What is Margin?

What is Margin? Lesson No 31

Alright, everyone, let’s get to the concept of “margin” in forex trading. Now, when trading in the forex market, you don’t have to pay the full amount to create a new position. No, only a little portion of it is required, which we refer to as the “margin.”

Let me explain with an example. Assume you wish to purchase $100,000 worth of USD/JPY. You will not have to put up the entire $100,000. Instead, you only need a portion, say $3,000. Now, the actual amount depends on your forex broker or CFD provider.

Consider margin as a polite gesture, a deposit of organises showing your dedication to keeping the transaction alive. It’s like announcing.

Margin is not a fee or transaction cost. It’s a small portion of your money that your forex broker keeps separate from your account balance. This ensures that you can cover any losses and keep the deal going.

Remember, it’s all about having the trust (and cash) to stick with the transaction until the conclusion.

AD 4nXf1mgkENH6Q dzOh3w oJrH8wHuzy2YzKxMA0CPTbIOZrD0BIQj1CsJgryZmRRKbCdzyiqRlOIbUwt4ew8sG1bdsYM8x4HhZmvqWk9Y2mxtPRfU

Now, here’s the deal, when you’re in a specific trade, a piece of your money, known as the margin, is “locked up” or “used” for the duration of the transaction. It’s like putting something on hold.

But, here’s the good news, once you close that trade, the locked-up margin is “free” or “released” back into your account. Now you have it back, and everything is “usable” again. You can use it to initiate some brand-new trades. Simple, right? It works like a cycle, use it, free it, and then use it again.

What is Margin Requirement?

Okay, let’s discuss percentages and margin requirements in Forex. So, what about this margin thing? It is a percentage of the “full position size,” also known as the “notional value” of the position you are going to open.

Now here’s where things get interesting. What is your required margin? That can vary. It depends on the currency pair and the forex broker. They may ask for 0.25%, 0.5%, 1%, 2%, 5%, 10%, or even more. We refer to this proportion as the “Margin Requirement.”

Let me provide a few examples to make things clear. Your broker may comment, “Hey, I need 1% as margin for this one, and maybe 0.5% for that one.” It’s like a menu of percentages based on what you’re trading. 


What is the Required Margin

Let’s go down what margin involves in Forex trading. When we talk about margin, it refers to the amount of money required in your trading account to open a trade. We call this the Required Margin.

Now, when you initiate a new trade, you must set aside some money as Required Margin. It is also known as Deposit Margin, Entry Margin, or Initial Margin.

Consider the EUR/USD pair, which pits the euro against the US dollar. If you wish to purchase or sell 100,000 EUR/USD units without utilising leverage, you’ll need the full $100,000 in your trading account.

However, with a 2% Margin Requirement, you would just need $2,000 to get started and maintain that $100,000 EUR/USD trade.

AD 4nXcudQub tpoD9SyQz2MTLRG0mYgExjpfGM31d3RjFlp96QZ7A1D nIe hTtDMGbv6Mbgsob NPNUVndsWizwNFzlIQvfC40joRap LrMOgOSEyf1uSl4lDCJO0oyQDAnsaD2Jhi0ejNLF5w

Example 1: Start trading long USD/JPY

Now, assuming you have $1,000 in your trading account, you would like to initiate a long position on the USD/JPY, which is a bet that the value of the US dollar would increase relative to the value of the Japanese yen. You wish to start with 10,000 units, or one micro lot.

You now need to know how much margin you’ll need in order to open this trade. The value of one mini lot in this combination is $10,000 because the USD is the base currency. We refer to that as the Notional Value.

The required margin for this trade will be $400 if your trading account is in USD and the margin requirement is 4%.

AD 4nXe VW5bnnMS2G4rm8zXT3 ev NrrddG5BwECqXYExnCZ27n6pEMjAFnP6aVrN JdwQT2moBFfoqv1ZO19Xk9dSIas h3UvyqmoOuZFI qn9J ObT4QtDda1hmUqf9ez4

Example #2: Start trading the GBP/USD pair long

Assume you’ve deposited $1,000 into your trading account and have thought about going long on GBP/USD at 1.30000. You want to open a position for one micro lot, which equals 10,000 units.

So, how much margin do you need to open this position? Because GBP is the base currency, this tiny lot is worth 10,000 pounds, or $13,000 in nominal value.

Assuming your trading account is in USD and the Margin Requirement is 5%, you will need $650 to open this transaction.

AD 4nXcyRTClXr7BEE9aPosYoYdBWf6y kDEri5ngl rx8A8LvhBvWO

Example 3: Open a long EUR/AUD position

Assume you want to go long on EUR/AUD and open a position of 1 mini lot, which is equal to 10,000 units.

So, how much margin do you need for this trade?

Assuming your trading account is in USD, the first thing you should know is the current EUR/USD price, which is 1.15000.

Given that EURO is the base currency, this small lot represents 10,000 euros, hence the position’s Notional Value is $11,500.

With a Margin Requirement of 3%, you’ll need $345 to open this position.

AD 4nXeik6dFxSY058JOlJ1l7bdxA7ZWK COEZfjwVX3RjsoYPSSFgER eMWKDBYg75wFDjGctHWfXZvaW6yQOv HmfBbcKOWWnQpquSl7hHelsLG2CPMYxTa9x6GJOU HiNNfYgBfOUznb1tXgCzFk5VHTcY

How to Calculate Required Margin?

When trading on margin, you need a set amount of money known as ‘Required Margin’ to keep a position open. This Required Margin is calculated as a percentage of the position’s size known as the ‘Margin Requirement’ or ‘Notional Value’.

The Required Margin amount is determined using the principal currency of the currency pair being traded. If the main currency differs from the currency in your trading account, the Required Margin is adjusted to reflect your account’s currency.

Here’s how to determine the required margin,

If the main currency is the same as the currency in your account,

AD 4nXd oCLJbivDxUuGgBzXPzu6GYt7aeuilh7dakULe8Sw8KnBGfP65RHr8RXFt5JVb9FnX Y9xrmFUJ6mT2EVFd4oVtu13NXZjJ

If the currency of your account differs from the base currency,

AD 4nXdjkg6AHQoyUvbJEaxphwsdNOLafVBrz

Your trading account’s funds are basically there to make sure that you can trade comfortably.

Making transactions in forex trading requires more than just having enough money in your account. The more important factor is your margin, or “trading power.”

Your broker determines if your account has enough “trading power” (margin), which may differ from the amount of money you have in it.

Don’t worry if this appears a little unclear at first. As we proceed, it’ll become more apparent.

Review:

In this lesson, we discussed:

Margin Requirement: This is the amount of money required to open a position. It is part of the overall position size.

Required margin: The required margin is the amount of money you set aside when opening a position. It resembles a deposit.

In previous lessons, we covered:

Margin Trading: Learn how your margin account works.

Balance refers to the amount of money in your trading account.

Unrealized and realised P/L: Understanding how gains and losses affect your account balance.
Now, let’s get into Used Margin.