Spreads And Margins In FX Trade



Spread and margin in FX trade are important concepts to learn about. In order to understand the manner in which FX trade and FX currency trading market functions, it is important that you have a good understanding of spread and margin in FX trade online.


In FX trades, the currencies are traded in pairs and exchanged against each other. Generally, in maximum number of FX trades, the currencies are traded against the US Dollar. In the currency pair, the first currency in is known as the Base Currency and the other is known as the Counter Currency or also Quote Currency.


The currency exchange rate describes the amount of counter currency which you need to pay in order to purchase one unit of the base currency. It also tells the seller what amount will be received in the counter currency while selling one base unit. Here is an example- suppose that exchange rate for EUR/USD of 1.4325 means that to the buyer of Euro that he has to pay 1.4325 USD for one Euro.


Now, let us take a look at what is spread in FX trading. Well, it is defined as the amount of difference between the buying and selling price. Just like ask and bid price in stock market. In more simple words, spread in FX trading is the difference between the market makers selling price and the price which market maker is ready to pay to buy the same currency. It represents that if you are purchasing a currency and then sell off the currency before the price has changed you will lose money because of the spread. Since bid price is always lower than the ask price in forex trading and this is the case.


Now, Now, let’s talk about margin in FX trading. there is a need to provide guarantee to brokers in order to ensure that investor can pay up in case there are losses. This guarantee amount is known as margin FX trading or also called as the minimum security deposit in forex trading. In other words, it is deposit to the trader account which is proposed to cover and possible trading losses in the future. Thus, we see that margin in FX trading facilitate traders to hold a lot larger position than their account value.


We really hope that the details presented here have really helped you in understanding the concepts of spread and margin in FX trade.