What is Margin in Forex Trading? How Your Margin Account Works?

A better understanding of margin is crucial when trading leveraged forex. It is also important to know that margin trading has high potential for gains and losses. Therefore, as a trader, you should be familiar with margin and its related terms, such as margin calls, margin levels, etc. In this article, we will go into more detail about what we just mentioned to help you understand why margin matters and how your margin account works deeper.

What is Margin in Forex？

Margin in trading is the deposit required to open and maintain a position. When trading on margin, you will get full market exposure by putting up just a fraction of a trade's full value. So margin is not a cost or a fee, but it is a portion of the customer's account balance that is set aside in order trade. Investors use margin trading in forex to increase possible return on investment.

Forex margin is used to guarantee a trade and is usually calculated from the leverage of the trade item. Generally speaking, traders need to pay a certain amount of forex margin to buy and sell a certain amount of currencies according to the financing multiple provided by the platform(offered by your broker). Traders make profits when prices rise or fall, but also take the risk of losses.

In other words, forex margin is the range of purchasing power a broker can offer you based on your deposits.

Margin trading allows traders to increase the size of their initial position. But you have to remember in mind that - margin a double-edged sword, because it increases both gains and losses. If your forecast on price is wrong, then your account will be empty in the blink of an eye because of a large number of trading volume.

To trade forex, you need an account, that's what we called - margin account.

What're the Different Types of Margin？

1. Minimum Margin

Before you can begin trading on margin, you must meet the minimum margin requirement. For example, your broker requires you deposit in your margin account the lesser of $100.

2. Initial Margin

When you start buying on margin, you are generally limited to borrowing a certain percentage of the cost of the currencies you intend to buy and sell, for example, if it is 10%, this can effectively increase your purchasing power. If you have $5,000 in your margin account, for example, you would be able to buy and sell $5,500 of currencies on margin.

3. Maintenance Margin

After you've bought or sold currencies on margin, you must maintain a certain balance in your margin account. Called maintenance margin or maintenance requirement. For example, your broker sets it at least 30% of the assets in your margin account to be owned outright by you.

What is Margin Level in Forex？

When a forex trader opens a position, the trader's initial deposit for that trade will be held as collateral by the broker. The total amount of money that the broker has locked up to keep the trader's positions open is referred to as used margin. As more positions are opened, more of the funds in the trader's account become used margin. The amount of funds that a trader has left available to open further positions is referred to as available equity, which can be used to calculate the margin level.

The margin level is the percentage (%) value based on the amount of equity versus used margin. Margin Level allows you to know how much of your funds are available for new trades.

The higher the margin level, the more free margin you have available to trade. The lower the margin level, the less free margin available to trade, which could result in something very bad…like a margin call or a stop out (which will be discussed later).

Here's how to calculate margin level:

Margin Level = (Equity / Used Margin) x 100%

Your trading platform will automatically calculate and display your margin level. If you don't have any trades open, your margin level will be ZERO.

For example, let's say a trader places $10,000 in a forex account and opens two forex trades. The broker requires a margin of $2,500 to keep these two positions open, so the used margin is $2,500. In this scenario, the margin level is ($10,000 / $2,500) x 100 = 400%. When the margin level drops to 100%, all available margin is in use and therefore, no further trades can be placed by the trader.

What Is a Margin Account？

A margin account allows you to borrow money to trade forex currencies on margin. Unlike a cash brokerage account, which only allows you to spend as much money as you've deposited, a margin account leverages your purchasing power with debt.

Margin accounts are offered by brokerage firms to investors and updated as the values of the currencies fluctuate. To get started, traders in the forex markets must first open an account with either a forex broker or an online forex broker. Once an investor opens and funds the account, a margin account is established and trading can begin.

When you open a margin account, your brokerage extends you a line of credit you can use to buy and sell currencies. The currencies are collateral for the loan, and the brokerage charges you an interest rate. Unlike other forms of debt, margin loans don't have a set repayment schedule, but you must maintain your account value above a certain threshold. Margin requirements usually varies among different brokers.

How Does Margin Trading in the Forex Market Work？

1. Forex Margin Requirement

An investor must first deposit money into the margin account before a trade can be placed. The amount that needs to be deposited depends on the margin percentage required by the broker. For instance, accounts that trade in 100,000 currency units or more, usually have a margin percentage of either 1% or 2%.

So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker.

2. Leverage and Margin

Leverage and margin are two sides of the same coin. If margin is the minimum amount required to make a leveraged trade, leverage is a tool that allows traders to transfer unaffordable volumes of trades at a 1:1 price. Leverage is “enhanced trading capacity” when using forex margin accounts. It is a virtual “placeholder” to distinguish between what you have and what you want to manipulate on it.

Leverage is usually represented in an “X: 1” format.

Here is the thing, if you would like to trade one standard lot of EUR/USD without margin, you would need $100,000 in your account. But with a margin requirement of just 1%, you would only need to deposit $1,000. In this case, the leverage would be 100:1.

As you can see, leverage has an inverse relationship to margin.

3. Margin Call

A margin call is what happens when a trader no longer has any usable/free margin. In a margin account, the broker uses the $1,000 as a security deposit of sorts. If the investor's position gets bad and their losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties. In situations where accounts have lost substantial sums in volatile markets, the brokerage may liquidate the account and then later inform the customer that their account was subject to a margin call.

In other words, the account needs more funding. This tends to happen when trading losses reduce the usable margin below an acceptable level determined by the broker. The point where your broker initiates a margin call is called the margin call level.

Different Forex Brokers Have Different Margin Call Level

Each retail forex broker or CFD provider sets their own margin call level. so it's crucial to know what your broker's margin call level is! A lot of traders don't even bother to find out what they are before opening their account, they just jump right into trading.

Margin call level is frequently ignored or overlooked by traders to the detriment of their account.

How to Avoid Margin Call in Forex Trading？

1. Do not over-lever your trading account. Reduce your effective leverage. In general, you are recommended to use leverage with 30:1, or less.

2. Keep a healthy amount of free margin on the account in order to stay in trades. In general, you are suggested to use no more than 1% of the account equity towards any single trade and no more than 5% equity on all trades at any point in time.

3. Exercise prudent risk management by limiting your losses with the use of stops.

4. Trade smaller sizes and approach each trade as just one of a thousand insignificant, little trades.