What is Margin?

 

Margin is a good faith deposit required by your broker to cover the position you have entered into the market. Without providing a margin you won’t be able to use leverage. This is because your broker uses this to maintain your position and cover any potential losses.

 

Different brokers will offer different levels of margin depending on a number of factors, such as the currency pair you are trading and the leverage of your account.

 

Each currency pair moves differently, so that is a factor in how much margin is required. You’ll tend to find the more volatile pairs move more in a day. This means the margin required to trade those currencies is likely to be higher.

 

Margin is normally quoted in percentage terms, such as 0.25%, 0.50%, or 1%. This tends to increase as leverage decrease

 

The simplest way to think of margin is that it represents the 1 in the leverage ratio. So if your leverage is 100:1, your margin is the amount needed in your account (represented by the 1). This means that if you have a mini account and place a $10,000 position in the market, you will need $100 to even open the trade.

 

What’s a Margin Call and Should I be Afraid of One?

 

A margin call is what happens when you have no money left in your account. To protect you from losing more money than you have, your broker will close out any open positions. This means you can never lose more money than you have in your account!

 

Before learning what a margin call is you need to know the definitions of two terms.

 

Used Margin: The amount of money currently being used in open trades. If you have $6,000 capital in your account and have $1,000 in an open trade, your used margin is $1,000. If you have $3,000 capital in your account and have $600 in an open trade, your used margin is $600. Simple!

 

Usable Margin: The amount of money in your account minus any open trade. Using the same examples, if you have $6,000 capital in your account and have $1,000 in an open trade, your usable margin is $5,000. With $3,000 capital in your account and $600 in an open trade, your usable margin is $2,400.

 

When your usable margin reaches $0 your broker will automatically margin call you. With good money management, this should never happen but newbies can slip up!

 

Below are a few examples of margin calls:

 

Tom opens a standard Forex account with $4,000 and 100:1 leverage. This means that on each trade Tom must enter a minimum of 100,000 units ($100,000). With 100:1 leverage, Tom must enter $1,000 of his own money to each trade.

 

After analyzing GBP/USD, Tom decide the pair is going up. He opens a long position with 2 standard lots on GBP/USD. That means Tom is trading $2,000

 

Disaster strikes! GBP/USD goes down instead of up nad Tom curses himself for taking a long. If Tom keeps the position open and it moves too far against him, he will get a margin call.

 

Before Tom opens his position he has $4,000 in usable margin. After opening a position with 2 standard lots ($2,000) his used margin became $2,000 and his usable margin became $2,000. If GBP/USD drop by too many pips and Tom’s usable margin reaches $0 his broker will close out his trade. This protects Tom from losing more money than he has in his account.

 

Another example:

 

Mary opens a mini Forex account with $1,000 at 100:1 leverage. After analyzing EUR/USD, she decides to short and enters 7 mini lots ($700). Before entering the positions, Mary’s usable margin was $1,000. Now that she is in the trade her usable margin is $300.

 

Once again, disaster has struck and Mary’s trade goes against her. If Mary’s usable margin reaches $0 her trade is automatically closed to prevent her from losing more money than she has in the account.

 

Margin calls can be easily avoided if you trade sensibly.

 

It is vital that you check what the margin policies are with you broker. Policies can differ from broker to broker so if you plan on opening an account, remember to ask!