaley thrusts have preceded major bull runs.

The MOVE index is the implied volatility of US Treasury options, the bond market equivalent of the VIX. A leading gauge of rates and macro stress.

The VIX is the implied 30-day volatility of S and P 500 options, annualised. Above 20 is elevated, above 30 is stress, above 40 is genuine panic.

ATR is a volatility measure averaging the true range over N bars. Traders use it to size stops at multiples of recent volatility rather than fixed pip distances.

Weekend gaps occur when the Sunday forex open prices news that broke while the market was closed. Routine on yen crosses, gold and indices CFDs.

Gap risk is the chance that price jumps over a stop level without trading at it, leaving the fill far from the planned exit. Largest on weekends and post-news.

A requote happens when the broker rejects the original price and offers a new one, usually worse. It is a market-maker behaviour rare on ECN/STP brokers.

Slippage is the gap between requested price and filled price. Negative slippage on stops is the main cost beyond spread. Positive slippage exists but is rarer.

STP routes client orders directly to a liquidity provider without a broker dealing desk in between. Faster fills than market-maker, narrower LP pool than ECN.

An ECN account routes orders to an electronic network of liquidity providers, with tight spreads, per-lot commission and no dealing-desk interference.

Standard accounts wrap the broker fee in a wider spread. Raw accounts charge a tighter spread plus an explicit commission. The all-in cost is the only honest comparison.

The swap rate is the interest debited or credited to a forex position held overnight, set by the rate differential between the two currencies plus broker markup.

A margin call is the warning that equity has fallen close to required margin. Stop-out is the automatic closure of positions when equity hits the floor.

Leverage is the ratio of notional position to margin posted. Higher leverage shrinks margin needed, not risk taken. The retail killer when misunderstood.

Lot size is the contract size on a forex trade. Standard is 100,000 base units, mini 10,000, micro 1,000, cent 100. Sizing decides survival.

A pip is the smallest standard price increment in a forex pair, 0.0001 on most pairs and 0.01 on yen crosses. The unit of trading cost and P and L.

The Fed’s overnight reverse repo facility lets money market funds park cash at the Fed for the ON RRP rate. It is the hard floor for short-term rates.

IORB is the interest the Fed pays on bank reserves. It sits at the top of the fed funds target range and acts as the soft floor for short-term rates.

Repo is the overnight secured lending rate against Treasury collateral. SOFR is the published reference. Repo stress is a leading liquidity warning.

Breakeven inflation is the nominal yield minus the TIPS yield. It is the market’s expected inflation rate and a key input into real-yield calculations.

A cross-currency basis swap exchanges floating rates in two currencies. The basis spread reveals dollar funding stress and is a leading risk-off indicator.

Term premium is the extra yield investors demand for holding long-dated bonds over rolling short ones. It moves independently of rate expectations.

The neutral rate, r-star, is the policy rate that neither stimulates nor restricts the economy. Estimates range, and shifts in those estimates move the dollar.