In the realm of forex trading, you'll frequently come across various financial terminologies. Among these, the term 'Margin' stands out as a crucial concept. This article aims to describe this term, offering comprehensive insight and instructions on how to calculate a margin value suitable for your trades accurately.
What Is Margin?
In Forex trading, 'Margin' signifies the security deposit that traders provide their brokers for opening orders. This deposit, acting as a safety fund, is refunded when the order is closed. Margins benefit traders in numerous ways, including amplifying potential profits and functioning as collateral for trades, a vital element when launching orders in the Forex market.
How to Calculate Margin?
The calculation of Margin usage can be achieved with the following equation:
Current Price x Lot Size x Contract Size / Leverage = Margin
For Example, when you're trading the EUR/USD currency pair at the present rate of 1.10000. If you wish to open a lot size of 1 with a leverage ratio of 1:1000, the margin calculation would be: 1.10000 x 1 x 100,000 / 1000 = 110
This calculation suggests the required collateral of $110 for this particular order.
The picture shows the role of Margin in order placement and other associated factors as below:
Margin: The mandatory collateral amount
Free Margin: The existing collateral (Equity - Margin)
Margin Level: The surplus fund before the insufficiency of Free Margin is shown as a percentage.
Conclusion
Acting as a trading security, the Margin is returned to the trader once the order is closed. The amount of Margin used varies and depends on the trader's individual trading style and expertise. However, it's highly advised, especially for novices, to regularly compute the Margin to minimize potential risks to their portfolio.
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Updated
11 months ago
(May 30, 2023 16:39)
