Calculating margin is essential when trading Forex. For this purpose, Forex traders can use a Forex margin calculator, which is a handy tool available on numerous platforms dedicated to Forex trading. Such tools can calculate margin in a matter of seconds, sparing you tons of time spent on calculating it yourself. However, without the proper knowledge, you won’t be able to understand the calculations a margin calculator provides. With this in mind, we’ve prepared a short guide to calculating your margin when trading in the Forex market.
What Is Margin?
First things first, let’s clarify what Forex margin is. In essence, margin refers to the capital a trader needs to put up to open a new trading position. What’s important to understand here is that margin is not a fee or a cost. It’s an amount of money freed up once you close your position, working as collateral protecting you from losses. Required margin will depend on the amount you’re trading, but it’s always recommended not to put too much on margin. Otherwise, you risk losing everything if your trades misfire.
The margin itself works pretty straightforwardly. Essentially, when your losses cause your margin to fall below the pre-defined stop-out percentage, the broker will automatically close all your open positions. You might also receive a margin call warning from your broker, informing you about them closing your positions.
What Is Leverage?
There’s no point talking about margin without mentioning leverage (or margin ratio as some call it). It allows you to control a more significant margin amount, amplifying potential rewards and risks involved in trading. This is referred to as leveraged trading or margin trading, where higher leverage means higher risk.
Here’s how it works:
Imagine you have a currency pair EUR/USD. When buying currency at 1.0000 without leverage, the price will have to go to zero for you to take a total loss and to 2.0000 to double your investment. However, if you use 50:1 leverage, a price movement worth 50 times less will produce the same loss or profit.
How to Calculate Margin?
There are two ways to calculate your margin. First is using the following formula:
margin required = ([{base currency} / {account currency}] x units) / leverage
However, why complicate things when you can use a tool that will do all the dirty work for you? When calculating your required margin, the best idea is to use a dedicated margin calculator. Using one, you’ll be able to figure out your margin in a matter of seconds.
Sticking with the EUR/USD currency pair mentioned above, let’s type all the required data into a standard online margin calculator:
- our currency pair (trading instrument) is EUR/USD
- our deposit currency is USD
- no leverage
- our trade size is 10,000 units (a standard lot)
- the current conversion price of EUR/USD is 1.0570
In this case, our required deposit amount to open the trade would need to be 105,570.00 USD. But let’s add a 30:1 leverage into the mix. Once we do that, our required margin amount falls down to 3,519.00 USD.
What Are the Rewards and Risks of Forex Margin Trading?
Margin trading financial instruments come with several potential rewards. However, they also involve numerous risks you should be aware of. Essentially, when trading using margin, the list of possible rewards and risks includes:
Rewards
- Margin can generate larger profits than when trading through an account balance.
- It can grow traders’ accounts faster.
- With less capital involved, traders can fund other investment opportunities.
Risks
- Margin trading is high-risk, and it can expose your trading account to significant losses.
- Margin call means you might be forced to sell your holdings and use them as collateral for your open position.
Key Takeaways
And there you have it, our short guide to calculating margin when trading Forex. If you have any further questions regarding the Forex market, be sure to check out our Forex dedicated page. There you’ll find all the resources needed to understand the ins and outs of Forex trading.
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