What is Margin in Forex Trading? How to Calculate Margin for Forex Trades|Margin Requirment

 

What is Margin Trading in Forex?

Margin Trading in Forex is a Small Part of Money from Your Investment, that Broker or Third Party undertake with him.

You are only required to put up a small amount of Money Known as "Capital" to open and maintain a new position, Trade or Lot.

This capital in Forex Market is known as the margin.

Margin in Forex Trading can be understood of as a good Trusted deposit Money or collateral that’s needed to open a position or Lot and keep it open with Broker. 

Simply "Margin in Forex Trading" is a part of your Investment that your forex broker sets apart from your account balance to keep your trade or Lot open and to ensure that you can away from the Unrealized loss of the trade.

Margin is Free when the trade or Lot is closed, Your Capital/Money/ in shape of Margin is back into your forex trading account. Now you can use that Free Margin to open New Trades or Lots.

What is Margin Requirement and How to Calculate Margin in Forex Trading?

In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in "lots" of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have Open.

"But I don't have enough money to buy 10,000 euros! Can I still trade?"

You can with margin trading!

Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Explanation of Margin Trading:

You believe that Forecast in the market are indicating that the British pound will go up against the U.S. dollar.

You open one standard lot (100,000 units GBP/USD), buying with the British pound at 2% margin and wait for the exchange rate to climb. 

When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).

If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). You now control 100,000 pounds with just US$3,000.

Your Forecast come true and you decide to sell. You close the position at 1.50500. You earn about $500.

Calculation; How Margin Calculated. 

What You Do	GBP	USD
You buy 100,000 pounds at the exchange rate of 1.5000	+100,000	-150,000
You blink for two seconds and the GBP/USD exchange rates rises to 1.5050 and you sell.	-100,000	+150,500
You have earned a profit of $500.	0	+500

When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.

This profit or loss is then credited to your account.

What is Margin Requirement in Forex Market?

Required margin is explained as a specific amount of your account’s currency.

Margin requirement in forex is simply the percentage amount that a broker sets, which determines how much margin is required for a trader to open a new position.

The amount of margin in Forex Trading needed to open a position Differ, Depending on the currency pair and forex broker,

Margin amount requirements demonstrated as: 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.

This percentage (%) is known as the Margin Requirement.

Examples of margin in Forex Trading requirements for several currency pairs:

What is Margin Calculator and how It works:

Margin calculator helps you calculate the margin needed to open and hold positions.

Enter your account base currency, select the currency pair and the leverage, and finally enter the size of your position in lots.

The calculation is performed as follows:

Required Margin = Trade Size / Leverage * Account Currency Exchange Rate

Example:

Volume in Lots: 5 (One Standard Lot = 100,000 Units)

Leverage: 100

Account Base Currency: USD

Currency Pair: EUR/USD

Exchange Rate: 1.365 (EUR/USD)

Required Margin = 500,000 /100 * 1.365

Required margin is $6825.00 USD

You can use Forex margin calculator Tool to Calculate your Own Margin and Leverage. 

May 17, 2021 Tags : Forex Basics , Forex Strategies