What is Margin?
The amount that you deposit in your forex account to trade with is known as margin. It is also known as capital amount.
For example, for opening position worth $1000 you are not needed to deposit the whole amount at your end, only a portion of money is what required from your end. The actual amount depends on your forex broker.
Fig 1. Illustrates margin.
Margin requirements are the basic requirements for choosing the leverage with any broker. You have to keep that much amount in your account so that you can bear your loss. Margin requirements differ as per the country from which you are trading. Considering an example, if a forex broker offers a margin rate of 3.3% and a trader wants to open a position worth $1000 then he/she is only needed to pay $330 to open that trade. The remaining amount is paid by the broker itself. Margin requirement changes as per the trade sizes. Professional client can have different margin requirements.
One is needed to have good understanding of margin as it is one of the most important terms in forex market. Trades are done on margin and margin can either provide you profit or loss.
Along with margin trader should also know about margin level and margin call.
Types of Margin
Fig 2. Illustrates type of margin.
There are two types of margin:
Free Margin: Free margin is the amount which has not been used yet for trading.
Used Margin: Used margin is the amount which is blocked because of opening of trades.
Difference between used margin and free margin
Fig 3. margin and free margin
What is Margin Level?
Whenever a trader opens a position, some amount is blocked which is termed as used margin as more trades are opened then more margin is blocked to run those trades hence, the used margin amount is increased.
The amount which is left or unused is termed as free margin which can be used to calculate margin level.
Therefore, margin level is the ratio of equity in the account to used margin, expressed as percentage. The formula is as follows:
Fig 4. Illustrates the formula to calculate Margin Level
Margin Level = (equity/used margin) * 100
What is Margin Call?
When the trades are going in negative then the margin level on account will fall. If the margin level falls 100% then it simply means that the amount in the account cannot cover the trader’s margin requirements. Now in this case the trader’s equity has fallen below the used margin. Either the trader has to put up more money into account and if there is negative protection from broker then you might end up losing all the funds in your account.
That’s why it is suggested to used stop loss feature in case trade goes wrong you will have the fix amount of loss in your account along with that avoid margin calls at all cost.
Margin is the amount of capital which is deposited in the trading account. There are two types of margin one is used margin and other is free margin. Used margin is the amount blocked for opening trades whereas, free margin is the amount which is free to open new trades. Along with these two terms traders are required to know about margin level and margin call also. Margin level is the ratio of the equity in the account to used margin whereas, margin call is the condition where the amount in the account can no longer cover the trader margin requirements.