Forex basic - Margin

The deposit given to the broker by the trader is known as a MARGIN. Margins are required in order to use leverage. A broker demands this margin so that the opened position is maintained and sustained. The amount of margin demanded varies from broker to broker. A trader will offer the collateral in order to ensure and guard that his broker is not under threat of any credit risk.

Before calculating the margin requirements to open a position, you must consider the type of the trading account on which the transaction is made.

Margin – This is the amount of money that is currently being used to hold your positions open and is calculated as such: Rate*Volume traded/leverage.

e.g: If you trade 1 standard lot of EURUSD (let’s assume the rate to be 1.4300) and your account has a base currency of USD and you use a leverage of 1:500, then the margin used will be: 1.4300*100,000/500= $286.

Margin=rate per diposit cur*contract size/leverage

Margin Level – This is calculated by the formula of Equity/Margin. If you have a standard account and your Margin level falls at or below 20% then your position will be closed. For Micro accounts this level is at 5%.

Free Margin – This is your current Equity minus your Margin.  It is in effect the money you have   available to open new positions.

Margin – the collateral

Base currency – the first currency in the currency pair, for example:

EURUSD – the base currency is EUR

USDJPY – the base currency is USD

GBPJPY – the base currency is GBP

Contract – the contract size in the base currency. The size of 1 lot is always 100,000 units of the base currency. Respectively, 0.1 lot = 100,000 * 0.1 = 10,000 units of the base currency, and 0.01 lot = 100,000 * 0.01 = 1,000 units of the base currency

Leverage – leverage, for example:

leverage 1:500 – 500

leverage 1:100 – 100

After calculating the margin in the base currency, you must convert it into the deposit currency (at the rate when the position is opened), e.g. USD, EUR.

Margin Calculation on a pamm.mt4 account

Margin calculation on a pamm.mt4 account with USD as the deposit currency:

Trading Instrument (Currency Pair) – EURUSD;

Base Currency – EUR;

Lot = 0.1

Contract = 10,000 EUR (100,000 * 0.1 lot)

Leverage = 1:100 (100)

EURUSD Rate at Position Opening = 1.3540

Deposit Currency – USD

Calculation:

Margin = Contract / Leverage = 10,000 EUR / 100 = 100 EUR

2. We then convert the margin into the deposit currency (USD). If USD is the first currency in the pair under consideration, the margin should be divided by the rate; otherwise multiplied:

Margin= 100 EUR * 1.3540 = 135.40 USD

Margin equals 135.40 USD