In online currency trading margin can be a big part of one’s experience. Understanding what is margin in Forex can help new traders better outline their strategy as well as optimize their profit. Let’s take a few moments to talk about margin Forex definition and everything you need to know about it.
Forex margin explained
First, margin is different from a fee or a charge. Best way to explain what is margin level in Forex is to picture it as collateral set aside from your account to serve as a good faith deposit - a guarantee of serious intentions backed up by actual money. Brokers use the margins to make the trading process possible by placing the transactions into the interbank network.
What is the margin level?
Margin level is an expression of the trader’s current status based on the correlation between the amount available to be used as margin and the amount that has already been used. It can be calculated by dividing equity by used margin and then multiplying that number by a hundred. And what is free margin level in Forex? Simply the money that is not involved in any trades and can be used to open new positions or set aside for the upcoming transactions.
Margin trading example
As an FX margin trading example, picture the scenario in which you would like to purchase $100,000 worth of USD/EUR, so in order to open a position you are offering a small portion of your account, for example $1,000. Types on margin in Forex will vary based on the currency pairs you are trading with and the specifics of the agreement between a trader and a broker.
Margin call definition
In margin foreign exchange trading, the scariest thing that can happen to a trader is a margin call. Margin calls occur when the amount of accessible margin is not sufficient enough to keep the current trades open. The way to avoid getting the margin call is to constantly check the margin level and adjust the trading process accordingly. Once the margin call takes place, the trader is left with two options: stop trading altogether, even if it means significant losses or deposit more money into the account and refill the margin.
The difference between Forex margin and leverage
We’ve already mentioned that margins are used to enable the trading process, however they should not be confused with leverage. The simplest way to look at it is to translate margin into collateral or even a downpayment and at the leverage into loan. Leverage is a balance magnifying tool, used by traders to operate with significant amounts of money, while the margin, as we have already established, is a portion of an actual account balance that exists as a sort of a good faith deposit.
Forex margin calculator
There are a few ways of how to calculate margin in Forex, however the easiest way to do it is by using a margin calculator. The online calculator has all of the requirement info built in and takes you straight to the numbers. Needless to say, it can save up a good portion of time as well as to help understand the Forex free margin meaning to the fullest, by seeing the way it works with your own eyes.
Profitable Forex trading is a process that largely depends on the desire to understand and learn. Starting simple with definitions of leverage, interest and margin in Forex trading and then moving up to more complex aspects, is the right path to take for anyone who wants to be a successful trader.