What is Margin in Forex? How to Calculate It & 3 Types of Margin

If you wish to trade a position worth $100,000 and your broker has a margin requirement of 2%, the required margin would be 2% of $100,000, which is $2,000. The margin protected the trader from losing more than the $2,000 deposited while controlling a much larger $100,000 position size. The margin deposited with the broker acts as collateral against potential trading losses. If you really want to understand how margin is used in forex trading, you need to know how your margin trading account really works. While this approach can prevent liquidation by drawing from your overall balance, it also means that all your margin trades are interconnected, increasing potential risks if multiple trades go wrong. For videforex instance, if you’re trading BTC/USDT on a margin basis, you can open a position with a smaller amount of USDT, borrowing additional USDT to leverage your trade.

What is Margin Level?

• You should therefore seek independent advice before making any investment decisions.
• Required Margin, on the other hand, is the actual dollar amount needed to open a position.
• Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics.
• If your broker has a maintenance margin of 0.5% (or $500 for your position), and considering your initial margin of $1,000, you’re left with only $2,500 as a buffer.
• Before beginning to trade forex on margin, retail traders need to understand the fundamentals of margin as explained in this article and how it functions.
• Aside from the trade we just entered, there aren’t any other trades open.

If the trader doesn’t act in time, the broker might automatically close some or all of the trader’s positions to prevent further losses. This is known as a “stop out,” and the specific level at which this occurs varies by broker. Continuing with the USD/CAD scenario, if the broker’s maintenance margin is set at 0.5%, for your trade of one standard lot, you must always maintain at least $625 in your account. Should a market downturn cause your balance to drop below this threshold, a margin call would be initiated.

For example, with 2% margin, the margin call triggers when equity falls to 3%. Traders must quickly add funds to restore equity above 3% or face liquidation. During extreme volatility, margin calls become more likely and require close monitoring. The high leverage possible on thin margins deserves careful consideration. Traders should weigh if the profit potential sufficiently compensates for the increased risk. If the base currency is DIFFERENT from your trading account’s currency, the Required Margin is then converted to your account denomination.

Example #1: Open a long USD/JPY position with 1 mini lot

In the securities world, margin is the money you borrow as a partial down payment, usually up to 50% of the purchase price, to buy and own a stock, bond, or ETF. Leverage is the ratio between the amount of money you really have and the amount of money you can trade. AxiTrader Limited is a member of The Financial Commission, an international organization engaged in the resolution of disputes within the financial services industry in the Forex market. Our Next Generation trading platform combines institutional-grade features and security, with lightning-fast execution and best-in-class insight and analysis. Let’s take the USDJPY trade you had open from up there as an example. At the moment of opening the trade, this is what your forex account would be like.

You should read and understand these documents before applying for any AxiTrader products or services and obtain independent professional advice as necessary. Desmond Leong runs an award-winning research team (2019, 2020, 2021 Finalists for Best FX Research and Best Equity Research) advising the largest banks and brokers on where the markets are heading. He specializes in technical analysis with a focus on Fibonacci, chaos theory, correlations, market structure, and Elliott Wave. There are a few margin terms you need to get acquainted with if you are going to explore margin trading. A margin call is definitely one kind of “call” you don’t want to get.

Step 2: Calculate Used Margin

And if you don’t have a certain amount of cash, you may not have enough “margin” to open new trades or keep existing trades open. This starts with understanding what the heck some (really important) numbers you see on your trading platform really mean. He contacts his forex broker and is told that he had been “sent a Margin Call and experienced a Stop Out“. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. The only reason for having funds in your account is to make sure you have enough margin to use for trading.

Assuming your trading account is denominated in USD, since the Margin Requirement is 5%, the Required Margin will be $650. Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be alpari forex broker review $400. When margin is expressed as a specific amount of your account’s currency, this amount is known as the Required Margin.

One of the mistakes new traders make is to use a high level of leverage, thinking they will make huge profits very quickly. If the market turns against your trade, it’s possible to suffer big losses and, in some cases, accounts have been wiped out (closed out) due to the use of high leverage. Using the Market Watch view on the MT4 trading platform, it’s easy to monitor the available margin level in a trading account. Using this view, you can quickly track all the relevant information – such as account balance, free equity, and available margin – and use this to manage margin levels accordingly. Using an example review thinking, fast and slow in forex trading, an investor’s account would need to deposit a certain amount based on the margin percentage required by the broker.

Most brokers now offer forex margin calculators or state the margin required automatically, meaning that traders no longer have to calculate forex margin manually. To calculate forex margin with a forex margin calculator, a trader simply enters the currency pair, the trade currency, the trade size in units and the leverage into the calculator. While margin trading is a good tool for forex trading to increase profits, it is important to realise that there are risks involved with it.

For those looking to take advantage of these strategies, platforms like XT provide competitive rates and a range of tools to enhance the trading experience. When margin level drops to 100%, all available margin is in use and the trader can no longer open new trades. If the margin level falls below 100%, the amount of money in the account can no longer cover the margin required to keep the position open. When this happens, a margin call will occur and the broker may close some of the trader’s positions if the margin call is not met to bring the equity in the trading account back up to the minimum value. Paying attention to margin level is extremely important as it enables a trader to see if they have enough funds available in their forex account to open new positions.