What are Spreads & Margins in Forex Trading?

You probably heard these terms often, but might never really understood the true meaning of these terms. When it comes to currency trading. You are trying to buy a currency and hope to sell it for higher which leads you into profit. The differences between the “Ask” and “Bid” prices is what’s known as the Spread.

“Ask” is a term used for your buying price base on the currency rate at that moment. “Bid” on the other hand refers to the selling price of the currency. The differences between the two is calculated by Pips. In Forex Trading, a wider spread means you have you buy higher and sell lower, which makes it a loss in this case. You goal is to try to go for a lower spread because it means you will be buying for less and selling for more….in another words, you make a profit.

The “Margin” in Forex Trading is the minimum required balance to execute a trade and it works very differently to stock exchange. In 4X, you are given leverage options which you can trade and the amount you have in your account works like a collateral for the transaction.

Let’s just say you’re trading AUD/JPY at 100:1 leverage and you wanted to purchase $200,000. In this case the deposit or the margin required is 10% of $200,000 making it $2,000. Since there are no interest pay on the remaining 90%, it’s not too difficult to understand why Forex is one of the biggest trade in the world. However, you must also realize that the more leverage usually means more risks, because this is money you need to pay back.