The market
can become a major source of income only for those traders who are not too lazy
to spend time studying all the theoretical basics. Understanding the basic
tools for trading in the market and the ability to quickly understand the
terminology is a basic knowledge package for any beginner. Therefore, in the
early days of their careers, traders need to learn what a margin in Forex is,
what it affects, and how to work with it.
The term
margin is widely used in Forex. It means a certain amount of collateral that
traders deposit to their brokers’ accounts at the moment of deal conclusion. In
fact, the amount is a guarantee that the brokers will not lose their money even
if the trades are unprofitable and the losses are equal to their traders’ total
balances.
A margin is the amount
of collateral that is deposited to be able to use loan funds provided by a
broker.
Trying to
understand what a margin in Forex is, you will realize at some point that it
exists only when you use borrowed funds to open a trade. Once a trader exits
the position, the margin disappears.
In the financial market, such a term as a margin
level is often used. It determines the percentage ratio between a trader’s available
funds and funds already used in trades. Thus, the margin level will allow
traders to understand how much of their money is in circulation and how much
remains on their account balance. The higher this figure the more their trading
capitals.
If a trader
fails to predict the market trend and an open trade turns out to be
unprofitable, he or she risks losing the entire deposit. If this happens, the
broker will forcibly close all the positions. This is what is called a margin
call. It means that the collateral becomes the property of the broker.
Once you
understand what a margin in Forex is, it will become clear that you need to
avoid such a thing as a margin call. To do this, avoid the following:
Remember
that when a margin call occurs, all active trades are automatically closed.
This means that potentially profitable trades can be closed along with a losing
position.
When
learning what a margin in Forex is, you should consider its varieties, namely:
Free margin. It is the amount used to enter into
trades. It is calculated as the ratio of the capital to the used margin.
Example: A trader has $5,000 on his or her account. $1,000 was used to
open a trade. In this case, a free margin will be: $5,000 - $1,000 = $4,000.
Negative margin. This is a real nightmare for traders.
In this case, the amount of the collateral is so meager that it does not allow
you to cover your current losses from Forex trades when using leverage.
It is worth noting that inexperienced beginners who choose long leverage when trading large lots face a negative margin most often.
Only when
fully understanding what a margin in Forex is and how to work with it, a trader
can count on successful margin trading. In fact, this is an extremely useful
tool for those who do not have large enough initial deposits. If properly using
borrowed funds, they can quickly increase their profits.
If you do
not take into account the risks and open positions thoughtlessly, margin
trading can significantly increase the risk involved. To avoid margin issues,
it is best to test all possible outcomes of events on a free simulator before trading
with real money. If the fear of entering into a losing trade and facing a margin
call remains, it is better to use robots for automated trading. They operate according to proven
technology and eliminate the human factor.