What is Margin in Forex Trading?
There is a prevalent term in forex trading called “Margin”. You may also have heard about it. Almost all forex traders know about this. It is an essential thing to know for being a successful forex trader. It can be an unknown topic for the new forex trader or the person who wants to start forex trading.
Well, this article is basically for the new forex traders who are new in this forex trading industry. Here, we will deeply discuss what is margin in forex trading. Besides, we will also give some important information about some related topics needed to know for the new forex trader.
By the way, as a beginner in forex trading, you should follow FXTradingmaster.com to get the most valuable tips and tricks. They will give you a proper guideline as well.
What is Margin in Forex Trading?
When trading forex, you have to put up a minimum fixed amount of capital to start and maintain the new position. This fixed amount of capital is called margin in forex trading. It is the kind of security that a trader generates for the broker to cover some of the risks of the potential loss.
Forex margin rate is typically shown as a percentage. You may have seen different types of margin requirements in forex trading, such as 1%, 2%, 3%, 5%, 10% and above. Therefore, it starts from around 3.3% in the UK. Actually, the margin is mostly dependent on the broker. Simply we can say, the margin in forex is a portion of the total balance that sets your broker besides your main account balance to keep your trade open.
However, you have to consider two types of margins in trading: initial margin and maintenance margin. The initial margin is basically the amount of deposit you need to open the position. It is also called deposit margin. And the maintenance margin is the amount of money that you need to have in your account to cover any losses and fund the present value of the position.
Margin has a lot of significance in forex trading. It allows a trader to increase the volume of his/her trading. Margin depends on the leverage that a broker provides to his/her traders. An example can clear you at all. Think that your forex trading broker wants to open a $100,000 position by offering you a 1% margin. Here you only need $1000($100,000 ×1%) to open the transaction. The remaining 99% will provide the broker. Here the leverage ratio is 1:100.
How to Calculate Forex Margin?
It is a very easy process to calculate the forex margin. Then again, it can be difficult for the new forex trader. Let’s clear it up. For example, think that your broker offered you the leverage of 1:20 for forex trading.
This means, for opening 20 unit of the currency position, you only need 1 unit of currency as margin. So, we can simply say that, for opening a $20 position, your forex margin is $1. That means you need only $1 for opening a $20 position. As simple as that. Here the margin is 5% (1/20).
Pros and Cons of Margin in Forex Trading
Pros: Margin can increase the amount of profit at a huge level. Just because of margin, you will easily open a huge amount of position by having a small amount of money. In a 1:100 leverage trade, for opening a $100,000 position, you only need $1000 as margin.
Cons: In the case of margin trading, the risk is also very high. Since the profit is counting on the total amount of position, the loss will also be counted on the total amount. In this kind of project, you have a great chance of losing more than the initial investment amount.
What Is Required Margin?
Required margin is the minimum amount of money that you need for keeping the position open. It will be placed and locked in the account after opening the position. Think that you want to open a position that worth $100,000 with a leverage of 1:100. Here you the required margin is $1000 ($100,000/100). This amount will be locked in your account till the position is open.
What is a Margin call?
A margin call is a warning call from the broker that says you don’t have enough required margin in your account; you need to deposit more equity. Otherwise, you will lose your position. When you have an opened position but don’t have enough required margin and free margin in your account relating to your position, you will get this kind of call, and you will be asked to top up.
What Is Free Margin?
The free margin is basically the difference between the equity you have in your account and the required margin. An example will clear your better. Think that you have $1000 equity in your account, and you have opened a position where the required margin is $500. So, here your free margin is $500 ($1000-$500).
Summary
You should have known now that what is margin in forex trading. Here in this article, we have discussed it very deeply with the most important related topics. We hope it has increased your knowledge about this topic at a significant level.
However, you can get the best advantage of forex margin if you can utilize it in the best way considering the profitability and risk. Make sure you read the margin agreement well before opening a position. If you can trade forex tactfully maintaining all the important factors, you can make a huge profit here.
