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MARGIN

The Forex market offers its participants the potential to trade on margin. The ability to trade on margin is one of the attractive – but at the same time risky- features of forex trading. Essentially trading on margin allows the forex trader to trade on borrowed funds.

In the Forex market the term margin is the amount of money required to open a leveraged position, or a contract in the market

Working Example of Margin

To calculate the margin required to execute 1 mini lots of USD/CAD (10,000 USD) at 1:100 leverage in a $1000 mini account, simply divide the deal size by the leverage amount e.g. (10,000 / 100 = 100). Therefore, $100 margin will be required to place this trade, leaving an additional $900 marginable balance in the trading account.

Free Margin and Used Margin

In the above example we had a $1000 account. In order to open the position above we were required to have initial margin of $100. This is referred to as used margin. The remaining $900 is known as the free margin. All things being equal, the free margin is always available to trade upon

Margin Level

Forex margin level = (equity / margin used) x 100

Suppose a trader has deposited $10 000 in the account and currently has $8 000 used as margin. The forex margin level will equal 125 and is above the 100 level. If the forex margin level dips below 100 the broker generally prohibits the opening of new trades and may place you on margin call.

It is essential that traders understand the margin close out rule specified by the broker in order to avoid the liquidation of current positions. When an account is placed on margin call, the account will need to be funded immediately to avoid the liquidation of current open positions. Brokers do this in order to bring the account equity back up to an acceptable level.

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