What is Used Margin?

Okay, let’s talk about “used margin”. But first, let us clarify what we mean by “required margin”.

When you make a new deal, you reserve a particular amount of money called Required Margin. We covered Required Margin in our previous lesson, so if you’re not sure what it means, go to our “What is Margin?” lesson first.

“Used Margin” refers to the total amount of money you’ve previously invested to keep all of your trades open. When you initiate a trade, you set aside a particular amount as “required margin.” If you have many trades open, each has its own Required Margin. The Used Margin is the sum of all required margins. It is the money you have already spent and cannot utilise for future trades. So, while Required Margin applies to each trade, Used Margin is the total of all your trades.

“In simple terms, Required Margin is for each trade you make, while Used Margin is the total amount of money you’ve put in to keep ALL your trades open.”

For example, start long positions in USD/JPY and USD/CHF

Suppose you have $1,000 in your account and wish to make two trades:

You wish to purchase a modest portion of USD/JPY, which means you’re investing in the US dollar-Japanese yen exchange rate.

You also wish to purchase a modest portion of USD/CHF, the exchange rate between the US dollar and the Swiss franc.

Each trade has its own set of limitations about the amount of money you must have in your account as a safety precaution. This is known as the ‘Required Margin.’

  • For USD/JPY, keep 4% of your total investment as Required Margin.
  • For USD/CHF, preserve 3% of your total investment as Required Margin.

If you’re putting $10,000 in each trade (the least amount you can invest, known as a mini lot’), let’s figure out how much money you should keep in your account for each trade.”

USD/JPY Position

Margin Requirement: The percentage of total trading value required in your account to open a position. It serves as a safety deposit.

For USD/JPY, the margin requirement is fixed at 4%. This means you must have 4% of the total trade value in your account as required margin.

Assuming your trading account is denominated in USD, your account’s currency is US dollars.

The Required Margin will be $400. For example, if you’re trading USD/JPY and the total transaction value is $10,000, you’ll need $400 in your account (4% of $10,000) to open the position.

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USD/CHF Position

The margin requirement for USD/CHF is 3%. This means that in order to open a position in USD/CHF, you must have 3% of the total transaction value in your trading account as required margin.

Assuming your trading account is in USD, This indicates that your trading account’s base currency is US dollars. It is the currency used to measure your account and compute profit and losses.

The required margin is $300. For example, if you’re trading USD/CHF and the whole trade value is $10,000, you’ll need $300 in your trading account. This $300 represents 3% of the $10,000 Margin Requirement for USD/CHF.

To summarise, if your trading account is in USD and you want to trade USD/CHF, you’ll need $300 to meet the Margin Requirement and open the position.

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You’ve opened two trades, one in USD/JPY and the other in USD/CHF.

Used Margin: This is the entire amount of money that has yet to be used to keep your open positions.

Calculating Used Margin: The required margin for the USD/JPY trade is $400, and for the USD/CHF trade, it is $300. When you add these two amounts ($400 and $300), you receive $700.

Because you have two open trades, your trading account’s total Used Margin is $700.

In summary, the Used Margin in your trading account is $700 due to two open trades, each with its own Required Margin.

The relationship between Used Margin, Required Margin, and Balance can be represented as follows:

Balance: The total quantity of funds in your trading account. It includes both your initial deposit and any profits or losses from your trading.

Required Margin: When you open a trade, a percentage of your account balance is reserved as Required Margin. This amount is decided by the size of your deal and the leverage available from your broker. It serves as a safety net, covering potential losses.

Used Margin: This is the total amount of your Required Margin that currently has been locked up in open trades. It reflects money that is not available for new transactions since they are being utilised to keep your current positions.

In essence, Used Margin is a percentage of your account balance that is “locked” into open transactions, ensuring that you have enough funds to support such positions and pay any potential losses.

By showing the constantly changing relationship between these three elements, the diagram helps traders in understanding how their account balance is allocated and managed in accordance with their trading activity.


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Overview

In this lesson, we discussed Used Margin, which is the total amount of margin currently being used to protect all of your open positions. It’s like adding up all of the money you’ve set aside for transactions.

To put it simply, Used Margin is the total amount of Required Margin that is now being used.

In previous courses, we discussed important topics such as:

Margin Trading: Learn how your margin account works.

Balance: The balance of your trading account refers to the amount of cash available.

Unrealized and realised P/L: Understanding how your gains and losses affect your account balance.

Margin: Required Margin is the money you set reserve but cannot utilise when you begin a deal.

Next, we’ll discuss equity. Stay tuned!