Margin

Razvan Mihai

Analyst

Forex trading bears the risk of losing your investment. . For this reason when an individual is interested in trading with a brokerage house, they will be required to make a deposit.

In the scenario a trader loses, the amount lost during the trade will be deducted from the balance. This is fair and reasonable. A brokerage house gives a trader the ability to use leverage in order to make more money. On the other hand, a trader is liable to pay the brokerage house if they incur a loss and for the services the brokerage gives for the spreads and commissions.

Margin is the required amount of money needed to open a trade with a desired volume. If you return to the previous example, I used as a benchmark amount 1000 Euro. I gave this example because it is the amount needed, while using 1:100 leverage, to open a standard trading *Lot*. So for 1 lot of EURUSD, using a leverage of 1:100 a trader will need to have a minimum amount of 1000 Euro in their account.

This amount is being blocked under the Margin section from the Terminal window. I use the term *blocked*, for the reason that it is used for opening that specific trade (buy or sell). To initiate another trade you would need to deposit more money. When the trade is closed, the money is unlocked and can be used to open an additional trade.

Essentially, to calculate money remaining in your trading account to open a certain volume, you will need to divide the nominal value of a standard lot to the leverage. The Margin required will have, as for the nominal value of 1 lot, in the first currency of the pair.


Below are some examples to give you some clarity.


For:

1 lot of EURUSD, using a leverage of 1:100 the margin will be 1%.

1 lot = 100,000 Euro; Margin required = 100,000 / 100 = 1000 Euro;

0.1 lots = 10,000 Euro; Margin required = 10,000 / 100 = 100 Euro;

0.01 lots = 1,000 Euro; Margin required = 1,000 / 100 = 10 Euro.

For 

1 lot of GBPUSD, using a leverage of 1:200, the margin will be 0.5%.

1 lot = 100,000 GBP; Margin required = 100,000 / 200 = 500 GBP;

0.1 lots = 10,000 GBP; Margin required = 10,000 / 200 = 50 GBP;

0.01 lots = 1,000 GBP; Margin required = 1,000 / 200 = 5 GBP.


Ascertaining what margin you need to open 1 lot, will give you the knowledge of how many lots you can trade or a particular number of transactions you can enter. If your balance is 2,500 Euro, you can open 2.5 lots of EURUSD. Or 1 lot of EURUSD, 1 lot of EURJPY and 0.5 lots of EURAUD. 

These are given just as examples, you should always manage your risk properly and avoid blocking all your capital in margin.


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