What Is Margin In Trading?

Margin is the $ amount that a trader provides to open and maintain a trade.

Using margin means trading using funds borrowed from a broker, the margin is taken from the traders deposit and serves as the collateral on each trade.

Each time you place a trade, you will only be required to put up a % of the total value of the position, the rest of the capital is provided by your broker.

Say you have a 10% margin requirement and open a position worth $100000, you will be required to provide $10000 to open and maintain the position, the rest is loaned from your broker.

What determines margin %?

Another name for margin trading is leveraged trading, because the leverage you chose on your trading account will determine how much margin you need to provide.

Think of leverage as a ratio of margin, if you have a 1:100 leverage then for every $1 of margin they provide, the broker credits them $100. This is the same as having a 1% margin requirement, because you only require 1% of the total trade value.

If you are slightly confused, here is a breakdown to show the relationship.

Calculating required margin

To calculate how much margin you require to open a trade

Margin = Total trade value x margin %

Example:
Margin = $100 000 x 1%= $1000

Therefore, a margin of $1000 will be required for you to open a trade

How to check margin on my trading account

Your trading platform will usually give you a breakdown of how much you are using:

(Source – MetaTrader)

Margin – The amount of your own capital that is currently being held for open positions.

Free margin – The amount of your capital that is available to open new trades.

Margin level – Relationship between equity and active margin.

Margin calls

Occur when you do not have enough equity to maintain open trades.

Your broker will require that you deposit more money into your account, otherwise they reserve the right to liquidate all open positions.

Advantages

  • You can open positions larger than your balance, increasing profit potential.
  • Increased capital allows you to open and maintain more trades, improving diversification.
  • It is possible to start trading with little capital.

Disadvantages

  • Greater risk because you can trade more capital than you have.
  • Losses can exceed your deposited funds.
  • You could face a margin call, so your positions can be closed without you wanting that.

Conclusion

You may be left thinking – Should I trade with margin? For most new traders I will say yes. But you need to avoid the pitfalls by managing risk correctly.

May the market be with you.

Margin FAQ

Margin is the $ amount that a trader provides to open and maintain a trade.

Each time you place a trade, you will only be required to put up a % of the total value of the position, the rest of the capital is provided by your broker.

Say you have a 10% margin requirement and open a position worth $100000, you will be required to provide $10000 to open and maintain the position, the rest is loaned from your broker.

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Guy Seynaeve

Guy Seynaeve

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