Trading Basics

Before placing trades, it is important to understand a few fundamental concepts used throughout the platform, including long positions, short positions, margin, leverage, and foreign exchange (Forex) trading.

Long Positions

A long position is represented by a positive number of units.

Long positions increase in value when the exchange rate of the selected currency pair increases.

Example: If you purchase GBP/USD and the exchange rate increases, the value of a long position generally increases as well.

Short Positions

A short position is represented by a negative number of units.

Short positions increase in value when the exchange rate decreases.

Unlike many traditional investments, foreign exchange trading allows you to open a short position even if you do not currently own the underlying asset. This means you can potentially profit from decreasing exchange rates as well as increasing exchange rates.

Understanding Exchange Pairs

Foreign exchange trading involves trading one currency against another. These combinations are known as currency pairs.

For example:

  • EUR/USD (Euro versus U.S. Dollar)
  • GBP/USD (British Pound (£) versus U.S. Dollar ($))
  • USD/JPY (U.S. Dollar versus Japanese Yen)

When opening a long position in GBP/USD, you are effectively exchanging a quantity of U.S. Dollars ($) for British Pounds (£) and speculating that the exchange rate will increase.

If the exchange rate rises, you may later exchange those Pounds (£) back into Dollars ($) at a more favorable rate, generating a profit.

Conversely, if the exchange rate declines, the position may lose value.

Margin Trading

Foreign exchange positions are commonly traded using margin.

Margin represents the amount of your account balance that is being used to support open trading positions.

Because the broker provides leverage, you can control positions that are significantly larger than your available cash balance.

Important Terms
  • Account Balance - Cash available in the trading account.
  • Margin - The portion of account value reserved to support open positions.
  • Leverage - Additional buying power provided by the broker.

Leverage

Leverage allows traders to control positions that are larger than the value of their account balance.

Typical leverage available in foreign exchange trading frequently ranges from approximately:

  • 20:1 leverage
  • 30:1 leverage
  • 50:1 leverage

The amount of leverage available depends on the currency pair being traded and the broker's policies.

While leverage can increase potential profits, it can also magnify losses. Small market movements can have a significant impact on a leveraged position.

Portfolio Protection

To help reduce risk, this platform limits position allocation so that the total amount of account balance allocated to positions cannot exceed approximately 50% of the account balance.

This restriction is intended to help reduce the likelihood of a margin call and provide additional protection during periods of elevated market volatility.

What Is a Margin Call?

A margin call occurs when losses on open positions consume too much of the available margin within a trading account.

When this happens, OANDA may automatically reduce or close positions to restore the account to acceptable margin requirements.

Margin calls are typically caused when leveraged positions lose value and insufficient account equity remains to support the open trades.

Position Value vs. Position Size

New traders often assume that the value of a trade is determined by the total number of units being bought or sold.

In practice, leveraged Forex positions work differently.

The profit or loss of a position is determined primarily by changes in the exchange rate between the two currencies, not by taking physical possession of the currencies themselves.

Margin allows a larger position to be controlled using a smaller amount of account capital. The position can then be settled later, with the resulting gain or loss based on how the exchange rate moved during the life of the trade.

Think of a Forex position as exposure to changes in an exchange rate. The position value changes as the exchange rate moves, while margin and leverage determine how much exposure you control.

Key Takeaways

  • Positive units represent long positions.
  • Negative units represent short positions.
  • Long positions benefit from rising exchange rates.
  • Short positions benefit from falling exchange rates.
  • Forex trading allows short positions without owning the asset first.
  • Margin and leverage allow larger positions than account cash alone would support.
  • The platform limits account allocation to approximately 50% of account balance for risk management.
  • Exchange rates determine position profit and loss.