This article answers your questions related to margin trading – Margin in Forex, such as: What is margin? What is free margin? What is the margin level? Each broker has different margin requirements. Therefore, you need to understand how margin works before choosing a broker and start trading.
What is forex margin? What is margin trading?
Margin trading, margin, margin account or margin trading is the most crucial concept in forex trading.
However, many people still do not understand or misunderstand the meaning of this term. Margin in Forex is a deposit that a trader sends to a stock exchange to maintain a trading position. Margin is not a transaction cost, but a portion of equity used as margin.
Margin affects a trader’s trading experience both positively and negatively. It can increase profits or increase losses many times. Exchanges take one trader’s margin and combine it with another trader’s margin to place trade orders on the global interbank network.
The margin is calculated as a percentage of the total number of trades. Most margin requirements in Forex fall between 2%, 1%, 0.5%, 0.25%. Based on the forex broker’s margin requirements, the trader will calculate the maximum leverage he can use with the trading account.
What is free margin?
Free margin is the balance in the trading account that the trader did not use to open a position. Therefore, traders can use it to open new trading positions. Margin is the difference between equity and margin. If the new order helps the trader to make more money, the higher the profit, the greater the initial capital and the greater the free margin that the trader will have. There are cases when the market needs to process an open trading position and a pending order at the same time.
At that time, if the market wants to activate a pending order but the trader does not have enough free margin in his account, the pending order will not be started or canceled automatically. This leads some traders to think that the exchange is not executing their orders. But in reality, the charge is not completed because the trader does not have enough free margin in the trading account.
What is the margin level?
To trade Forex better, a trader needs to understand what a margin account is. Margin level, margin level or margin ratio is also an important concept that traders understand. The margin level compares the usable margin with the margin used based on the percentage value. In other words, the margin level is calculated based on the net worth and margin used with the following formula:
Margin level = (Net Worth/Margin used) x 100
Exchanges use margin levels to determine whether a trader can open a new trading position. Different trades have different margin limits, but most will set this limit at 100%. This limit is called the margin call level. The 100% margin call is when the account margin reaches 100% and the trader can only close a trading position but cannot open a new one.
The 100% margin call occurs when the equity is equal to the margin used. It usually happens when a trader has a losing trading position and the market continually goes against the direction of the trader’s desire. At that time, the capital will be equal to the margin used, and the trader cannot open more trades.
Forex Margin Example:
In order for traders to understand what the margin level is, what is the margin in Forex, let’s consider the following example:
Suppose we have $10,000 in our account and a losing trade with a margin of $1,000. If the market goes against the desired trend and we lose $9,000, the net worth is only $1,000 (10,000 – 9,000 = 1,000), equal to the margin used. Thus, the margin will be 100%. When the margin level reaches 100%, a new trade cannot be opened unless the market suddenly reverses and the capital becomes larger than the margin.
If the market continues to go against the desired trend, the Forex broker is forced to cut all the trader’s losing orders. This limit is called Stop Out Level. When the Forex broker sets a 5% stop, the trading platform will automatically close the trader’s losing positions if the margin reaches 5%. Please note that the trading platform starts to approach from the most significant loss order.
Usually, closing a losing trade will cause the margin to be 5% higher, as the margin used for this trade is released. Thus, the total margin used decreases and the margin level increases. The system usually takes a margin of more than 5% by closing the most significant trade first. If other loss-making trades continue to lose and the margin reaches 5%, the system closes another loss-making trade.
The exchange closes the trading position when the margin level reaches a stop because it cannot let the trader lose more than the amount deposited in the trading account. The market can always go against what a trader wants, and the stock exchange cannot afford to pay for these ongoing losses.
What is Margin Call? When is a Margin Call?
Margin calling is one of the biggest nightmares that forex traders face. The trader receives a margin call when the exchange announces that the margin deposit has fallen below the minimum level because the current trading positions are going against the market trend and losing money.
Margin trading is a profitable Forex investment strategy, but traders need to understand the possible risks. Traders need to understand how the margin account works and carefully read the quarterly terms of the stock exchange. If there is something unclear in terms of margin, ask questions and make sure you understand.
There is a rather unpleasant fact regarding margin calls in Forex. That is, the trader does not even get a margin call before the trading positions are closed. If the amount in the account falls below the minimum deposit, the exchange will close some or all of the trades, as mentioned earlier in this article, to prevent the trader’s account from closing. less.
How to avoid margin calls?
Traders can avoid margin calls by regularly monitoring their accounts and using stop-loss orders on trades to minimize risk. In addition, traders can also apply risk management policies in trading. If there is an effective risk management policy, traders will understand them well, predict them and avoid them.
The share margin is the subject of much debate. Some traders think that using too much margin is dangerous, but it really depends on the trading style and experiences the trader has. If trading on a margin account, a trader must know the broker’s policy for a margin account and accept the risks involved. Be very careful and avoid margin calls in Forex.
Most exchanges require a higher margin on weekends. Traders only need 1% margin during the week, but if they want to keep the trade at the end of the week, the trader must accept a margin of 2% or higher.
Therefore, in this article, we have learned all the issues related to the margin of securities, such as what is margin trading, what is a margin account, what is the margin level, what is called margin when it is margined? call margin. As a result, traders understand and can apply margin to Forex strategies to trade more effectively and successfully.