There are many types of margins in the financial market, from real estate, loan contracts, etc. However, using margin in Forex is a new concept for many traders because it is often misunderstood in many different ways.
So what is margin in Forex Let's learn about the article.
What is Margin?
Margin in Forex is an amount of money used as collateral, or deposit, that a trader makes to initiate a trade. Essentially, it is a minimum amount of money that a trader needs to have in the account to open a new trading position. This is usually expressed as a percentage of the value for a trade order.
Or to put it more simply, margin in forex is the minimum amount of money you need to make a trade with leverage and it is also a useful tool for risk management.
Understand margin and leverage
Before continuing you must understand the concept of leverage . Leverage and margin in Forex are closely related because the more margin required in forex, the less leverage traders can use. This is because the trader will have to finance more of the trade with his own money and borrow less from the broker.
Leverage and how to calculate leverage
Leverage in the Forex market is a useful financial tool that allows traders to access the market more easily than the initial investment (balance). This means that a trader can enter a position worth $100,000 with just $1,000, with a leverage of 1:100.
The above also means that both profits and losses will increase when investors apply leverage in transactions. Therefore, in adverse market situations, overusing leverage can even cause you to lose more money than your initial capital.
Leverage has the potential to create large profits and losses, which is why traders must use leverage strategically. Leverage may vary between brokers and between jurisdictions. Especially in countries like UK, Australia, USA, Euro, etc
How to calculate leverage
Traders need the following to calculate leverage:
Equity = Margin percentage X Trade size
To calculate leverage, simply divide the trade size by equity.
Leverage = Trade size / Equity
Below is a typical example of how to calculate leverage using the above formulas:
Trade size: 10,000 currency units (one mini contract on USD/JPY with trade size equal to 10,000 USD)
Margin rate: 10%
Equity = (Margin percentage) x (Trade size) = 0.1 x $10,000 = $1,000
Leverage = Trade size / Equity = $10,000 / $1000 = 10 times or 10:1.
In conclusion, using 1:10 leverage means traders can access up to ten times the value of their forex deposit.
The relationship between margin and leverage
Leverage and margin are closely related because the more margin required, the less leverage traders can use. Margin in forex requirements are set by brokers and are based on the level of risk they are willing to accept, while complying with regulatory restrictions.
Below is an example of the required margin for GBP/USD.
Trade size: $100,000, equivalent to 1 lot of base currency trading. The required margin for 1 trading order with 1:400 leverage is only $250.
Margin in forex is often seen as a fee that traders must pay. However, it is not a transaction cost, but a part of the capital that is set aside and allocated as a deposit.
The amount of forex margin required to open a position is determined by the trade size. As the trade size increases, the required margin will also increase. Margin in forex requirements may temporarily increase during periods of high volatility or before the release of potentially more volatile economic data than usual.
After understanding margin in forex, traders need to ensure that the trading account has enough funds to avoid Margin Call. Traders can monitor their account status via margin levels in forex:
Forex margin level = (equity / margin used) x 10
Margin Level = (Equity/ Margin Used) x 100
Let's say a trader has deposited $10,000 into the account and now has $8,000 used as margin, the margin used would be equal to 125. If the margin level in forex falls below 100, you may be exposed to margin call.
Traders must understand the margin in forex closing rules set by their brokers to avoid having their existing positions closed. When an account is subject to a margin call, the account needs to be funded immediately to avoid closing out currently open positions - Stop out.
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Some terms about Margin in forex
The most important thing before starting to trade Forex, traders must understand Margin terms to get important calculation parameters. This will help you gain a deeper insight into risk management, as well as understand the nature and calculation for all margin transactions in forex.
- Equity: is the balance of the trading account after adding profits and subtracting current losses.
- Margin requirement: The amount of forex margin required to execute a leveraged trade.
- Used margin: A portion of account equity that is set aside to hold existing trades on the account.
- Free Margin: The equity in the account after deducting the used margin.
- Margin Call: When equity falls below an acceptable level set by the broker, this triggers the immediate closing of open positions to bring equity back to an acceptable level .
- Forex margin level: A measure of the level of capital invested, by dividing the capital (Equity) by the used margin amount and multiplying by 100.
- Leverage: Leverage is a useful financial tool that allows traders to increase their market exposure beyond the initial investment by putting up small amounts and borrowing the rest from home. agency. Traders should know that leverage can yield large profits and losses.
Allocated margin for current position: $8,000
Unused margin = equity - margin on open positions
Unused margin = $10,000 - $8,000
Unused margin = $2,000
When trading on an account using margin in forex, traders must understand how to calculate the required margin for each position. Be aware of the relationship between margin and leverage and how the margin requirement increases, reducing the amount of leverage available to the trader.
Track important news releases using an economic calendar if you want to avoid trading during volatile periods. There should be a large amount of equity in your account in the form of Free Margin. This assists traders in avoiding margin calls and ensures that the account has enough funds to enter high probability trades as soon as they appear.
Wishing you successful trading!
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