Since we have covered Leverage and how Leverage works in Forex, let’s take a look at Margin. Margin is the amount of funds that the broker requires from the trader as collateral, in order to open a specific position of volume based on the leverage that the client has selected. Since a trader is allowed to use more capital than the amount he or she deposited, the broker requires an amount of funds to cover any potential losses. This amount is what we call margin. See it as a good deposit, represented as a percentage. It is the amount you need to have in your account in order to keep a position open. Let’s assume that a trader deposits €20,000 in an account with leverage 1:25. The broker has set the margin at 4%. What does this actually mean? If the trader buys 2 Lots of EURUSD at 1.2000, you can calculate the margin as 200 000 x 1.20000 = €240 000. He must have €9,600 in his account in order to keep his position open.
More on Beginner's Education
What is a Bid Price/What is an Ask Price?
The Bid price is the price a forex trader is willing to sell a currency pair for. Ask price is the price at which a trader will buy a currency pair. Both of these prices are given in real-time and are constantly updating. So for example, the British pound against the...
What is Forex Spread?
What are Base and Quote Currencies?
In forex, currencies are always traded in pairs. The first currency is called the base currency and the second currency is called the quote currency. For example, EURUSD, means that the base currency is the Euro and the quote currency is the US Dollar. The quote...
