This article will address several questions pertaining to Margin within Forex trading, such as: What is Margin? What is free margin in Forex?’ and What is Margin level in Forex? Every regulated forex brokers has differing margin requirements and offers different things to traders, so it’s good to understand how this works first, before you choose a broker and begin trading with a margin.
What Does Margin Mean?
Margin is one of the most important concepts of Forex trading. However, a lot of people don’t understand its significance, or simply misunderstood the term. 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 is set aside and assigned as a margin deposit.
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 around: 2%, 1%, 0.5%, 0.25%. Based on the margin required by your FX broker, you can calculate the maximum leverage you can wield in your trading account.
What is Free Margin?
Free margin in Forex is the amount of money that is not involved in any trade. You can use it to take more positions, however, that isn’t all – as the free margin is the difference between equity and margin. If your open positions make you money, the more they achieve profit, the greater the equity you will have, so you will have more free margin as a result. There may be a situation when you have some open positions and also some pending orders simultaneously.
The market then wants to trigger one of your pending orders but you may not 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 their orders. 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.
What is a Margin Call in Forex?
A margin call is perhaps one of the biggest nightmares professional 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 that 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 and make sure everything is clear.
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 earlier in this article. This can actually help prevent your account from falling into a negative balance.
As you may now come to understand, FX margins are one of the key aspects of Forex trading that must not be overlooked, as they can potentially lead to unpleasant outcomes. In order to avoid them, you should understand the theory concerning margins, margin levels and margin calls, and apply your trading experience to create a viable Forex strategy. Indeed a well developed approach will undoubtedly lead you to trading success with the best forex system.