You may have already heard the term “margin” mentioned in forex trading, or it may be a completely new concept to you. In any case, this is a very important topic that you need to controlling in order to become a effective forex trader.
In this article, we will give a thorough answer to the interrogation “What is margin in forex trading?
The Meaning of Margin in Forex Trading
What is a margin in forex trading? Margin is a deposit that a trader must make to his broker’s deposit to cover some of the risk that the trader creates for the broker. It usually makes up part of the transaction position and is articulated as a percentage.
The margin required by a Forex broker determines the maximum leverage you can use in your trading account. For this reason, leveraged trading is also occasionally referred to as “margin trading”.
Each broker has different margin necessities and it is important to understand this before you choose to start trading on margin.
Trading on margin can have different consequences. It can affect your trading results either positively or negatively.
Free Margin can be considered as 2 items:
- the amount available to open NEW positions;
- the amount by which existing positions can move against you before you get a Margin Call or Stop Out.
Margin call is a signal that the broker sends to his clients as a reminder that the trading account is at risk of losing money. And Margin Stop Out is done to prevent negative funds on the account.
Calculating Forex Margin
Let’s say a broker offers 1:30 leverage for forex trading. This means that for every 30 units of currency in an open position, 1 unit of currency is required as margin. In other words, if the size of your desired Forex position is $30, then the margin will be $1.
Thus, in this example, the margin is 1/30.
The Relationship Between Leverage and Margin in Forex
When you first open a trading account with a forex broker, chances are you will see leverage ratios available. Higher leverage ratios make it easier for you to open positions. Thus, many brokers use leverage ratios for marketing purposes.
Popular leverage ratios in forex trading include 1:10, 1:50, 1:100, 1:200 and even higher. Simply put, the leverage ratio determines the size of a position you can open based on the size of your trading account.
Final Words on Margin in Forex Trading
So, Margin Trading is extremely popular among retail forex traders.
Now you should already have an answer to the basic question of what is margin in forex trading. As well as an understanding of the way it operates and for who it is intended.
It is definitely a profitable approach to forex trading, but it is important that you understand all of the risks. If you decide to trade forex on margin, make sure you understand exactly how your account works.