TRADING ESSENTIALS

Learn all the trading fundamentals before you start placing trading orders. Practice these key elements on your demo account using virtual money, and get ready to trade CFD and forex live in real-time with your account balance.

EXCHANGE RATES & QUOTE PANEL

Quote list and quote panel show different views

The Exchange Rate is the price for which foreign currencies are traded. The Quote List and Quote Panel show different views of the current OANDA exchange (buy/sell) rates in real time. When there is movement in the exchange rate for a currency pair, the green and red up/down indicators alert traders to momentary changes in direction.

CURRENCY PAIRS

Currency pairs are always listed in the same order. For example, the most commonly-traded currency pair consists of the Euro and the U.S. dollar. This pair is always listed as EUR/USD and never the reverse order. In this example EUR is is the BASE currency, and USD is the QUOTE currency. When published with an exchange rate, the currency pair indicates how much of the quote currency is required to purchase one unit of the base currency.

SPREAD

The SPREAD is the difference between the two prices. The bid price is always less than the ask price because brokers pay less than they receive for the same currency pair. This difference – known as the spread – is how your broker generates much of its revenue. In this example, the spread is 1.4 pips. For currency pairs displayed to four decimal places, one pip is equal to 0.0001. NOTE: Yen-based currency pairs are an exception and are displayed to only two decimal places (0.01).

BID PRICE

The BID price is the rate that your broker is willing to pay for the currency pair; in other words, this is the rate you receive if selling to the market. For example in the rate panel shown, the bid price is 1.05761. You could sell one Euro for 1.05761 US dollars.

ASK PRICE

The ASK price is the rate at which your broker is willing to sell and represents the rate you must pay to buy the base currency. In the example 1 Euro will cost you 1.05775 US dollars.

CLOSING A TRADE

Active trades are referred to as open positions and are subject to fluctuations in the exchange rate. Open positions are closed by entering into a trade that takes the opposite position to the original trade, bringing the total amount for the currency pair derivative back to zero. The OANDA trading platform automates the process of closing a position for you. For example, if you have a short position consisting of 50,000 units of USD/CAD, you only need to click a single button to create and execute a buy order for 50,000 USD/CAD to close your position and realize your return.

REALIZING GAINS/LOSSES

Only when you close a position do you realize the actual gains or losses for the trade, thereby affecting the actual cash balance of your account. It is important to understand that gains or losses for open positions are still unrealized. 

CLOSING A LONG POSITION

To close a long position, you must sell an equal amount of the same currency pair derivative to reduce your long position to zero. If you receive more when you sell than you paid to buy the order, you earn a profit. If you receive less, you realize a loss.

CLOSING A SHORT POSITION

A short position is the opposite of a long position. In order to close a short position, you would need to buy enough of the currency pair derivative to bring your position back to zero. If you can buy this back for less than you earned when you sold it originally, the difference is retained as profit.

PARTIAL POSITION CLOSE

It is possible to partially close an open position by only selling or buying enough to partly offset the open position. For example, selling only $75,000 when you have an open position of $100,000 EUR/USD, closes three-quarters of the original position, leaving an open EUR/USD position of $25,000.

BENEFITS OF TRADING FOREX

Accuracy- Illustrated icon of an arrow in a target bullseye.

LIQUIDITY

The forex market is the largest and most liquid financial market. Daily activity often exceeds $4 trillion USD, with over $1.5 trillion of that conducted in the form of spot trading.

Reliability- Illustrated icon of a lightning bolt.

VOLATILITY

Volatility boosts opportunity due to exchange rate fluctuations. Forex trading operates 24 hours a day, 5 days a week. The greatest liquidity occurs when operational hours in multiple time zones overlap.

Support - Illustrated icon of a stylized person in a computer screen under a speech balloon.

TIGHT SPREADS

Spreads in the forex market tend to be tighter (less), than the spreads applied to other securities such as stocks. This makes OTC forex trading one of the most cost-effective means of investment trading.

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FOREX AND CFD MARKETS

Trade commission-free on over 100 instruments, including currency pairs, indices, commodities, bonds and metals †.

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WHAT IS A PIP?

A pip is the smallest price move in a given exchange rate. Understanding the change in value helps traders to enter, or edit orders according to the objective of the strategy plan.

LEARN TO DETERMINE PIP VALUE

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Losses can exceed investment

KEY TRADING TERMS

Volatility

A measure of how much the price of a currency changes over time.

Hedge

A hedge is the practice of buying a physical commodity to protect against a possible currency devaluation.

Market Maker

Market-Maker – A dealer or broker that provides a two-way quote (i.e. a bid and ask price) for which the dealer agrees to buy or sell. Offering both sides of a trade literally "makes" a market for those wishing to engage in currency trading. In recent years, new developments in web-related technologies have made it possible for independent brokers to develop internet-based trading platforms. These brokers serve as market-makers and provide a two-way quote for each currency pair they support. OANDA is an example of a forex market-maker.

Liquidity

Refers to the number of buyers and sellers in the market willing to trade at any given time. Generally speaking, the greater the liquidity within a market, the greater the number of trades completed, which translates into higher volumes.

Speculation

An attempt to profit on the fluctuation in prices for currencies and other investment securities.

Gold Standard Currency

A commitment to fix the value of a currency to a specific quantity of gold. Under this system, the holder of the country's currency can convert funds to an equal amount of gold. After World War II, economies in Europe were left in tatters. To help these economies recover – and to avoid mistakes made in the wake of the First World War – the Bretton Woods Accord was convened in July 1944. Several resolutions arose from Bretton Woods, but it was the "pegging" of foreign currencies to the U.S. dollar, rather than gold, that arguably had the greatest immediate impact on the global economy.

Spot Trade

A contract to buy or sell a specified amount of a currency pair at a given exchange rate.
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† Disclaimer:

Execution speed numbers are based on the median round trip latency measurements from receipt to response for all Market Order Fills executed between June 1st and Sept 1st 2016 on the OANDA legacy and OANDA v20 execution platforms, excepting MT4 initiated orders.

Contracts for Difference (CFDs) or Precious Metals are NOT available to residents of the United States.

MT4 hedging capabilities are NOT available to residents of the United States.

The Commodity Futures Trading Commission (CFTC) limits leverage available to retail forex traders in the United States to 50:1 on major currency pairs and 20:1 for all others. OANDA Asia Pacific offers maximum leverage of 50:1 on FX products and limits to leverage offered on CFDs apply. Maximum leverage for OANDA Canada clients is determined by IIROC and is subject to change. For more information refer to our regulatory and financial compliance section.

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

Trading FX and/or CFDs on margin is high risk and not suitable for everyone. Losses can exceed investment.