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What is margin in Forex: Explaining the term in plain English
What is margin in Forex: Explaining the term in plain English

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, to succeed in the early days of their careers traders need to learn what a margin in Forex is, what it affects, and how to approach it.

UNDERSTANDING THE TERMINOLOGY

The term margin is widely used in Forex. It means a certain amount of collateral that the trader deposits to his or her broker's account at the moment of deal conclusion. In fact, the amount is a guarantee that the broker will not lose his or her money even if the trade is unprofitable and the losses are equal to the trader’s total balance.

 

Margin is the amount of collateral deposited in order to secure 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 using borrowed funds to open a trade. Once a trader exits the position, the margin disappears.

Such a term as a margin level is often used in the financial market. It determines the percentage ratio between the trader’s available funds and funds already used to open his or her positions. Thus, the margin level will enable the trader to understand how much of his or her money is locked up and how much is left on the account balance. The higher this ratiothe bigger the trading capital of the trader.

What happens to the collateral if you lose your deposit

If the 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:

 

  • Reluctance to close losing trades that can empty your account in a matter of minutes
  • Opening a large number of trades at the same time if it is impossible to analyze and assess each of them.
  • Opening a trade that is out of proportion with your deposit.
  • Reversal trading during aggressive price movement.

 

Remember that when a margin call occurs, all active trades are automatically closed. This means that potentially profitable trades can be closed along with the losing position.


Basic principles of margin trading

When learning what a margin in Forex is, you should consider its varieties, namely:

 

  • Free margin. It means 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, the 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 face a negative margin most often when trading large lots. 

SUMMARY

Only when fully understanding what a margin in Forex is and how to work with it, traders 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 traders properly use borrowed funds, they can quickly increase their profits.

If you do not take into account the risks and thoughtlessly open positions, margin trading can significantly increase the risk involved. To avoid margin issues, it is best to test all possible outcomes on a free simulator before trading with real money. If the fear of entering into a losing trade and facing a margin call does not go away, it is better to use robots for automated trading. They operate according to proven technology and eliminate the human factor.

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