Margin trading or margin is the minimum amount required as collateral to open a trade. It is one of the most important concepts in trading.
However, many beginner traders do not understand its meaning or misinterpret the term. This leads to a series of mistakes that generate losses, especially because they do not know the basic definitions regarding Forex margin.
If this is your case, don't worry! here we explain it to you:
Margin in Forex is a deposit that is needed to keep positions open. This margin is not a commission or a transaction cost, it is a portion of your account capital that is set aside and allocated as a deposit. Margin trading is a percentage of the total amount of the chosen position.
Margin trading can have significant consequences: it can influence the results of your operations both positively and negatively.
In summary: Initial margin in trading is the minimum amount you must have in your trading account to be able to open a position in the stock markets.
Currency brokers take the initial margin to place orders in the market. Margin is a promise from the client that they can face the potential losses of a trading position. A margin is often expressed as a percentage of the nominal value of the chosen contract.
Most Forex margin requirements are estimated at: 2%, 1%, 0.5%, 0.25%. These percentages represent the capital to be held in the account as a percentage of the trading position. The larger your trading position, the higher your margin if you maintain the same leverage.
Depending on the margin required by your broker, you can calculate the maximum leverage you can have with the current trading account.
This means that a trader with 1:100 leverage will need to have 1000 euros in their trading account to open a 1 lot position in euro dollar.
To check the variation of these amounts and see the margin retained in each instrument, it is necessary to have the MetaTrader trading platform downloaded. It is the best way to learn and practice as it comes with a free demo account! Simply click on the following link: https://my.invertox.com/es/register
We must warn you that trading with margin in Forex, that is, leveraging, is considered a risky operation.
Do you want to know what margin looks like in MetaTrader 5? To do this, you have to access your account on the trading platform.
As we explained in the previous section, if you open a one-lot operation in euro dollar, the margin retained with 1:500 leverage will be 200 euros.
You can see this in the MT4 and MT5 Toolbox, at the bottom of the platform.
Forex free margin is the amount of money that is not used to guarantee any operation and you can use it to open more positions.
Another way to define or calculate it is:
Free margin is the difference between your equity and the margin.
There is a topic that still needs to be discussed. A situation may occur where you have open positions and also some pending orders simultaneously.
The market wants to activate one of your pending orders, but you do not have enough Forex free margin in your account. That pending order might not be activated or would be automatically canceled.
The trader might think that their broker has failed to execute the order, and has not launched their orders to the market, and therefore is working with a bad broker. Of course, in this instance, that statement is not correct. They simply do not have the available margin to open a new position.
If we return to the data from the previous example:
Let's say the trading account balance is 1500 euros, and the Forex trader opens a 1 lot position in EURUSD:
The free margin or available margin in your trading account will be 1300 euros (1500 – 200 = 1300 EUR).
Assuming an example of 1:30 leverage, the margin required for a 1 lot position in EURUSD is 3333.33 EUR, which is the result of 100000 euros, which is the lot size divided by the leverage 100000/ 30= 3333.33. This amount is higher than the amount in the trading account, so the trader will have to make an extra deposit of 1833.33 EUR to be able to open this position.
To better understand Forex trading, we must know everything about margin in Forex. That is why we also want you to familiarize yourself with the term "Forex margin level", which you need to understand.
The Forex margin level is the percentage value based on the account equity versus the used or retained margin. In other words, it is calculated as follows:
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Margin level = (equity / retained margin) x 100 |
The broker uses the margin level as a tool to detect whether the trader can open new trades or not. Depending on the broker, the limit for the margin level may vary, but most set it at 100% before the margin call is triggered, a concept we will explain later.
Is the margin level in trading a constant percentage? The answer is no. Depending on whether it is a buy or sell operation and whether the quote increases or decreases, the free or available margin will vary.
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Quote increases |
Quote decreases |
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Buy operation |
Equity increases Free margin increases Margin level % increases |
Equity decreases Free margin decreases Margin level % decreases |
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Sell operation |
Equity decreases Free margin decreases Margin level % decreases |
Equity increases Free margin increases Margin level % increases |
It is essential to have good trading training to try to avoid these situations. Do not hesitate to watch our free online trading courses to help consolidate concepts.
Before starting with the example, we have good news, and that is that you do not have to calculate the margin level manually. The MetaTrader platform includes a margin calculator.
Let's use an example to answer this question. Imagine you have an account of 10,000 euros and you have a losing position with a retained margin of 1000 euros.
If your position goes against you and reaches 9000 dollars in losses, then the capital or equity will be 1000 dollars.
Example: 10,000 – 9000 = 1000 = which is equivalent to the margin
Then the margin level will be 100%. Again, if the margin level reaches the 100% rate, you cannot place new positions, unless the market suddenly turns in your favor and your equity becomes larger than the established margin.
Let's imagine that the market remains against you. In this case, the broker will simply have no choice but to close all your losing positions.
In principle, yes, but sometimes the margin can be negative. The margin is the immobilized sum to open a position. When losses exceed the initial margin, it is called negative margin. A trading account that has a negative margin means that the margin level is below 100%.
Yes, when an account has a margin level below 100% on your trading platform, we are talking about negative margin trading. In this case, the trader does not have enough money in their account to maintain their position.
For example:
If the trader has equity of 800 euros in their account and the trading margin retained for a euro-dollar contract is 1000 euros, the trader's account has a negative margin of 200 euros.
Let's see what this situation implies, but first… Let's see what a margin call in Forex is!
A margin call is perhaps one of the biggest nightmares Forex traders can have.
Technically, a 100% Forex margin call level means that when your account's margin level reaches 100%, you can still close your positions, but you cannot open new ones.
Evidently, a 100% margin call level occurs when your account equity equals the margin. This happens when you have losing positions and the market is rapidly and constantly moving against you.
When your account equity equals the margin, you will not be able to open any new positions.
The trading platform warns when this margin level is reached. The problem arises when the warning is received and the market continues to move rapidly against you or you cannot act at that moment.
At that moment, if your account equity falls below the margin requirements, your broker may close some or all positions, as we will see in the next section.
Do you want to see how these margin trading levels work? Do you need to practice to decide which is the best strategy to follow? Then we recommend that you use a demo trading account. You will operate with virtual funds, so you will not have any type of risk.
This can currently help you prevent your account from having a negative balance due to closing operations. At Invertox, we have negative balance protection.
Margins in Forex are a debatable topic. Some traders claim that having too much margin is very dangerous. However, everything depends on the personality and the amount of trading experience one may have.
If you are going to trade in an account with margin or leverage, it is important to know the policies that your broker offers in margin accounts and you must understand them and feel comfortable enough with the risks involved.
As we are approaching the end of our guide, it is important that you keep one fact in mind. Most brokers require a high margin during weekends. In fact, this can take the form of a 1% margin during the week and if you want to maintain the position during the weekend, it can go up to 2% or more.
The stop out in Forex or stop out level in Forex is the level or percentage, established by the broker, at which the platform will automatically close your positions.
For example, if the broker sets the stop out at 80%, the platform will automatically close your positions when your margin level is 80%. This will prevent your trading account balance from being negative.
It is important to note that it begins to close from the position with the largest losses. If your other positions continue to lose and the margin level reaches 80% once again, the system will close another losing position.
You might wonder why brokers do this. Well, the reason is that brokers close positions when the margin level reaches the stop out level because they cannot allow traders to lose more money than what they have deposited in their Trading account. The market can continue against the trader's position, and the broker does not want to assume their losses.
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Retained margin * Stop out level = Equity |
1000 euros x 0.8 = 800 euros of equity
This means that the losses would have to be = 2000 – 800 = 1200 euros.
Finally, having seen concepts such as "equity", "balance", "margin" and it is possible that they are sometimes confused, we are going to see the differences between them.
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Balance = Initial amount of the trading account or amount with all closed operations |
The balance is the initial amount contributed by the Trader or the resulting amount once operations are closed and losses or profits are consolidated.
Here we have introduced an important term, "consolidation of losses and profits" and that is that until an operation is closed we cannot consider the profit or loss as such.
And from here and by the concept of consolidation, the concept of Equity comes into play.
The value of equity and therefore its definition will depend on whether the trader has open positions or not.
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Equity = Used margin + Free margin + Unrealized profit or loss |
or
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Equity = Balance + Unrealized profit or loss |
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Equity = Free margin = Account balance |
Equity is truly the capital that traders possess in their accounts, which implies the sum or subtraction of the capital that traders have when all open positions are finalized.
1) If the market undergoes a change in trajectory and there is a decrease in the degree of losses, then more margin will actually be released, and equity will soon exceed that margin again.
2) There is another situation. If the market continues to move against you, then equity will fall to a level where it will be less than the margin, making it practically impossible to support open operations.
As we explained previously in this article, the broker establishes stop out levels. Once these levels are reached, the broker will close the losing position, starting with the one with the largest floating loss.
If the trader deposits more capital, this can be added to the margin and thus keep the position open. Which is not a good idea, as the market may continue to go against it and consequently lose even more capital.
As you know, margin trading or margin in Forex is one of the aspects of trading that should not be overlooked, as this can lead to an unpleasant outcome and risk generating significant losses.
To avoid a margin call and what it entails, you must understand the theory about margins, margin levels, and margin calls, and apply your trading experience to create a viable Forex strategy.
Undoubtedly, understanding margin in Forex and its consequences can save you a lot of trouble.
Margin Trading is a debatable topic. Some traders consider margin trading to be very dangerous, while others, such as currency speculators, find it particularly useful for operating with short-term strategies that can pay off with a small initial investment.
Everything depends on your trading experience and your objectives.
Once you have practiced everything you have learned today about Forex margin in the demo account and are confident in your knowledge, you can take the step to a real account.
For any questions about margin and free margin, please contact soporte@invertox.com.