Forex Trading

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Exchange Rates and Spreads

Exchange Rates

An exchange rate refers to the number of units of one currency needed to purchase one unit of another, or the value of one currency in terms of another. Exchange rates, influenced by real world events, change constantly.

Exchange rates are quoted in currency pairs. The first currency is referred to as the base currency and the second as the counter or quote currency. For example, the exchange rate quoted for the EUR/USD would tell you how many USD (the quote currency) would be needed to buy one Euro (the base currency).

If buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of 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.

Bid and Ask Prices

OANDA's FXTrade Platform uses the bid/ask (bid/offer) method for quoting prices. For example, the exchange rate for EUR/USD might look like one of the following:

  • 146.972/981
  • 146.972 vs. 146.981

The first number is the bid price, or the rate used if you sell a currency. The next set of numbers (after the slash) shows the last few digits of the ask price if you buy a currency. For the EUR/USD example 146.972/981:

  • if you sold 100 Euros you would get 146.972 USD
  • if you bought 100 Euros you would pay 146.981 USD.

3-Letter Codes

A currency exchange rate is always quoted using standard International Standards Organization (ISO) 3-letter code abbreviations. For example, USD/JPY refers to two currencies: the U.S. Dollar and the Japanese Yen.

Here are some major ISO codes. (You can find the ISO code for any currency from FXLookup.)

AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc
EUR - Euro GBP - Great Britain Pound JPY - Japanese Yen
NZD - New Zealand Dollar USD - U.S. Dollar XAU - Gold


Spreads

The difference between the bid and the ask price is referred to as the spread. In the example above (EUR/USD at 146.972/981), the spread is .009 or 9 pips.

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.

The smart trader pays close attention to spreads, because they are the cost of trading (and the way the broker makes a profit). Find out more about OANDA's spreads.

Indirect rates

OANDA's FXTrade platform is designed for the speculative spot market, so all transactions are roundtrip back to the currency of the trader's account (or subaccount). This means that some trades may use indirect rates that don't involve the home account currency.

For trades involving indirect rates, there are several spreads to consider: the spread for the traded pair, and the spread for the pair involving that pair's base currency and the home account currency.

For example, if you make a trade involving the USD/MXN pair from a Euro account, you need to consider the spread for both the USD/MXN pair and the EUR/USD pair.