What is Margin in Forex trading?
Margin is the amount of funds that the broker requires from the trader in order to cover any potential losses, since a trader is allowed to use more capital than the amount he or she initially deposited. It’s like a good faith deposit that’s represented as a percentage and directly connected to the leverage you are trading with. Another way of describing margin is that it’s the amount you need to have in your account in order to keep a position open. For example, if a trader was to deposit $20,000 in an account with 1:25 leverage, the margin set by the broker would be 4%. This means that if the trader were to buy 2 lots of EURUSD at 1.2000, he would need $9,600 (4% of $240,000 (200,000 x 1.2000)) in his account to keep his position open.
What happens when I use some of my capital in trading positions?
You may need to deposit more money in your account – it depends on how your open positions are affecting your trading account balance. Two important bits of information will help you keep track:
- Free Margin: This is the money in your account that’s available for trading. To calculate this, subtract the margin of your open positions from your equity.
Your balance is $10,000. You buy 2 lots of EUR/USD at 1.20000, so you need $240,000 (200,000 X 1.2000) and the margin is 240,000/50 = $4800. If the price of EUR/USD drops to 1.19050 you’d take a loss of 0.00950 pips (1.20000 – 1.19050), equivalent to $2280 ($240,000 X 0.00950). So your free margin is: Equity ($10,000 – $2280) minus Margin ($4800) = $2920.
- Margin Level: This is the ratio of your equity (the balance plus or minus any profit or loss from open positions) to the margin you’re using in your open positions.
It’s shown as a percentage and the formula is: (Equity/Used Margin) x 100.
For example: Your equity is $5,000 and you’ve used up $1,000 of your margin. So, your margin level is ($5,000/$1,000) x 100 = 500%.
What is a good margin level in forex?
Anything above 100% is considered healthy. If your forex trading account drops below that level, it’s best to top up your deposit before opening any new positions.
How much margin do I need to trade forex?
Margin is the money you put up in order to trade with leverage, so the two are interlinked. If, for example, the margin is 10%, the leverage is 10:1. If it’s 20%, the leverage is 5:1. Take a look at our guide to margin requirements.
What if my margin level runs low without me noticing?
When markets move against your open positions, your margin level falls. If it ever falls close to a fixed percentage agreed with your broker, say 40%, you’ll be notified with a Margin Call.
Your margin call is set at 40%, and your balance is $5,000. However, you take a $3,800 loss and have used up $1,000 of margin. Your margin level is now: ($5,000 - $3,800) / 1,000 x 100 = 120%.
If it drops another 80%, you’ll receive a margin call. It’s then time to either deposit more money, or close losing positions, to free up more margin.