Free margin forex definition

Definition of margin.

Margin is defined as the amount of money required in your account to maintain your market positions using leverage. For example, if you are in an open position for $20,000 using a 100:1 margin, then your account balance should be no less than 1% of that amount. This is simply because you can usually trade up to 100 times the money you actually have. Similarly, if your broker require a 2% margin, you have a 50:1 leverage. The calculation for leverage is:

Leverage = 100 / Margin Percentage.

In other words, margin is a courtesy deposit needed to access a leveraging facility in forex. Your deposit is also known as an initial margin or initial deposit. Say, you have $100 in your account and your leverage is 100:1. This means that you can trade up to $100,000 worth of currencies. Your account balance will be 'earmarked' and locked for every transaction that you make leading to the $100,000 mark. So if you hold a $10,000 open position, $100 of you account balance is tied up as a security to your broker. This is known as a maintenance margin. You can now trade the remaining $90,000 leverage inclusive of your $900 balance. Similarly, once you close position, your 'earmarked' money will be free for use again.

When the level of maintenence margin drop below the required level, a margin call will be issued by your broker to bring the level up again. In this event, an investor have two options, that is to top up his account balance or to liquidate his trades to meet the requirement. This usually happens when an investor suffer losses in an open position, resulting in brokerage firm seeking some form of security.

According to authors John Jagerson and S. Wade Hansen of the book 'Profiting With Forex', "Most dealers require you to set aside somewhere around $100 per contract in a mini account or $1,000 per contract in a full-size account. Where many investors get confused is that they believe the $100 or the $1000 they have set aside is the maximum amount they can lose in the trade. This couldn't be farther from the truth."

Taking from the previous example, the maximum amount you can lose if you enter a contract of $10,000 with a margin of 100:1 is not the actual locked amount of $100 in your account, but the entire $10,000 traded. Hence, just like an investor is able to enjoy 100 times of profit, one also stand to lose 100 times one's money. Because of this, margin should be used wisely and moderately along with safety precaution such as using a stop-loss order.

How does margin trading in the forex market work?

When an investor uses a margin account, he or she is essentially borrowing to increase the possible return on investment. Most often, investors use margin accounts when they want to invest in equities by using the leverage of borrowed money to control a larger position than the amount they'd otherwise by able to control with their own invested capital. These margin accounts are operated by the investor's broker and are settled daily in cash. But margin accounts are not limited to equities - they are also used by currency traders in the forex market.

Investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account - the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage the investor is taking on.

Before the investor can place a trade, he or she must first deposit money into the margin account. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker. For accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%. So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close his or her position before the delivery date, it will have to be rolled over, and interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.

In a margin account, the broker uses the $1,000 as security. If the investor's position worsens and his or her losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.

Margin in Forex trading. Margin level vs Margin call.

Margin is one of the most important concepts of Forex trading. However, a lot of people don't understand its significance or simply misunderstand the term. Fortunately, we can help you out. What is known as a Forex margin is basically a good faith deposit that is needed to maintain open positions. A margin is not a fee or a transaction cost, but instead a portion of your account equity set aside and assigned as a margin deposit. We should warn you that trading on a margin can have different consequences. It can influence your trading experience both positively and negatively, with both profits and losses potentially being seriously augmented.

Your broker takes your margin deposit and then pools it with someone else's margin Forex deposits. Brokers do this in order to be able to place trades within the whole interbank network. A margin is often expressed as a percentage of the full amount of the chosen position. For instance, most Forex margin requirements are estimated to be: 2%, 1%, 0.5%, 0.25%. Based on the margin required by your FX broker, you can calculate the maximum leverage you can wield with the trading account you have.

What is Forex margin level?

In order to understand Forex trading better, one should know all they can about margins. We want you to get acquainted with the term Forex margin level, which you need to understand. The Forex margin level is the percentage value based on the amount of accessible usable margin versus used margin. In other words, it is the ratio of equity to margin, and is calculated in the following way: margin level = (equity/used margin) x 100. Brokers use margin levels in an attempt to detect whether FX traders can take any new positions or not.

Different brokers have different limits for the margin level, but most will set this limit as 100%. This limit is called margin call level. Technically, a 100% margin call level means that when your account margin level reaches 100%, you can still close your positions, but you cannot just take any new positions. As expected, 100% margin call levels occur when your account equity is equal to the margin. This usually happens when you have losing positions and the market is quickly and constantly going against you. When your account equity equals the margin, you will not be capable of taking any new positions.

What is margin level in Forex? We'll use an example to answer this question. Imagine that you have a $10,000 account and you have a losing position with a margin evaluated at $1,000. If your position goes against you and it goes to a $9,000 loss then the equity will be $1,000 (i. e $10,000 - $9,000), which equals the margin. Thus, the margin level will be 100%. Again, if the margin level reaches the rate of 100%, you can't take any new positions, unless the market suddenly turns around and your equity turns out to be greater than the margin.

Let us presume that the market keeps on going against you. In this case, the broker will simply have no choice but to shut down all your losing positions. This limit bears a special name and that is the stop out level. For example, when the stop out level is established at 5% by a broker, the platform will start closing your losing positions automatically if your margin level reaches 5%. It is important to note that it starts closing from the biggest losing position.

Often, closing one losing position will take the margin level Forex higher than 5% as it will release the margin of that position, so the total used margin will go lower and consequently the margin level will go higher. The system often takes the margin level higher than 5% by closing the biggest position first. If your other losing positions continue losing and the margin level reaches 5% once more, the system will just close another losing position.

You might ask why brokers even do this. Well, the reason why brokers close positions when the margin level reaches the stop out level is because they cannot permit traders to lose more money than they have deposited into their trading account. The market could potentially keep going against you forever and the broker cannot afford to pay for this sustained loss.

What is free margin in Forex?

Free margin Forex is the amount of money that is not involved in any trade and you can use it to take more positions. That isn't all - the free margin is the difference of the equity and margin. If your open positions make you money, the more they go to profit then the greater equity you will have, so you will have more free margin.

There is one topic that ought to be discussed. There may be a situation when you have some open positions and also some pending orders simultaneously. The market wants to trigger one of your pending orders but you don't have enough Forex free margin in your account. That pending order will either not be triggered or will be cancelled automatically. This can cause some traders to think that their broker failed to carry out orders and that they are a bad broker. Of course in this instance, this just isn't true. It's simply because the trader didn't have enough free margin in their trading account.

We hope that we have answered the question - what is free margin in Forex?

What is margin call in Forex?

A margin call is perhaps one of the biggest nightmares Forex traders can have. This happens when your broker informs you that your margin deposits have simply fallen below the required minimum level owing to the fact the open position has moved against you. Trading on margin can be a profitable Forex strategy, but it is important to understand all the possible risks. You should make sure you know how your margin account operates, and be sure to read the margin agreement between you and your selected broker. If there is anything you are unclear about in your agreement, ask questions.

There is one unpleasant fact for you to take into consideration about the margin call Forex. You might not even receive the margin call before your positions are liquidated. If the money in your account falls under the margin requirements, your broker will close some or all positions, as we have specified above several times. This can actually help prevent your account from falling into a negative balance.

How can you avoid this unanticipated surprise? Margin calls can be effectively avoided by carefully monitoring your account balance on a regular basis and by using stop-loss orders on every position to minimise the risk.

Margins are a debatable topic. Some traders argue that too much margin is very dangerous, however it all depends on the personality and the amount of trading experience one has. If you are going to trade on a margin account, it is important that you know what your broker's policies are on margin accounts and that you understand and are comfortable enough with the risks involved. Be careful to avoid a Forex margin call.

As we are approaching the end of our guide, it is important to draw your attention to one fact. Most brokers require a higher margin during the weekends. In fact, this might take the form of a 1% margin during the week and if you want to hold the position over the weekend, it may rise to 2% or higher.

Conclusion.

As you understand, FX margins are one of the aspects of Forex trading that must not be overlooked as it could lead to an unpleasant outcome. In order to avoid it, you should understand the theory about margins, margin levels and margin calls, and apply your trading experience to create a viable Forex strategy. Indeed a well developed approach will undoubtedly give you profit in the end.

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Risk warning: Trading Forex (foreign exchange) or CFDs (contracts for difference) on margin carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Before using Admiral Markets UK Ltd or Admiral Markets AS’ services, please acknowledge all of the risks associated with trading.

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Forex Education.

Find definitions for key Forex trading terms along with introductions to the concepts, people and entities that impact the Forex market.

Buying on margin allows a client to leverage a position that is larger than the actual amount put down. Margin requirements in the Forex market vary depending on a countries Forex regulations, ranging from .25% to 2% of the value of a position.

Another way to refer to margin requirement is the leverage offered by a broker. A 2% margin requirement is equivilent of offering 50:1 leverage while a 1% margin requirement can also be reffered to as 100:1 leverage.

Forex Trading Terms (Alphabetical)

Risk Disclaimer: Online forex trading carries a high degree of risk to your capital and it is possible to lose your entire investment. Only speculate with money you can afford to lose. Forex trading may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary.