What is Margin in Forex and how does it affect your trading Account?

Margin is an important concept in Forex trading, and everyone needs to learn how it can affect their trading account.

What is Margin trading in Forex?

Generally, margin can be defined as the amount of money that a trader uses to open a trade. A forex traders needs to pay only a small percentage of the total value of each position. Margin trading enables them to trade with large volumes of Forex currencies with only a small amount of capital.

Margin can make you rich or poor depending on whether you are making losses or profits. It magnifies your profits or losses. Thus, margin trading has high risks and high returns.

Essentially, you open large positions with a small amount of money, and the profits & losses are based on the full value rather than the amount you use to open the trade.

Margin requirements always depend on the broker, and in turn the margin requirement affects the leverage available for the trader. In some jurisdictions, regulatory bodies provide limits for the leverage values.

In the UK, margin requirements start from 3.3%, which means that you can use only 3.3% of the full value to open a position. Let’s say, for instance, that you want to open a position of $10,000 and your broker requires a margin of 5%. That means that you need $500 to open that position. This means you will operate on a leverage of 20:1. When the size of your trade increases, the margin requirement also increases.

What is the margin level in leveraged forex trading?

In online forex trading, there are several margin terms that you need to know. One of them is the margin level, but let’s start with Used Margin.

What is Used Margin in forex trading?

When you open a position in online forex trading, your broker will lock your initial deposit for that deposit as collateral. For instance, if you used $500 to open a position worth $10,000, your broker will lock $500 from your account, and that will be the used margin until you close that position. When you close an open trade, your used margin will be released and it will be available to open another trade. This brings us to the concept of available margin.

What is Available Margin in Forex trading?

Available margin refers to the amount of money that are available for you to use in opening a new position in forex trading. For instance, if you deposited $800 in your online forex trading account, and you use $500 to buy EUR/USD worth $10,000. You will lock $500 for that open position, but $300 will be available for you to open another trade.

Available margin is also called available equity.

How to calculate margin level

The available equity is used to calculate the margin level in forex trading. We can say margin level is the ratio of equity to used margin, always expressed as a percentage.

Margin level = (equity/used margin) × 100

Example of How to Calculate Margin Level

In the example above, assume $800 is equity, and used margin is $500.

Margin level = (800/500) × 100 = 160%.

That is a good margin level. Let’s say your open position gave you a loss of -$50, what will be your new margin level?

A loss often reduces your equity, so the new equity will be:

Equity = trading balance + profits – losses.

That is, $800-50 = 750.

New Margin level = 750/500 × 100 = 150%.

As you make more losses, the margin level reduces. The forex broker will close your trades if margin level comes to a certain minimum. Most brokers require a minimum margin level of 30%, below which your open trades will be closed, starting with the highest loss. However, they will give you a margin call, which is like a warning, when the margin level is approaching the minimum requirement.

FXPesa, for instance, gives you a margin call when your margin level comes below 100%.

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