What is Margin?

As a Forex trader, the amount of capital is necessary to open or maintain a new position in a trade is called margin. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset.

Lets take example, say you want buy $100,000 worth of USD/JPY pair to trade, here you do not need to have or to put up to the complete amount, but you can only put up fewer amount of the money intended to open trade with, like $3,000. The actual amount or the proportion to put up depends on the broker or CFD provider.

Margin is the collateral that an investor has to deposit with their broker or CFDs to cover the credit risk the holder poses for the broker or the exchanger. It is a “good faith” declaration that you can afford to hold the trade until it is closed.

It is neither a fee nor charges. Margin is just some part of your capital that your forex broker set apart from your mai trading balance so that to keep your trade open and also to assure that you can cover the potential loss associated with the trade.

That allocated amount that is set a side is used or locked for the period of specific trades. Once the trade is closed, the margin is freed or released to return back in to your Initial count balance and it then be usable or withdrawn or to open new trades.

The margin requirement is categorized as a percentage of the value of marginal security, which is paid by the investor's available money. The amount of margin required can vary depending on the brokerage firm and depends on the margin percentage that the broker need.

You may see margin requirements like 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher. Depending on the Broker. This percentage is what a as margin percentage is.

Let's look at some examples of margin requirements for some currency pairs.

Currency Pair Margin Requirement

EUR/USD 2%

GBP/USD 5%

USD/JPY 4%

EUR/AUD 3%

What is Required Margin？

Before trading margin, some specific amount of your trading capital is expected which is elaborated to be Required Margin. And for each position you open will have it is own Required Margin amount that will need to be freeze.

Note: Required Margin is also known to be a Deposit Margin, Entry Margin, or Initial Margin.

Let us take a look at Normal EUR/USD pairs trade. In order to buy or sell a 100,000 of EUR/USD pair bur it no leverage is included then a trader would need to add up to $100,000 in the trading account, that is the full value of the position. But if a margin requirements of 2% is included, then it only needs $2,000 which is the Required Margin of the capital in the account of a trader to open and also maintain that $100,000 EUR/USD pair position.

Let's see some examples

Example #1: Open a long USD/JPY position

Assuming youve deposited $1,000 and you are set to go long USD/JPY pair also intended to open 1 mini lot (10,000 units) position.

How much margin will you require to open this position？

Remember that USD is the base currency. This mini lot is 10,000 dollars, which means the positions Notional Value is $10,000.

Let's say your trading portfolio is ruled in USD, since the Margin Requirement is 4%, the Required Margin will be $400.

Example #2: Open a long GBP/USD position

Assuming you have deposited $1,000 in your user account ready to go long GBP/USD at 1.30000 and need to open 1 mini lot (10,000 units) position.

How much margin will you need to open this position？

Also GBP is a major currency, this mini lot is 10,000 pounds, this means the positions Notional Value is $13,000.

Let's say your trading account is ruled in USD, since the Margin Requirement is 5%, the Required Margin will be $650.

Example #3: Open a long EUR/AUD position

Supposed you want to go long EUR/AUD and want to open 1 mini lot (10,000 units) position.

How much margin will you require to open this position？

Let's say your trading account is denominated in USD, you will expect to first know what the EUR/USD price. Lets say EUR/USD is trading at 1.15000.

Since EUR is the base currency, this mini lot is 10,000 euros, which means the positions Notional Value is $11,500. As the Margin Requirement is 3%, the Required Margin will be $345.

How to Calculate Required Margin

As a Forex trader, when you plan to trading with margin, the amount of margin which is(“Required Margin”) that is needed to detain open a position is simplified as a percentage (“Margin Requirement”) of the position size (“Notional Value”).

The certain amount of Required Margin is calculated according to the base currency of the currency pair traded. When there is a different in the main currency from your trading accounts currency, the Required Margin is then converted to your account denomination.

Below is the formula to calculate the Required Margin But when the main currency is the same to the currency in your account:

Required Margin = Notional Value x Margin Requirement

While if the apex currency is different from your main accounts currency then:

Required Margin = Notional Value x Margin Requirement

x Exchange Rate Between Base Currency and Account Currency

What to take note for having some money in your trading account is to ensure you get enough margin to use to trading. More importantly, its based on the amount of margin you have.

This means that your broker is at all the time interested to see if you have more margin in your Forex account, and that may really varies from the balance in your account.

If you still find this difficult, not clear, no need to worry. But as we continue it will start to make more sense.

Recap

So far In this lesson, we learned about the following:

• Margin Requirement which is the amount of margin you should have to open a position. It is represented as a percentage (%) of the “full position” size or “Notional Value” of the position you wish to open.

• Required Margin which we elaborate as part of money that is“locked up” when you open a position.