What is Margin
In the Forex market the term margin is most often referring to the amount of money required to open a leveraged position, or a contract in the market. It may also be used to describe the type of account, i.e. margin account; meaning that an account is being traded on borrowed funds. It is generally safe to assume that all off-exchange retail foreign currency (or Forex) traders are trading within margined accounts. Without leverage, or the ability to trade on borrowed funds, a trader placing a standard lot trade in the market would need to post the full contract value of $100,000 in order to have his or her trade executed. Trading with a margined account allows traders to utilize leverage, meaning that the same $100,000 contract can be placed for an amount of margin determined by the set level of leverage. An account at 100:1 leverage would require $1,000 of margin to place a $100,000 trade.
The below table illustrates the amount of margin required to open standard, mini and micro contracts, also referred to as lots. As can be seen, at 1:1 leverage (no leverage at all) the full value of a contract is required.
Equity placed on margin per lot traded
|Margin per Mini Lot||Margin per Standard Lot||
Marginable % of lot size
* 100:1 is the standard leverage value.
Default leverage levels for new accounts are set at 100:1 for accounts. * These levels have been set by Trust FX,
Simply stated, trading Forex on margin increases your buying power. As an example: a trader with $10,000 in a margin account that allows 100:1 leverage, would be able to purchase a maximum of $1,000,000 in currency contracts (10 standard lots). At 100:1 leverage 1% of the contract value is required as collateral.
By trading on margin, traders can potentially increase their total return on investment with less cash outlay. Trading on margin should be used wisely as it magnifies both your potential profits AND potential losses.
Margin Trading Example
A trader with a $10,000 account balance decides that the US Dollar (USD) is undervalued against the Euro (EUR). The current bid/ask price for EUR/USD is 1.2348/1.2350 – meaning a trader can buy $1 USD for 1.2350 EUR or sell $1 USD for 1.2348 EUR. The trader decides to sell EUR (buy dollars) by selling 1 standard lot, or selling 100,000 EUR and buying $123,480 USD. With leverage at 100:1 or 1%, initial margin deposit for this trade is $1,000, leaving the account balance at $9,000. As anticipated, the EUR/USD drops 48 pips to 1.2298/1.2300. To close out the position the trader would buy 1 lot or 100,000 EUR and sell $123,000 USD. In this scenario the trader has realized a profit of $480 US Dollars.
Managing a Margin Account
It is important that traders new to the Forex market take the time to understand the risk associated with trading in a margined account.
Every trader should be clear on the parameters of their own account, i.e. at what level does their broker consider them subject to a margin call. Be sure to read the margin agreement in the account application when opening a live account.
The positions in a trading account could be partially or totally liquidated should the available margin ("Free Margin") in the account fall to the predetermined threshold of 0% margin level. *
Traders should monitor margin balance on a regular basis and utilize stop-loss orders to limit downside risk. However, due to the extreme volatility that can be found in the Forex market, stop-loss orders are not always an effective measure in limited downside risk. There is still the possibility of losing all, or more, of your original investment.