For many traders, using a margin call in forex trading is a novel idea that is sometimes misinterpreted. Margin is the bare minimum of funds needed to execute a leveraged transaction and may be an effective risk management strategy. The idea of a margin call, which traders take considerable measures to avoid, is closely related to the notion of margin. Before entering a deal, forex traders must understand the margin since failing to do so might be pretty expensive.
Read on to discover more about utilizing margin call in forex trading, how to calculate it, and effective risk management.
FOREX MARGIN: WHAT IS IT?
A trader uses forex margin call, or good faith deposit, as collateral to start a deal. Essentially, it is the least amount a trader must have to initiate a new position in their trading account. A proportion of the notional amount (trade size) of the FX deal is often used to express this. The broker is “loaned,” the amount that separates the deposit from the deal’s total value.
Example of FX margin
The required forex margin for the total trade amount is shown below:
Size of trade: $10,000
Margin required: 3.33%
The relationship between leverage and margin
Understanding the idea of leverage is crucial before moving forward. Leverage and margin are closely associated since traders can employ less leverage as more margin is demanded. The trader may borrow less from the broker since he will have to finance a more significant portion of the deal with his funds.
Because leverage has the potential to result in both enormous gains and severe losses, traders must utilize it carefully. Be aware that, by regulatory regulations, leverage may vary amongst brokers and will do so across various countries. Below are examples of specific margin needs and the accompanying leverage:
| MARGIN REQUIRED | MAXIMUM LEVERAGE |
|---|---|
| 50% | 2:1 |
| 3.33% | 30:1 |
| 2.00% | 50:1 |
| 0.5% | 200:1 |
FOREX MARGIN REQUIREMENTS
Forex margin call requirements are established by brokers and depend on the amount of default risk they are ready to take on while abiding by regulatory rules.
The sample forex margin requirement for the GBP/USD exchange rate is shown below under the title “Deposit Factor”:
Margin is often thought of as a cost that traders must incur. However, a percentage of the account equity is put aside and assigned as a margin deposit, not a transaction fee.
It’s crucial to remember that the deal’s size will eventually decide how much margin is required to hold open a position when trading with FX margin. The following tier, where the margin need (in monetary terms) also rises, is reached when transaction size grows.
During extreme volatility or before the release of economic data expected to cause more than average volatility, margin requirements may be temporarily raised.
The margin requirement remains at 3.33% for the first two levels but increases to 4% and 15% for the following two tiers.
Traders must ensure that the trading account is adequately financed to prevent a margin call after comprehending the margin requirement. A forex margin level is a straightforward tool that traders may use to monitor the condition of their trading accounts:
Forex margin level = (equity/margin utilised) x 100
Consider a trader who put $10,000 into the account but is now using $8,000 as a margin. The forex margin level will be 125, which is higher than the level of 100. The broker will often restrict the initiation of new trades and may issue a margin call if the forex margin level falls below 100.
To prevent the liquidation of existing positions, traders must be aware of the broker’s margin close-out policy. If a margin call is issued for an account, the account must be filled right once to prevent the liquidation of any open positions. Brokers use this action to restore the account equity to a respectable level.
TERMS IN FOREX MARGIN
- Equity: The amount remaining in the trading account after removing any current losses from the cash balance and adding any current winnings.
- Margin requirement: The amount of money (deposit) necessary to execute a leveraged deal.
- Used margin: The part of the account equity put aside to maintain open positions on the account.
- Free Margin: The account’s equity remaining after deducting any spent margin.
- Margin call: When a trader’s account equity falls below the broker-mandated permissible threshold, it results in the urgent liquidation of open positions to raise equity back to an acceptable level.
- Forex margin level: By dividing equity by the amount of margin utilized and multiplying the result by 100, this indicator of how well the trading account is financed is provided.
- Leverage: By investing a small portion of the transaction and borrowing the remaining funds from the broker, leverage in forex is a beneficial financial instrument that enables traders to expand their market exposure beyond the original investment. Leverage has the potential to produce both enormous gains and large losses for traders.
WHAT DOES A FREE MARGIN IN FOREX MEAN?
The equity in a trader’s account that is not used as a margin for open positions is referred to as a free margin. The quantity of money in the account that traders may utilize to finance new positions is another way to look at this.
Here’s an illustration to help illustrate this:
Equity: $10,000
Margin assigned to current position: $8,000
Equity – margin on open positions = free margin
The free margin is $10,000 minus $8,000
Free margin = $2 000
MANAGEMENT OF MARGIN TRADING RISKS
If the margin needed for each position is not automatically calculated on the deal ticket, traders must know how to do so when trading on a margined account. Understand the connection between margin and leverage and how a rise in the necessary margin affects the amount of leverage that traders may use.
If you want to avoid trading during such turbulent times, keep an eye on significant news releases using an economic calendar.
They have a sizable portion of your account equity designated as the free margin call is considered sensible. This helps traders avoid margin calls and ensure the account has enough money to execute high-probability deals as soon as they present themselves.
USEFUL RESOURCES TO IMPROVE YOUR FOREX TRADING
- Leverage errors must be avoided at all costs; to learn how to prevent this and other problems traders may encounter, see our list of the Top Trading Lessons.
- When trading with leverage, using stops is strongly advised. Guaranteed stops prevent the possibility of negative slippage during highly volatile markets.
- To prevent a margin call, educate yourself with a forex broker’s margin policy.