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Gerard Moore 11 / November / 20

What determines the margin size in forex trading and how to calculate?


What is margin in forex trading?
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Margin is the amount of collateral that is required when using leverage. This is the amount that is “frozen” in the trading account until the position is closed. These funds are needed as a guarantee to the broker that the trader will pay off his obligations in the event of an unfavorable outcome of the transaction.

The amount of the margin depends on the volume of the trade and the leverage. You can calculate the margin required to open a deal using the formula:

Base Currency Margin = Trade Volume / Leverage. For example, for 3 lots of EURUSD: 300,000 (volume) / 30 (leverage) = 10,000 EUR.

Margin in quote currency = Trade volume / Leverage X Exchange rate.

For example, if in the example above the trader has an account in USD, in order to find out the amount of the margin in the currency of the account, you need to multiply the required margin in EUR by the EUR rate in USD. With the EUR USD rate of 1.0940, the deposit will be 10940 USD.

 

Now let's see how the amount required for collateral depends on the selected leverage:

 

So, if you want to buy one standard lot (€ 100,000) for the EUR / USD pair, without using leverage (1:1), you need to have € 100,000 in your account. However, when using 1:100 leverage, you only need € 1000 as the required margin. When using a leverage of 1:200, you will need € 500, and with a leverage of 1: 500 - only € 200.

 

Now let's see how the amount required for collateral depends on the selected leverage:

 

Higher leverage → Less funds are needed as margin

Lower leverage → More funds are needed as margin

For example, a trader, in order to buy one standard lot (€ 100,000) for the EUR / USD pair, without using leverage (1: 1), must provide a collateral of € 100,000 on a trading account.

 

When using a leverage of 1: 100, he only needs € 1000 as the required margin. When using a leverage of 1: 200, this amount will be € 500, and with a leverage of 1: 500 - only € 200.

 

At the same time, the risks from an unfavorable change in the price of a position remain entirely with the trader. Excessively high transaction volumes create risks that the trader is risking the entire deposit, and not just the collateral amount.

 

The maximum fixed leverage may vary depending on the asset group.To calculate the required margin for other assets, use the formula:

Trade size (in units) / Leverage X Market price = Margin in the base currency of the asset

Let's take an example of how to calculate the margin for 1 lot of GOLD in USD using a 1:20 leverage (1 lot of Gold = 100 ounces, current price is $ 1511.73). 100 oz / 20 X 1511.73 = $ 7,558.65

At the end of the topic - a few basic terms that are important to understand.

Free margin is the amount on the trading account that is not currently used, and for which the trader can open new deals. [Free Margin = Account Balance - Used Margin]

 

Equity is the sum of the trading account balance and the profit (or loss) from all open positions on the trading account.

The margin level is the ratio of the amount of your deposit to the amount of the collateral involved in the transaction.

 

When the margin level drops to 100%, it means that the entire balance of your trading account is used as collateral and you can no longer open any other positions.

 

Stop out is the forced automatic closing of all traders' transactions by the broker if the balance of his trading account falls below a certain level (50% for accounts under FCA / CySec regulation; in SCB / MENA jurisdictions the Stop out level is set to 20 % for MT4 and 30% for MT5 / cTrader).

 

Let's recall the definitions of the main terms that relate to the trading account:



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