Using margin in forex trading

Trading with margin is a new concept for many novice market participants, and one that is often misunderstood. Margin is the minimum amount of money required to place a leveraged trade and can be a useful risk management tool.

In this lesson, you’ll learn more about using margin in forex trading, how to calculate it and how to effectively manage your risk.

What is forex margin?

Forex margin is a ‘good faith’ deposit that you put up as collateral to initiate a trade. Essentially, it’s the minimum amount that you need in your account to open a new position (set by your broker/trading provider).

This is usually given as a percentage of the notional value of the trade (also known as the trade size). The difference between the deposit and the full value of the trade is ’borrowed’ from the broker.

Below is a visual representation of the forex margin requirement relative to the full trade size:

Understanding forex margin requirements

Margin requirements in forex are set by brokers. They’re based on the level of default risk the broker is willing to assume, whilst adhering to regulatory restrictions.

Below is an example of margin required based on the position size. Ensure that you’re familiar with your broker’s margin requirements before trading with them.

As you can see in the image above, the first two tiers maintain the same margin requirement at 3.33%, but then escalate to 4% and 15% in the following two tiers.

Margin is sometimes seen as a ‘fee’ a trader must pay. However, it’s not a transaction cost, but rather a portion of the account equity that’s set aside and allocated as a deposit.

When trading with margin, it’s important to remember that the amount of margin needed to hold open a position will ultimately be determined by the trade size. As trade size increases, you’ll move to the next tier where the margin requirement (in monetary terms) will also increase.

Additionally, brokers will sometimes increase margin requirements temporarily during periods of high volatility, or in the lead up to economic data releases that are likely to contribute to greater-than-usual volatility.

After understanding your broker’s margin requirement, you need to ensure that your trading account is sufficiently funded to avoid margin call.

One way to keep track of your account status is through calculating the forex margin level as follows:

(Equity / margin used) x 100 = margin level

For example, say you’ve deposited $10,000 into your account and currently have $8000 used as margin. Your margin level will equal 125, which is above the 100 level. If the margin level dips below 100, your broker may prohibit you from opening new trades and may place you on margin call.

You should be aware of the margin close-out rule specified by your broker in order to avoid your current positions being liquidated. When you’re placed on margin call, you’ll need to fund your account immediately to avoid this.

Margin call is a broker’s way of bringing your account equity back up to an acceptable level.

The basics of available margin in forex

Available margin, also known as free margin, refers to the equity in your account that’s not tied up in margin for current open positions. Another way you can think of this is that it’s the amount of cash in your account that you’re able to use to fund new positions.

For example, if your account equity is $10,000, and the margin allocated to your open positions is $8000, then your available margin is $2000.

Managing the risks of margin trading

Our trading platform calculates your margin requirement for you before you open a trade. However, not all trading providers may have this in place. So you may want to understand how to calculate your margin requirement per position.

One way to manage the risk of going into margin call is to monitor important news releases that could cause heightened volatility. Remember, trading providers can sometimes increase margin requirements when this happens, so you may want to manage your open trades during these periods.

It may also be beneficial to have a large amount of your account equity as free margin to avoid margin calls. This also ensures that your account is sufficiently funded in case you may want to open new trades as opportunities arise.