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Using Margin in Forex Trading

Margin trading in forex is a novel idea for many traders, and it is frequently misinterpreted. Simply defined, margin is the smallest amount of money necessary to execute a leveraged trade and may be an effective risk control tool.

The idea of margin call is closely related to margin, and traders go to considerable efforts to prevent it. Not understanding what margin is may be highly costly, which is why it is critical for forex traders to understand margin before entering a transaction.

Continue reading to learn more about how to calculate margin in forex trading and how to successfully manage risk.

What is Forex Margin, and how does it work?

A good faith deposit that a trader puts up as collateral to start a deal is known as forex margin. In essence, it is the minimum amount required in a trader’s trading account to initiate a new position. This is generally expressed as a percentage of the FX deal’s notional value (trade size). The broker “borrows” the difference between the deposit and the entire amount of the deal.

Understanding Margin Requirements in Forex

Brokers determine margin requirements based on the degree of risk they are willing to take (default risk) while complying to regulatory regulations.
Margin is sometimes misunderstood as a charge that a trader must pay. It is, however, a percentage of the account equity that is put aside and assigned as a margin deposit, rather than a transaction cost.

When trading with forex margin, keep in mind that the amount of margin required to keep a position open is ultimately decided by the size of the deal. Traders will advance to the next tier as their trade size grows, and the margin requirement (in monetary terms) will grow as well.

During moments of extreme volatility or in the run-up to economic data releases that are expected to contribute to higher-than-normal volatility, margin requirements might be temporarily raised.

The first two tiers keep the margin requirement at 3.33 percent, while the next two tiers increase it to 4% and 15%, respectively.

To prevent a margin call, traders must ensure that their trading account is adequately financed after learning about margin requirements. The forex margin level is one simple approach for traders to keep track of their trading account status:

(equity / margin utilised) x 100 = Forex margin level

Assume a trader has placed $10,000 in his account and is now using $8,000. The forex margin level will be 125, which is higher than the previous level of 100. If your forex margin falls below 100, your broker will usually prevent you from placing new trades and may put you on margin call.

In order to prevent the liquidation of current positions, traders must grasp the margin close out regulation given by the broker. When an account is put on margin call, it must be paid right once to avoid the liquidation of existing open positions. This is done by brokers in order to restore account equity to a reasonable level.

Dealing with the dangers of margin trading

When trading on a margined account, traders must know how to determine the amount of margin required per position if it is not automatically given on the transaction ticket. Understand the link between margin and leverage, and how requiring more margin reduces the amount of leverage available to traders.

If you want to avoid trading during such turbulent periods, keep an eye on significant news releases using an economic calendar.

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