If you have been trading in the forex market for quite some time, you might have encountered the term “margin” at some point in your whole trading journey. You probably don’t fully understand what that term means, so we’ll gladly discuss with you what “margin” is.
If you have already read some articles that discuss about leverage, you probably know by now how it works. With just a small amount of money, you are able to control positions that are multiple times bigger than your initial investment. In case you haven’t heard about leverage yet, or have no idea what it is, you can read this article.
Margin refers to the amount of money you need to maintain on your account balance to be able to trade on a leverage. Remember, to trade on a leverage, you must have sufficient amount of cash in your account balance relative to the size of the position you want to control.
For example, let’s say that the current leverage ratio of your broker is 1:100. It means that if you want to control a larger position, you would need to have at least 1% of the total amount of the position you want to control. So, to be able to control a position size of $100,000, you would need to have at least $1,000 in your trading account balance.
The margin is used by your broker as a security. In the event that your position worsens and your total accumulated losses draw near your minimum maintenance margin, your broker might prompt you to deposit more money or to close your position to minimize the risk to both parties.