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About a margin in Forex in simple terms
About a margin in Forex in simple terms

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.

Understanding the terminology

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.

What happens to the collateral if you lose your deposit

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:

 

  1. Reluctance to close unprofitable trades that can empty your account in a matter of minutes
  2. Opening a large number of trades simultaneously if it is impossible to analyze and assess each of them.
  3. Opening a trade that is out of proportion with your deposit.
  4. Reversal trading during aggressive price dynamics.

  

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.

Basic principles of margin trading

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.


Summarizing

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.

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