What is forex margin and how It affects trading

 In this article, the term forex margin will be explained.. as well as how it can be calculated, how it relates to leverage, what a margin level is, and much more!

It is a very important topic that you will need to master to become a successful Forex trader

What does margin mean?

Margin is the security that a trader has to deposit with their broker to cover some of the risks the trader generates for the broker. It is a fraction of open trading positions and is expressed as a percentage. It 

The margin required by your fx broker will decide the maximum leverage you can use in your trading account. Therefore, trading with leverage is referred to as “trading on margin”.

Every broker has differing margin requirements and it’s important to understand this before you select a broker and start trading on margin.

Margin trading has different results. It can affect your trading result either positively or negatively, with both profits and losses potentially being magnified.

What is free margin?

Free margin is the amount of money in a trading account that is accessible to be used to open new positions. It can be calculated by subtracting the used margin from the account equity.

What is equity?  The equity is the amount of the account balance and any unrealized profit or loss from any open positions.

This means that if you have an open position that is presented in profit.. you can use this profit as an additional margin to open new positions on your trading account.

What is the FX margin level?

The forex margin level is a major concept, which demonstrates the ratio of equity to used margin. It is displayed as a percentage and is calculated as follows:

Margin Level = equity / used margin) * 100

Brokers use margin levels to decide whether forex traders can take any new positions or not. A margin level of 0% means that the account right now has no open positions.

A margin level of 100% means that account equity is equal to the used margin. This means the broker will not allow any further trades on your account until you add more cash to your account or your unrealized profits rise.

What is an FX margin call?

A margin call is one of the biggest nightmares for pro forex traders. The margin call is a notification from your broker that your margin level has fallen under a certain threshold.. known as the margin call level.

The margin call level differs from broker to broker but occurs before resorting to a stop out. It serves as a warning that the market is moving against you. Brokers do this to avoid situations happening where the trader cannot afford to cover their losses.

If the market moves quickly against you.. it is possible that the broker will not have a chance to make the margin call before the stop-out level is reached.

Margin calls can be avoided by carefully monitoring your account balance regularly and by using stop-loss orders on every position you create. 

ESMA trading margin and leverage limits

On 1 Aug  2018, the European Securities & Markets Authority increased the required margin for retail clients by implementing limits on leverage levels for spread betting, FX, and CFD products. The basic purpose of this difference between retail and pro clients is to protect more inexperienced traders from large losses caused by excessive leverage.

Retail traders are entitled to maximum leverage of 1:30 on the fx markets, which corresponds to a margin requirement of 3.33%.

Professional traders can acquire leverage of up to 1:500 on fx markets, which is a margin requirement of 0.2%.

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