Understanding Margin in Trading

When a trader utilizes leverage (allowed to use more capital than the amount deposited), the broker requires a specific amount of funds to cover any potential losses. This amount is what we call Margin.

Key Concepts of Margin

  • Function: Margin acts as a good faith deposit, usually represented as a percentage of the total trade value.
  • Requirement: It is the minimum amount of funds required in your account to keep a position open.

Margin Example Scenario

Let's examine how margin requirements affect a trader's account:

  1. Trader Deposit: $20,000
  2. Account Leverage: 1 to 25
  3. Broker Margin Setting: 4%

The Trade: The trader buys two lots of EUR/USD at a price of 120.

Based on the broker's 4% margin requirement, the calculation determines the required funds:

To maintain this open position, the trader must have $9,600 available in his account.


Detailed Summary

Margin in trading is the specific amount of funds a broker requires from a trader utilizing leverage. It functions as a good faith deposit, typically a percentage of the total trade value, and represents the minimum funds necessary to keep a leveraged position open and cover potential losses. An example scenario illustrates that for a $20,000 deposit with 1:25 leverage and a 4% margin requirement, a specific trade would necessitate $9,600 in required margin to remain active.

Key Takeaways

  • Margin is a required deposit set by the broker when a trader uses leverage.
  • It acts as a good faith deposit, covering potential losses.
  • Margin is usually expressed as a percentage of the total trade value.
  • It represents the minimum funds needed in the account to maintain an open position.
  • In the provided example, a 4% margin setting required the trader to allocate $9,600 to support the specified two-lot EUR/USD trade.