What is a margin?

When using leverage to control a big position, your broker will require you to deposit a minimum amount of money on your account to allow you to have the requested size. That amount of money is the margin.

Definition:

A margin is good faith deposit collateral that is held by the broker to hold position to ensure that you have sufficient balance in your account relative to the size of your position.

For example for you to hold a position of $100,000, $500,000, $10000, $5000 your broker requires you to set aside $1000 from your account which is your margin for a leverage ratios of 100:1, 500:1, 10:1 and 5:1 respectively.

Margin is the amount of money required by a broker as collateral from a trader to allow you to hold a position with a broker. Therefore it is a good faith deposit a trader sets aside to hold an open position.

Your margin is used by your broker to pool it to someone else’s margin deposit to maintain your position within the interbank network.

Margin is always expressed as a percentage of full amounts of the held position. Forex margins are expressed as 2%, 1%, 0.5% or 0.25% basing on the margin required by the forex broker.  This helps traders to be able to calculate the maximum leverage to fit for their trading accounts.

Here are some of the maximum leverages provided by brokers with the available margins required.

The amount of margin required does not only depend on leverage but also on your position size, as the trade size increases your margin requirement increases as well.

These are some of the related terms that you are likely to encounter as you trade;

Account balance: 

Total amount of money on your trading account.

The profit & loss on your orders will be added or subtracted to or from your account when you close your open positions.

Margin used:

Amount of money locked by your broker to maintain your open position. It is only released at the close of your current position.

The amount of money used to open a position and is calculated basing on leverage.

Free margin:

The amount of money that is not involved in any trade and can be used to open more positions.

This is the difference between equity and the margin used to open a trade.

 When there is no open trade  running, your free margin is the same as your account balance.

Equity

Equity is the account balance plus the floating profit or loss of a running trade.

Equity = account balance +profit/loss

 When there is no current trade running, your equity is equal to the account balance and  equal to free margin.

Margin call.

This is a call received from your broker when the equity amount on your account is equal or below the margin level (margin) and the market is still going against you.

At this point you cannot take any additional positions.  You must deposit more money into the account or some  of the open positions will be closed by the broker to limit the risk.

Margin level

This is the level where a broker can determine whether you can take any more new trades or not. Most brokers use 100%. This means, at this level your equity  is equal to margin so you will not be allowed to open any new position unless any of your running trades goes back to profits and your equity increases.

 

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