What is margin in Forex?
Margins in Forex trading are needed to open a position and keep it open. By applying margins, a Forex trader can effectively trade with more capital than actually in their account.
We can use leverage and trade Forex with the help of margins. To establish and sustain a trade, we simply need to invest a little amount of capital up front. An account margin is not a transaction cost like swaps or commission, but a portion of the funds set aside by a broker to open a trade and cover any losses that the trade incurs.
This capital is then used for that specific trade and cannot be allocated to other trades. In trading terms, margins are sometimes referred to as the “margin requirement.” This term is defined as: the percentage of the total position that you wish to open on the trade.
Margin requirements can be upwards of 1%, 5%, or 10%. The percentage will depend on the instrument you are trading, as well as your broker or provider. If you have a circumstance where the margin requirements are 3%, you will only need to put up 3% of the capital to open and maintain the trade.
If a Forex trader has multiple positions open, each trade will have an independent, required margin. The total of the open trade margins is known as the “used margin.” The used margin is the total of all required margin being used.
What is free margin?
The free margin is essentially the difference in value between the equity and total used margin. Thus, the free margin is the margin not tied up in the account. This statistic is usually shown live on your trading platform next to your account balance. As you open and maintain trades, the free margin will decrease and the remaining free margin will be displayed.
To calculate the free margin in a situation, we use the equation: Free margin = Equity – Used margin. The result will constantly change given the current margin situation. If multiple open trades are running in profit, the equity increases and more free margin will become available. This scenario would become more apparent with a higher leverage trading account.
If your trading positions are losing money, the equity will decrease alongside the free margin. If you have no open trades, the free margin will be the same value as your balance amount. The level of free margin versus the equity will depend on the buying power of the trading account.
What is the margin call level?
Margin call or stop-outs are a Forex trader’s worst nightmare; the margin level has reached the upper threshold on the account. When this level is reached, the broker will forcefully close all positions and leave the small remaining capital. This process is known as “liquidating the position.”
Depending on your Forex broker, you will have a margin call of around 90%, with some brokers offering 100%. Ideally, you should never be anywhere near this level. If you are only risking a small percentage of your account value and you practice disciplined trading, you will never have to worry about the margin call.
If you do experience a stop out, take some time away from the Forex markets to refresh your mindset and revaluate your trading decisions. Focus on your missteps and rebuild your strategy more independently of your account margin.
What is margin in Forex conclusion
While it may seem ideal to use high leverage and a high account margin to flip your account, regardless of your account type or leverage, it is important to maintain a low-risk strategy and not overextend your margin in Forex trading.. You can practice this by limiting the number of trades you place to one or two at any time. By limiting the amount of risk exposure on your account, you are also less likely to experience a margin call.