What is forex margin? Margin level and margin call

EducationNovember 15, 2021

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This article answers your questions related to margin trading – Margin in Forex, such as: What is margin? What is Free Margin? What is the margin level? Each broker has different margin requirements. Therefore, you need to understand how margin works before choosing a broker and starting to trade.

What is margin forex? What is margin trading?

Margin trading, margin, margin account, or margin trading is the most crucial concept in forex trading. However, many people still do not understand or misunderstand the meaning of this term. Margin in Forex is a deposit that a trader sends to a stock exchange to maintain a trading position. Margin is not a transaction cost but a portion of equity used as margin.

Margin affects a trader’s trading experience both positively and negatively. It can increase profits or increase losses many times over. Stock exchanges take a trader’s margin and combine it with another trader’s margin to place trade orders on the global interbank network.

Margin is calculated as a percentage of the total number of trades. Most margin requirements in Forex fall between 2%, 1%, 0.5%, 0.25%. Based on the Forex broker’s margin requirements, the trader will calculate the maximum leverage they can use with the trading account.

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What is Free Margin?

Free margin is the balance in the trading account that the trader has not used to open a position. Therefore, traders can use it to open new trading positions. Margin is the difference between equity and margin. If the new order helps the trader make more money, the bigger the profit, the higher the initial equity will increase, and the more free margin the trader will have. There are cases where the market has to process an open trading position and a pending order simultaneously.

At that time, if the market wants to activate a pending order but the trader does not have enough free margin in his account, the pending order will not be started or canceled automatically. This leads some traders to think that the stock exchange is not executing their orders. But in fact, the charge is not completed because the trader does not have enough free margin in the trading account.

What is Margin Level?

To trade Forex better, a trader must understand what a margin account is. Margin level, margin level, or margin ratio is also an important concept that traders understand. Margin level compares usable margin with used margin based on the percentage value. In other words, margin level is calculated based on equity and used margin with the following formula:

Margin level = (Equity/Margin used) x 100

Stock exchanges use margin levels to determine if a trader can open a new trading position. Different exchanges have different margin limits, but most will set this limit at 100%. This limit is called the margin call level. The 100% margin call is when the account margin reaches 100%, and the trader can only close a trading position but cannot open a new one.

100% Margin Call occurs when equity equals used margin. It usually happens when a trader has a losing trade position, and the market continuously goes against the direction of the trader’s desire. At that time, the equity will equal the used margin, and the trader cannot open any more trades.

Forex margin example:

In order for traders to understand what is the margin level, what is margin in Forex, we consider the example below:

Let’s say we have $10,000 in our account and a losing trade with a margin of $1,000. If the market goes against the desired trend and we lose $9,000, the equity is only $1,000 (10,000 – 9,000 = 1,000), equal to the margin used. Therefore, the margin will be 100%. When the margin level reaches 100%, a new trade cannot be opened unless the market suddenly reverses and the equity becomes larger than the margin.

If the market continues to go against the desired trend, the Forex broker is forced to cut off all the losing orders of the trader. This limit is called the Stop Out Level. When the Forex broker sets a 5% stop, the trading platform will automatically close the trader’s losing positions if the margin reaches 5%. Please note that the trading platform starts to approach from the most significant losing order.

Usually, closing a losing trade will cause the margin to be 5% higher, as the margin used for this trade is released. Then, the total used margin decreases, and the margin level increases. The system usually takes a margin higher than 5% by closing the most significant trade first. If other losing trades continue to lose and the margin reaches 5%, the system closes another losing trade.

The stock exchange closes the trading position when the margin level reaches a stop because it cannot let the trader lose more than the amount deposited into the trading account. The market can forever go against what a trader wants, and the stock exchange can’t afford to pay for these ongoing losses.

What is Margin Call? When is a Margin Call?

Margin call  is one of the biggest nightmares that forex traders face. The trader gets a margin call when the stock exchange announces that the margin deposit has fallen below the minimum level because the current trading positions are going against the market trend and losing money.

Margin trading is a profitable Forex investment strategy, but traders need to understand the possible risks. Traders must understand how the margin account works and carefully read the stock exchange’s quarterly terms. If there is anything unclear in the margin terms, ask questions and make sure you understand.

There is a rather unpleasant fact regarding margin calls in Forex. That is, the trader doesn’t even get a margin call before the trading positions are closed. If the amount in the account falls below the minimum deposit, the exchange will close some or all trades, as mentioned earlier in this article, to prevent the trader’s account from being closed. minus.

How to avoid Margin Call?

Traders can avoid margin calls by regularly monitoring their accounts and using stop-loss orders on trades to minimize risk. In addition, traders can also apply risk management policies in trading. If there is an effective risk management policy, traders will understand them well, predict them and avoid them.

Stock margin is a subject of much debate. Some traders think that using too much margin is dangerous, but actually, it depends on the trading style and experiences the trader has. If trading on a margin account, a trader needs to know the broker’s policy for a margin account and accept the risks involved. Be very careful and avoid margin calls in Forex.

Most stock exchanges require a higher margin on weekends. Traders only need 1% margin during the week, but if they want to keep the trade at the end of the week, the trader must accept a margin of 2% or higher.

Conclusion

Thus, in this article, we have learned all the issues related to securities margin, such as what is margin trading, what is a margin account is, what is margin level is, what is called margin when is margined? call margin. As a result, traders understand and can apply margin to Forex strategies to trade more effectively and successfully.

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