Currency Trading Overview
Buying and Selling:
Basic Rule: All trades result in the buying of one currency and the selling of another, simultaneously.
The objective of currency trading is to exchange one currency for another with the expectation that the market rate or price will change such that the currency you have bought has appreciated in value relative to the currency you have sold. Ifthe currency you have bought appreciates in value and you close your open position by selling this currency, or effectively buying the currency that you originally sold, then you are locking in a profit. If the currency depreciates in value and you close your open position by selling this currency, or effectively buying the currency you have sold, then you are realizing a loss.
Buying a currencyis synonymous with taking a long position in that currency.
Selling a currency is synonymous with shorting that currency.
An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or losefrom fluctuations in the price of that currency pair.
Rates and Spread:
A currency exchange rate is always quoted for a currency pair using International Standards Organization (ISO) code abbreviations. For example, USD/JPY refers to two currencies: the U.S. Dollar and the Japanese Yen. You can find the ISO code for any currency from OANDA's FXLookup. OANDA's FXTrade platform is currentlydesigned for the speculative spot market - all transactions are roundtrip back to trader's home currency.
An exchange rate is simply the ratio of one currency valued against another. The first currency is referred to as the base currency and the second as the counter or quote currency. If buying, an exchange rate specifies how much you have to pay in the counter or quote currency to obtain one unitof the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency.
A currency exchange rate is typically given as a bid price and an ask price. The bid price is always lower than the ask price. The bid price (the left side of a price) represents what will be obtained in the quote currency when selling oneunit of the base currency. The ask price (the right side of the price) represents what has to be paid in the quote currency to obtain one unit of the base currency. The following USD/JPY price quote is an example of bid/ask notation.
The first component (before the slash) refers to the bid price (what you obtain in JPY when you sell USD). In this example, the bid price is 118.48. Thesecond component (after the slash) is used to obtain the ask price (what you have to pay in JPY if you buy USD). In this example, the ask price is 118.53.
The difference between the bid and the ask price is referred to as the spread. In the example above, the spread is .05 or 5 pips. Unlike the USD/JPY, most currency pair quotes are carried out to the 4th decimal place (e.g., EUR/USD may be quotedat 0.9517/22), in which case 5 pips represents a difference of .0005. Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market.
Most currencies are traded directly against the US Dollar. The market rates that are expressed for such currency pairs are called direct rates. In most cases, the USDollar is the base currency pair whereby the quote currency is expressed as a certain number of units per 1 US Dollar. For example, the following rate USD/CAD=1.4500 indicates that 1 USD (US Dollars) = 1.4500 CAD (Canadian Dollars).
For some currency pairs, the US Dollar is not the base currency but the counter or quote currency. The market rates that are expressed for such currency pairs are...
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