What is Margin?
Margin is the sum of money that a trader deposits to their trading account to provide the opening and maintenance of a position. Forex margin is not a variety of a fee or a commission to a brokerage company. Yet this is a part of the trader’s account balance that is set aside in order to trade. A broker firm needs to take a margin from a trader so that it could be able to place trades across the global interbank market.
Primarily a forex trader needs to make payment into their margin account in order to be able to place a trade. Different forex brokerage firms require different amounts of margin. However, the margin of any broker is usually shown as a percentage of the total amount of the selected position. For example, most margin requirements are valued at 2%, 1%, 0.5% or 0.25%. If a trader wants to trade 100,000 units of currency or larger, their margin percentage is 1% or 2%.
That is why if a trader wants to trade $100,000 that means that there must be $2,000 in their trading account. The rest 99% is provided by their brokerage firm.
At the same time, some brokers ask for higher margin to hold positions during the weekends and holidays because of higher liquidity risk. That means if the standard margin is 1% during the working days, it can grow to 2% when it is a day off.
In continuation of the example above – if the market does against the trader so that their position gets worse and their losses approach $2,000, then the company runs a margin call. That is a situation when the brokerage firm may ask a trader to either replenish more money into the account or to close open positions to avoid the harm for them both.
Together with this, in situations when trade accounts have lost a significant sum of money for example because of volatility, the brokerage may liquidate the account and only after it notify its client that their account was subject to a margin call.
Brokers can use specific plugins like StopOut Email Notifier to inform their customers about margin call events in their accounts.
Free Margin in Forex
Free margin is the amount of money which a trader doesn’t use in any of their trade. So, a trader can use it to open new positions. Free margin can also be identified as the difference between equity and margin. The more funds a trader is getting, the more free margin they are having.
Margin and Leverage
Margin is closely connected to leverage. The higher the leverage, the less is the deposit which the broker needs to freeze on the trader’s account. Accordingly, with a larger leverage, a trader will be able to open more deals, as well as to get more profit or loss. Therefore, they say that a large leverage is more risky. To manage the leverage brokers can also use particular tools like Dynamic Leverage plugin.