Meaning of Margin in trading

Margin in trading is the deposit which is required to open and maintain a position.

By trading with Margin, traders will get full market exposure by putting up just a small amount of trade’s value. The amount of capital required as margin required will be usually given as a percentage.

Margin is one of the most important concepts to understand in forex trading.

There are two types of margin: initial margin and maintenance margin. The initial margin is the deposit that is required to open a trade position which is often called the deposit margin or just the deposit. Whereas, Maintenance margin is the amount that must be available in the trader’s account for funding the present value of the position and to cover any running losses.

Working of trading on Margin

After opening the position, the trader may require to make more deposit in case he incurs a loss in trade and the initial margin is not sufficient to maintain the position. On happening of such scenario, the broker will place the trader on margin call and He will be required to add more funds in the account – this is the additional capital which known as maintenance margin.

Connection between margin and leverage

Before going further, Lets understand  the concept of leverage which is closely connected with the Margin. More margin that is required, the less leverage traders will be able to use. The reason behind this is the trader will have to fund more of the trade with his own money and thus he is able to borrow less from the broker.

Leverage is the two edge sword as it has the potential to produce large profits and large losses. Thus it is crucial that traders use leverage responsibly. Please note that leverage can vary between brokers. Typical margin requirements and the corresponding leverage are produced below:

Example of buying on margin

For example let’s say EUR/USD is trading at $1.12825 , with a buy price of 1.12832 and a sell price of 1.12805. You decide to go with long entry of 1 lot of EUR/USD (equivalent to 100,000 units of the base currency) as you think the Euro to gain value against the dollar. Hence you decided to buy value of €100,000 ($112832).

However you need not want to put the entire amount of the trade. By choosing to trade with margin, you need only a percentage of the total value of trade and get exposure to the full value of the trade.

In Winstone Prime, EUR/USD has a margin factor of 0.2%, so you only have to commit €2000 ($22566) as margin. In this example, your leverage would be 500:1.

Final words :

Margin is simply a portion of the traders fund that the forex broker sets aside from account balance to keep the trade open and to ensure that the trader can cover the potential loss of the trade. This portion is locked up for the duration of the specific trade. After the trade is closed, the margin is released back into the trader’s account and he can use it again to open new trades.

Margin is not a transaction cost, but rather it is a security deposit that the broker holds. Trading forex on margin is a popular strategy, as the use of leverage to take larger positions can be profitable. However, at the same time, it’s important to understand that losses will also be magnified by trading on margin. Traders should take time to understand how margin works before trading using leverage in the foreign exchange market.

Traders should always be aware that their forex positions could be liquidated if their margin level falls below the minimum level required.  Go through New to Forex to get started and open demo account to start practice.

Happy trading!!!