Margin (Margin) in Trading - Everything Traders Need to Know

Basic Meaning of Margin Means “Collateral”

When talking about margin in online trading, we are referring to the amount of money required to open a trading position. The term margin means the collateral that your account must have in order for you to conduct transactions. It is not a fee or cost, but rather money that is temporarily “locked” by your broker to maintain the account’s integrity.

Simple example: If you want to control a position worth $100,000, the broker may require you to have only $1,000 in your account. This means you are using 100:1 leverage to trade. When you close the position, this margin money will be released back to your account for future trades.

How to Calculate Initial Margin

Initial margin (Initial Margin) depends on 3 main factors: current price, trading volume, and the margin ratio of that currency pair.

Calculation formula: Margin = Contract Value × Margin Ratio (%)

If you trade 1 mini lot (10,000 units) on a currency with a margin requirement of 0.5% (which equals 200:1 leverage), you will need only $50 ($10,000 × 0.5% = $50). This figure is the minimum amount required in your account to open this position.

Maintenance Margin (Maintenance Margin) - An often overlooked but important concept

Maintenance margin (MM) differs from initial margin in that it is the minimum amount you must have in your account to keep your open position active. This system is similar to “free margin” which cannot be used.

Calculation formula: Maintenance Margin = Contract Value × MM Ratio (%)

MM Ratio (%) = Initial Margin Ratio (%) × 50%

For example, if you set aside $1,000 as initial margin, you must always maintain at least $500 this amount in your account. This is the maintenance margin level.

Margin Call Situation - When your position is at risk

Problems occur when your trading starts to incur losses. The amount of maintenance margin needed is calculated from the real-time contract value. If the equity in your account falls below 50% of the initial margin placed, the broker will issue a “Margin Call.”

Imagine: You open 1 mini lot with $1,000 margin. Your position is now at a loss, with $600 your account balance now at $400 . In this case, you need to add more money $100 to bring you back to the maintenance margin level $500 . If you do not do so, the broker may close your position without permission.

The Relationship Between Margin and Leverage

Margin and leverage are related concepts. Higher leverage means lower margin requirement, but also higher risk. Leverage amplifies both profits and losses. In our example with 200:1 leverage, even small price movements can lead to significant gains or losses.

Summary of Key Concepts About Margin

• Initial Margin: The money required to open a new position (calculated as contract value × margin ratio)
• Maintenance Margin: The minimum amount to keep the position open (usually 50% of initial margin)
• Margin Call: A warning signal issued when your account is at risk
• Margin Requirement: Depends on the risk of the currency and your broker’s policies

Understanding margin is crucial to prevent your positions from being unexpectedly closed and to make your trading more efficient and safer.