Margin Defined

So what about the term “margin”? Excellent question my bright padawan learner.

Let’s go back to the earlier example:

“For example, in forex, you can control $100,000 with a $1,000 deposit. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.”

The $1,000 deposit is “margin” you had to give in order to use leverage.

Margin is the amount of money needed as a “good faith deposit” to open a position with your broker. It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades with the interbanks.

Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, .5% or .25% margin.

Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.

If your broker requires 2% margin, you have a leverage of 50:1. Here are the other popular leverage “flavors” most brokers offer:

Margin Required	Maximum Leverage
5%	20:1
3%	33:1
2%	50:1
1%	100:1
.5%	200:1
.25%	400:1

Aside from “margin required”, you will probably see other “margin” terms in your trading platform. There is much confusion about what these different “margins” mean so I will try my best to define each term:

Margin required: This is an easy one because I just talked about. It is the amount of money your brokers requires from you to open a position. It is expressed in percentages.

Account margin: This is just another phrase for your trading bankroll. It’s the total amount of money you have in your trading account.

Used margin: The amount of money that your broker has “locked up” to keep your current positions open. While this money is still yours, you can’t touch it until your broker gives it back to you either when you close your current positions or when you receive a margin call.

Usable margin: This is the money in your account that is available to open new positions.

Margin call: If the equity in the account drops below your usable margin, a margin call will occur and some or all open positions will be closed by the dealing desk at the market price.