What is forex margin
The use of margin trading mechanisms at Forex allows to significantly increase the volume of operations on the foreign exchange market. Its essence is that exchange operations are conducted on a net basis, without attracting real funds.
The general concept of Margin
In the semantic context of the Forex market, the term "margin" refers to a certain amount of money on the speculator's trading deposit, which is deposited by the forex broker as an insurance (cover) each time the leverage is given to the speculator to make a transaction by a standard lot.
What is Forex Margin? A specific part of the currency speculator's trading capital is considered Margin, which the speculator has to deposit into his trading deposit as a kind of collateral for the broker's loan received in the framework of forex trading. Without such a brokerage loan, it is known that a "remote" private speculator will not be able to make any transactions with currency in Forex.
Any speculative online transaction with a currency contract necessarily involves two mutually agreed procedures:
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if there is a "promotion game" - purchase (buy) currency at the most favourable rate of ASK (opening a deal), and then sell it at the most favourable price of BID (closing a deal);
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buying currency at the most advantageous ASK rate (closing of a deal).
Regardless of the "game" direction (up or down), the price trader sells a currency must be higher than the rate at which the same currency is purchased (meaning in one particular transaction). If the trader uses high leverage, it is essential to be able to allocate funds in the account correctly, and for this purpose, it is necessary to calculate the Margin accurately. Many brokers' websites have margin calculation calculators, but it is better to know how to calculate Margin for Forex and be able to do it yourself.
How to calculate the Margin on Forex
When calculating the margin value, first of all, you should take into account whether the trader has pending orders in the currency used in the trading process. When calculating the Margin of Forex you need to know the size of the leverage, the current rate of the currency pair and the volume of the transaction, the formula for calculating the Margin looks like this:
Margin = Deal volume/Leverage* Rate
It is important to consider that volume at calculation under this formula should be specified not in lots, but units.
Example:
You need to buy 0.5 lots of the currency pair EUR/USD with a leverage of 1:500 and for 1.24. In this case, the calculation formula will look like this:
Margin: 50000 / 500 x 1.24
Bail will amount to 124 USD
What is the free Margin at Forex?
Free Margin - the difference between the Margin of open positions and the number of funds in the trader's trading account.
Free Margin
If you can correctly determine the level of Forex margin and compare its performance to your capabilities, you can significantly increase your profit level. If these parameters are not compared, the risks of a speculator will dramatically increase, and a trader can lose money even by correctly choosing the direction of price movement in a deal.
Advantages and mechanism of margin trading
The use of margin trading mechanisms at Forex allows to significantly increase the volume of operations on the foreign exchange market. Its essence is that exchange operations are conducted on a net basis, without attracting real funds.
The size of the standard lot is 100,000 units of the base currency of the contract (for EUR/USD contract the base currency is EUR). There are also mini lots (0.1 from standard) and micro-lots (0.01 from usual). The size of transactions can be several lots, and small and medium speculators do not have such amounts. That's why the mechanism of margin trading has started to be applied, it has earned due to brokers' intermediary activity, and it has allowed increasing the volume of transactions sharply.
"Leverage", "Trade Lot", "Price Point" terms definition
The term "margin" at Forex is closely connected with other, no less essential concepts of this market - "leverage", "trade lot", "price point".
The price point is a minimum ("atomic") unit of currency rate dynamics. The specific value of one "pip" for any currency pair is directly predetermined by the specifics of the currency pair itself. A trading lot is a quantitative characteristic of the volume of an asset sold or bought by a trader.
To be able to trade a standard lot, a trader has to use a "brokerage credit", the possible ratio of which with the number of funds available to the trader trading account is determined by the size of the leverage, which is one of the main parameters in forex trading.
We advise noting that the size of the Margin mentioned above is inversely related to the trading lot size and the size of the leverage. The more significant is the size of the trading lot and the corresponding leverage; the smaller is the Margin required for this transaction.