09. What is Margin in Forex?
In our previous chapter, we discussed about leverage. And with leverage, comes the topic of margin. So, what is the margin in forex? In simple words-
Margin is the money you need to deposit with your forex broker to open positions and trade in the market. This is a portion of your balance kept aside by your broker as collateral.
Why do you need to provide a collateral?- well it’s an assurance that you are able to hold the trade until it’s closed. Margin is like a safety deposit set aside by your broker. Your broker temporarily holds this to make sure you have enough to cover potential losses while your trade is open.
What is the Margin Requirement?
The margin is shown as a percentage of the “full position size”. This percentage is called the Margin Requirement. The Margin Requirement can be different depending on the forex pair and the specific forex broker you’re using.
Different brokers may have different requirements. Some examples of margin requirements are-
Here’s how it works in a practical example with a EUR/USD trade:
Let’s say, you want to buy or sell 100,000 EUR/USD without using leverage. Generally you would normally need the full value of the position, which is $100,000. But with a Margin Requirement of 2%, you don’t need the entire $100,000. Only $2,000 (the Required Margin) of your funds is required to open and maintain that $100,000 EUR/USD position.
How to Avoid Margin Calls?
You will need to maintain a margin percentage at all times. Your margin percentage is set by your broker. This is the minimum amount of cash you must maintain in your account proportional to its total value. So, if your margin is 25%, you need at least 25% of your account’s total value in cash.
That’s why you need to regularly monitor your account. Brokerage firms may adjust the margin requirement during volatile market conditions. Margin calls are typically based on your account value at market close, generally around 4 p.m. EST. However, if the market is highly volatile, margin calls may come earlier.
Thus, it’s essential to keep a close eye on your account and be prepared to take action if necessary.
This is what you learned today-
- Margin is the amount of money your broker keeps aside as collateral.
- The margin requirement is the percentage (%) amount of money of your initial capital required to open a position in the market.
- Keep a close eye on your margin to avoid margin calls.
