Margin is the portion of the funds in a trading account that is used as collateral to open a position, rather than a fee or transaction cost.
In other words, margin in trading is the collateral that a trader must deposit into their account to cover a portion of the risk that the trader creates for the broker. It is usually a portion of the trading position and is expressed as a percentage.
The margin that your Forex broker requires will determine the maximum leverage that you can use on your trading account. For this reason, trading with leverage is sometimes referred to as “margin trading.”
Each broker has its own margin requirements, so it is important to do your research before choosing a broker and starting margin trading with them.
Margin trading can have both positive and negative results, and both potential profits and losses can increase significantly.
Margin = (Lot Size * Contract Size) / Leverage
For example, a broker offers a leverage of 1:20 for Forex trading. Essentially, this means that for every 20 units of currency in an open position, 1 unit of currency from your funds is required as margin. In other words, if you want to open a position in the market of 20 USD, the margin is only 1 USD.
So in this example, the margin is 1/20 or 5%.
Unlike unleveraged trading, with margin trading you can trade positions of such volumes that will exceed the actual funds in your account.
Margin Trading Tips
Margin is a controversial topic. Some traders believe that margin trading is very dangerous, while others find it a very useful trading feature. While it all depends on your individual trading style and trading experience, here are some general tips:
Don’t open too many orders at once. It takes a lot of funds to maintain a large number of open orders. This reduces your free margin level and increases the likelihood of a stop out.
Use a stop loss. This will allow you to keep your losses under control when the market moves against you.
Only trade with funds that you can afford to lose. Learn how to manage your money properly and only use leverage if you feel it makes sense.
Margin trading can be an extremely profitable approach to trading the markets, but it is important that you understand the risks involved.
We wish you successful trading with ArtCap!
