Chapter 1  An Introduction to Margin

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1. Forex Margin

Forex margin is a good faith deposit that you puts up as collateral to initiate a trade. Essentially, it is the minimum amount that you needs in the trading account to open a new position.

For example, if a Forex broker offers a margin rate of 3.3% and a trader wants to open a position worth $100,000, only $3,300 is required as a deposit to enter the trade. The remaining 96.7% would be provided by the broker.

Margin is used or locked up for the duration of the specific trade.Once the trade is closed, the margin is freed or released back into your account and can now be usable again to open new trades.

2. Margin Requirement

Margin requirement is the amount of margin required to open a position.It is expressed as a percentage of the full position size, such as 0.25%, 0.5% and 1%.

Depending on the currency pair and Forex broker, the amount of margin required to open a position varies.

Besides, within the same broker, margin requirement will ultimately be determined by the trade size. As trade size increases, you will move to the next tier where the margin requirement increases as well.

3. Required Margin

When margin is expressed as a specific amount of your account’s currency, this amount is known as the required margin. Required margin is also known as deposit margin, entry margin, or initial margin.

For example, to buy or sell a 100,000 of EUR/USD with a margin requirement of 2%, only $2,000 (required margin) of the trader’s funds would be required to open and maintain that $100,000 EUR/USD position.

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4. Used Margin

Used margin is the amount of money that your broker has “locked up” to keep your current positions open.While this money is still yours, you can't touch it until your broker gives it back to you when you close your current positions or when you receive a margin call (It will be discussed later).

5. Usable Margin

Usable margin is the money in your account that is available to open new positions.

6. Forex Margin Level

The Forex margin level provides a measure of how well your account is funded. It is the percentage value based on the amount of accessible usable margin versus used margin. In other words, it is the ratio of equity to margin.

The margin level can be calculated using the following formula:

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

The higher the margin level, the higher the amount of cash available to trade, while the lower the margin level, the lower the amount of cash available to trade, and this is where an account could be subject to a margin call.

If you don't have any trades open, your margin level will be zero.

The Forex margin level shows the current risks, allowing them to be lessened. By paying attention to the margin level, you can see whether you have enough funds to open a new position or to keep an open position open.

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%.

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