What is the forex margin trading?

Spread on the forex margin trading

In the forex market, the spread is defined as the price gap between the bid rate and the offered rate. Here, the bid rate stands for the lower price of the quotation at which you can sell at any time, and the offered rate is the higher price at which you can buy at any time. For instance, when the price quotation is shown as 120.30-35, the spread is 5 points, and 120.30 is the bid rate while 120.35 is the offered rate.

Let's compare to TTS/TTS rates banks offering

When you want to make a deposit in foreign currencies at the bank, the TTS rate is applied for the exchange rate to buy the relevant foreign currency, while you can get Japanese Yen using the TTB rate when withdrawal. TTS/TTB rates are always shown at the counter in the bank. If the fixing rate for the day is 120.00 for a dollar, the TTS rate becomes 121.00 which is one big figure or one Yen higher than the fixing rate, and the TTB rate does 119.00 which is one big figure or one Yen lower. This spread between the TTS rate and the TTB rate gets 200 points or two Yen width in the end. Therefore, you should be happier to trade at the narrower spread, like 5 points or 10 in the forex margin trading.

Spread in the interbank market

At the interbank market, some market makers are called as price quoters who are obliged to make price quotations both for the bid rate and the offered rate at the same time, and other are called as position takers who take or hit the market prices which the market makers provide for. According to the request by a position taker, the market maker has to show his own price with considering the current market level and his own position. There does not exist the sole price because the forex market is different from the exchange traded products. He price is always moving, and therefore, the market makers would become necessary to quote the market prices with some spread widening as taking risks into consideration.

In the interbank convention, each bank sets a credit line to take the relevant counterparty risk. Each bank sets up the maximum limit of the outstanding, and then, there occurs "Never trade with such a bank". Most banks set the credit line in accordance with the rating or grades. It makes difficult for the lower rating banks to get the credit line from the higher rating banks. Even if the lower rating banks could get the credit line from the higher, the spread they actually trade would become wider. It is not simple how to decide the credit line for each bank because it is closely relating to the annual revenue target. In the forex market, the spread is getting two points or three between good names, while 5 to 10 points between the lower rating banks. It is needless to say that the spread should become wider when the price moving gets more rapidly.

Attractive spread in the forex margin trading

In the forex margin trading, it makes you possible to trade with the narrower spread just like the interbank market. This is much attractive. The forex margin trading does not require any credit line because the margin is placed in advance as collateral. This is how most investors could escape any default against the huge losses. Such narrow spread like 5 or 10 points would make you possible to trade as easily as lower rating banks. The key point of the forex margin trading is to trade forex in the equal condition with the interbank players.


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