Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Direct Quotation
A direct quotation refers to an exchange rate expressed as the number of units of domestic currency needed to buy one unit of a foreign currency. It puts the foreign currency as the fixed base and shows how much local currency that unit costs. This is in contrast to an indirect quotation, which flips the relationship and shows how many units of foreign currency one unit of domestic currency will buy.
Whether a quotation is direct or indirect depends on the perspective of the person or country doing the quoting. For a trader in the United States, a direct quote for the euro would be expressed as the number of US dollars per one euro – for example, 1.08.
This rate would be an indirect quote from a European perspective. Understanding the convention for quoting exchange rates is important because it differs across major currency pairs and market traditions.
Example: When a bank that imports USD from the UK sees a direct quote of 0.79 USD, it means USD costs 79 pence in the UK. But if the pound weakens and the rate hits 0.83, then imports costing dollars have become more expensive – the direct quote has changed, and the cost of doing business has changed, too.
Directional Movement Index (DMI)
The Directional Movement Index is a technical indicator created by J. Welles Wilder that assesses the strength and direction of a price trend. It draws two lines, the positive directional indicator and the negative directional indicator that cross when the market moves between bullish and bearish momentum.
There is also a third line, the Average Directional Index, which evaluates the strength of the trend, no matter which direction it is going.
When the ADX is increasing and exceeds 25, it usually suggests that a strong trend is in place. If the model is flat and below 20 the market is probably range bound and trend following methods tend to struggle. Traders use the DMI to stick with strong trends for longer and to avoid chasing moves in directionless markets.
Example: A trader watches the positive directional indicator cross above the negative one and the ADX rising above 28. That signals to them that the combination is a bullish trend that’s gaining strength; not simply rising higher, but doing so with conviction, which provides them more confidence to keep the position rather than exit too early.
Discount Rate
The discount rate is the rate of interest the central bank charges commercial banks when they borrow funds directly from it. Think of it as the cost of emergency money. Banks don’t utilize this window for daily operations; they prefer to borrow from each other in the interbank market.
But when liquidity gets tight, the central bank’s discount rate becomes the backup. Changes in the discount rate give indications about where monetary policy is going, since it affects the cost of money at its most basic level.
A higher discount rate usually suggests the central bank is tightening conditions. If it’s going down it’s likely trying to vent pressure in the system.
Example: In the 2008 financial crisis, the Fed aggressively slashed its discount rate and told banks they could borrow freely from its lending facilities. The message was meant to be that the Fed was open for business, liquidity was there, and it was doing everything it could to stave off a complete freeze in the banking system.
Discount Window
The discount window is the mechanism by which commercial banks can borrow directly from a central bank. (This is usually a last resort.) The name stems from the traditional practice of banks actually displaying assets at a teller window to get loans against them. Today it’s 100% computerized, but the idea is the same – a bank puts up collateral and gets cash in exchange.
There’s a decades-old stigma surrounding access to the discount window. And banks are afraid that getting there would be perceived as a sign of financial weakness, which would cause the very panic they are attempting to prevent.
During the 2008 crisis, the Federal Reserve actually encouraged healthy banks to borrow to help normalize activity and lessen the stigma.
Example: A mid-sized regional bank experiences an unexpected run on one afternoon. Rather than selling assets to a falling market at distressed prices, it goes to the discount window overnight, pledges government bonds as security, and covers the shortfall, buying itself time to deal with the crisis without a fire sale.
Discretionary Trading
Discretionary trading is when a human trader decides all trades, when to enter, when to exit, and how much to risk. It’s not rules-based, it’s judgment-based. The trader looks at the market, takes a position, and acts, using experience, intuition, and a sense of conditions that don’t necessarily fit neatly into a model.
This is in sharp contrast to algorithmic or systematic trading, where a series of rules is programmed to execute automatically without human intervention.
Discretionary traders generally do well in odd or fast-changing circumstances where pattern recognition and adaptation are more important than speed. The shortcoming is consistency – human judgment is also prone to emotion, tiredness, and bias. Example: A macro trader monitors central bank commentary, reviews positioning data, and sees that market sentiment has become highly one-sided in a currency pair.
There would be nothing in a quantitative model that would indicate it, but experience tells them the setup is ripe for a reversal. They create a position to justify that verdict. That’s discretionary trading at its finest.
Disparity Index
Disparity Index is a technical indicator that shows the percentage difference between the current price and a selected moving average. It tells you whether an asset is too far above or below its average, and possibly due for adjustment back toward it. A positive reading suggests that the price is trading above the moving average.
If the reading is negative, it has dropped below. The further the reading deviates from zero, the more stretched the price is considered to be. It is used by traders to identify situations where the price has moved too far in one direction and may be subject to mean reversion.
It is best suited for ranging markets and less beneficial in strongly trending conditions, as lengthy readings may persist for extended periods.
Example: A trader notes that the Disparity Index for a commodity is +12 %. This means that the price is 12% above its 20-day moving average. They interpret this as a warning that the rise is overstretched, alongside other indicators of fatigue in the price movement, and start looking for a chance to take profits rather than add to the position.
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