What is margin in forex trading?

November 9, 2023

Forex

Brokers require minimum deposits, also known as margins, to open and maintain leveraged positions.

diagram showing margin in forex with deposit and buying power balancing on leverage

There is an inverse, proportional relationship between the margin required and the leverage provided. For example, higher leverage means you need a smaller margin to control a larger position size.

In this guide, we’ll cover:

What is forex margin?

Margin is the amount of money required to open and maintain a trade. Think of it as a loan from the broker, allowing traders to open larger positions than their account balance would normally allow. Margin acts as collateral and is typically expressed as a percentage of the total position value. Deriv’s forex margin requirements can be found in our trading specifications page.

There are 2 types of margin. Used margin is the amount of capital that is currently being used as security to sustain open positions. Free margin is the remaining amount of capital available to open new positions. For example, if your total account balance is 5,000 USD and used margin is 3,800 USD, you will have 1,200 USD free margin to open new positions.

How to calculate margin in forex

Traders can use Deriv’s forex margin calculator which is based on the formula:

Margin = (Volume x Contract size x Asset price) / Leverage

For example, let’s say you want to trade 3 lots of EUR/USD with an asset price of 1.10 USD and a leverage of 30. You will require a margin rate of 11,000 USD to open the position.

(3 x 100,000 x 1.10) / 30 = $11,000

What is a margin level?

A margin level is a measure of how much of your own money remains in your trading account compared to the amount you've borrowed from your broker for leveraged trading. It's usually expressed as a percentage and calculated as:

Margin level = (Equity / Used margin) × 100

A higher margin level indicates that you have more margin available in your account relative to the borrowed funds, which is generally considered safer. On the other hand, a lower margin level means you're using a larger portion of borrowed funds, which can increase the risk of potential losses.

What is a margin call?

A margin call serves as an alert when your margin drops below 100%, indicating a low level of equity for your trades. In response, traders should take action by either depositing additional funds into their account or closing some of their open trades. Traders can find their margin levels on the Deriv MT5 platform on the Trade tab of the Toolbox.

A stop-out level is a preset margin level below the call threshold. At Deriv, it is 50%. When reached, if you have several trades open, the system will start closing them one by one, starting with the trade that has the highest loss, until your margin level goes back up above 50%.

For example, if you have an account with 1,000 USD equity and you enter a trade with a margin requirement of 1,000 USD, in case the market moves against you, causing your account to drop to 500 USD or less (50% margin level), your trade will close automatically.

Trading on margin

Leverage is a double-edged sword in trading. On the one hand, it provides the ability to take on much larger market exposures than one’s capital would normally permit, vastly amplifying profit potential from favourable market movements. However, leverage also dramatically magnifies potential losses from adverse market swings.

It’s important for newer traders to respect this double-edged nature. Starting with more modest leverage while building skills will help avoid being cut by the razor’s edge. If used judiciously over time, leverage can be a tool for seasoned traders to execute strategies not otherwise possible.

Conclusion

Margin trading demands careful risk management, as leverage can amplify losses if trades don't go as planned. In the fast-paced world of trading, it's essential to monitor your margin level diligently in order to prevent margin calls and forced trade closures.

You can open a demo or real trading account with Deriv to practise trading forex with margin today.