Lesson 3: Currency Trading Conventions – What You Need to Know Before Trading

Trading in The Forex Spot Market

Role of the Forex Market Maker

  • Often referred to as a dealer or a broker, a forex market maker provides a two-way quote for each currency pair it offers.
  • A two-way quote consists of a bid price and an ask price, and represents the exchange rate at which the market maker is willing to buy or sell the currency pair.
  • The exchange rate as published by a forex broker, advertises the current rate at which you can trade (exchange) one currency for another.
  • If currency A is worth 1.25 of currency B for example, and you wanted to exchange 500 units of currency A, you would receive 625 units of currency B (500 × 1.25).
  • Looking at this the other way, if you instead needed 1200 units of currency B, but only had currency A, you would need to exchange 960 units of currency A to get the required amount of currency B (1200 ÷ 1.25).

Exchange Rate – Describes how much of one currency can be bought or sold in exchange for one unit of another currency.

Spot Trade Settlement

  • Spot trades in the forex market are intended for immediate settlement.
  • This means the trade is considered to have been completed (or executed) once the buyer and the seller agree to the terms of the trade.
  • The physical delivery of the currencies involved in the trade however, can take up to two days after the trade itself. This is the settlement date.
  • In the industry, this is referred to as "T+2" which stands for "trade day plus two days" for the settlement (the physical delivery of the currencies) to be completed.
  • T+2 is a throwback to the days when trading was conducted mostly using fax machines or over the telephone. While these methods allowed for instantaneous agreement between the trade participants, it could take several days for the actual transfer of funds between the buyer and seller accounts.

Spot Trade – A contract to buy or sell a specified amount of a currency pair at a given exchange rate.

While many forex trades are still conducted under the restrictions of a "T+2" settlement, OANDA offers immediate settlement on all trades and updates accounts accordingly. This is because as a market maker, OANDA can support both sides of each trade.

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.