Tuesday, November 17, 2009
attractive spread in forex margin
Tuesday, October 13, 2009
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.
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.
Let's compare to TTS/TTS rates banks offering
Spread on the forex margin trading
Swap point is neutral
Swap poin
Swap trade adjusts the trading price arising from the differential in interest rates. Looking at the trade of long position in USD-JPY as we have mentioned above, and the cost of the position is decreasing day by day. It means a little advantageous for players whi have USD-JPY long position because the price they got originally becomes lower. This is caused by the swap trade for rolling over at the end of the day, and as a result, the trading price is adjusted, which is arising from the interest rate earning between US dollar and Japanese Yen.
To say exactly, the old position is set off by one side of the swap trade and the new one is set up by another side of the swap trade with taking the carrying cost into account. The swap trade itself yields nothing. Roughly saying, the higher yield currency is decreasing its values with passage of time. Even if you get some swap points in favor, the value would be going down in the forex market. Adversely, the interest rate might be going down when the value of higher yield foreign currencies is going up.