Margin In the Forex market (foreign exchange market), the term “margin” refers to the security deposit that a trader has to pay with a forex broker. Margin is used to secure the positions opened by the trader and to ensure the continued performance of his trades.
Trading operations in the Forex market are considered margined operations, which means that a trader can open trades with a value much greater than the deposit he owns thanks to margin. Margin allows the trader to use leverage, which increases the possibility of making large profits, but at the same time also increases risk.
When opening a trade in the Forex market, the trader is required to pay a small percentage of the trade value as a security deposit. This percentage is known as the margin percentage, and it varies depending on the currency pair and the policies specified by the broker. Margin can be cash or financial assets placed as collateral.
Traders are advised to be fully aware of their broker’s margin policies and manage their balance carefully to avoid excessive risk and protect capital.How to calculate margin: Forex margin is a portion of the total funds in the account. It is calculated using the following equation:
Size (lot) x contract size (currency unit) x price) / leverage
Example, you decide to buy one lot of the EUR/USD currency pair. The current exchange rate is 1.1030, and the leverage provided by the Forex broker is 1:100. In this case, the equation will be as follows:
Margin = (1 x 100,000 x 1.1030) /100 = $1,103
Therefore, to enter a trade with this lot, you must have at least $1,103 USD in your account.
Free margin: what it is and how to calculate it
concept of free margin is inseparable from the concept of margin. Free margin is the amount of money in a margin account that is not involved in transactions and can be used for trading or withdrawal. In other words, Forex free margin is an indicator of how much money in the account can be used to open additional trades. If there are no open trades on the account, Forex free margin equals the balance and equity.
Free margin is an important indicator. Experienced traders spend it only when absolutely necessary. If the free margin in the Forex market approaches zero, your trading account is in a dangerous situation. In this case, brokers can use a margin call to prevent losses.
How to calculate free margin: Free margin is the portion of funds remaining in account after opening trades. It is calculated by the formula: Free Margin = Funds (Equity) – Margin
We calculate the free margin when purchasing one lot of the EURUSD contract. Let’s assume your trading account balance is $5,000. The current exchange rate of the asset is 1.1030, and the leverage offered by the broker is 100:1. And the equation will look like:
Free margin = 5,000 – 1,103 = 3,897 USD
Such as how to calculate free margin without thinking about open trades and other fees on the trading account. To get a more accurate value, you need information about open trades. Before opening the trade, you already have another open trading position, which makes a profit of $100. In this case, the stock index will not be equal to the trading account balance. Therefore, first of all, it is necessary to calculate the total funds (equity).
Money (Equity) = Balance + Profit (or Balance) – Loss
Money (Equity) = 5,000 + 100 = 5,100 USD
Margin level and how to avoid margin calls and forced stops
In addition to the two main indicators, margin and free margin, there is an additional indicator of margin level. This is the ratio of account funds to margin, expressed as a percentage. That is, the margin level is the ratio of equity to the use of deposits. It is also called the maximum deposit load. The margin level shows how much the trading account is loaded with open positions. We can conclude that the trading account is not much loaded and many other trades can be opened. However, if you lose money quickly, the rate will decrease. The moment it reaches 100% will mean that the money is equal to the margin. After that you will not be able to open new trades, and soon you will get a margin call. To avoid this, do not forget to use stop loss.
Margin calls and forced stops: A margin call is a signal to the broker that the trader’s trading account is overloaded and the Forex margin has reached a critical value. If you do not add free funds to your trading account, open trades will be forcibly closed.
A forced stop is used to force brokers to close trades (starting with the most unprofitable trades) when the margin reaches a certain level. When this process is completed, closed trades release margin. If the indicator returns above the threshold value, closing trades will be completed.
Each broker has its own margin call level and stop levels. Traders should understand that brokers risk their money by providing leverage. If they do not limit losses in time, they may incur losses. To avoid reaching these levels, leave more free margin in your account.
Used margin and available margin
The used margin is an amount of your account balance required to keep your positions open. It is also a deposit for the trader in the open positions. The account must maintain this amount in order for the trades to remain open. If you add all the required margin for all open positions, the total amount is the used margin, and the used margin cannot be used to open new positions.
If you open more than one position at a time, each given position will have its own required margin. If you add up all the required margin for all open positions, the total amount is what is called used margin.
Used Margin: This is all margin that is “locked” and cannot be used to open new trades.
Free margin and how to increase it: To avoid a margin call in your account, keep your margin level above 100%. In other words, make sure there is always free money. Also, don’t let the margin get close to the size of your total equity.
How can I increase my free margin? There are three ways to increase free margin. First, you can add new funds to your trading account. Second, one or more trades can be closed. Third, open opposite positions for identical instruments, this is often called locking.
What is the available margin? The available margin is the amount remaining in your account after deducting the value of the asset you purchased and calculating the margin used for it. This amount is considered the maximum amount you are allowed to lose in your deal. Also, the available margin is used to open new trades, unlike the used margin.
