What is margin?

In forex trading, margin refers to the amount of money a trader needs to deposit with their broker to open and maintain a trading position. It’s essentially a “good faith” deposit that ensures you can cover potential losses in your trade.

Key Concepts of Margin in Forex

1. Margin Requirement The margin requirement is a percentage of the trade’s total value that must be deposited to open the position. For example, if the broker requires a 1% margin, and you want to open a position worth $100,000, you need to deposit $1,000 as margin.
2. Free Margin Free margin refers to the amount of money in your trading account that is available to open new trades. It’s the difference between your equity (total account balance) and the margin already used for existing trades.
3. Used Margin This is the total amount of margin being used to maintain your open positions. For example, if you have multiple trades open, each requiring a margin deposit, the sum of all those deposits is your used margin.
4. Margin Level The margin level is the ratio between your equity and the used margin, expressed as a percentage. Brokers use margin levels to determine if traders can open new positions or if they are at risk of a margin call.
   • Formula:
     Margin Level = (Equity / Used Margin) x 100
5. Margin Call A margin call occurs when your margin level falls below a certain threshold set by the broker, typically 100%. When this happens, your broker may ask you to deposit more funds into your account to maintain open positions or automatically close your trades to prevent further losses.

Example of How Margin Works

Let’s say you want to open a trade worth $100,000 in the EUR/USD currency pair. If your broker requires a 2% margin, you need to deposit $2,000 to control that $100,000 position. The rest of the position is essentially “borrowed” from the broker, but the margin ensures that you can cover potential losses up to a certain extent.

Relation Between Margin and Leverage

Margin and leverage are closely related:

• Leverage allows you to control a large position with a smaller deposit (margin).
• Margin is the actual money you put down to open a trade, while leverage determines how much of the trade value your broker is lending to you.

For example, with 50:1 leverage, you only need a 2% margin to open a trade. If you use 100:1 leverage, you need only a 1% margin.

Key Points:

• Higher leverage requires a smaller margin.
• A margin call can occur if your trade moves against you and your account balance falls below the required margin level.

Understanding how margin works is critical for managing risk in forex trading, as improper margin use can lead to significant losses, including losing more than your initial deposit.