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What is Margin

So what is margin? Margin is the amount of funds you will need to bring to trade.

In simple terms, margin is the amount of money that you are required to put forth (from your account) in order for you to open a trade. This is also commonly and more clearly called your trading margin requirement.

Now, you might ask, if I put a lot of money into my account, will it cover all the margin I might need to open different trades? The answer will depend on a few different choices you make.

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What Is Margin and How Does It Work?

As mentioned above, margin is the amount of funds you will need to bring to place a trade. Your total margin requirement will be dependent on the cost, volume (or how much) of the instrument you choose to trade along with the leverage you select for your account.

Let’s go over these options in more detail to better understand what is margin.

what is margin is explained with diagrams

Value Differences Between Instruments Can Increase Your Margin Requirement

For instance, let’s say you are comparing two different instruments you might trade, such as gold or silver. These instruments’ underlying values are different. In fact, gold is currently valued at around 70 times more than that of silver.

With this increased value means increased cost. As cost increases so will then the margin you are required to put forth.

In more detail, at present, if you chose to trade one ounce of gold (one Troy Ounce) your margin requirement would be 1,724.25 USD. Whereas, if you chose to trade one ounce of silver your margin requirement would be 24.35 USD.

Clearly you can see that the instrument’s underlying value alone would have a large impact on the amount of margin you would be required to put forth for a trade.

The Volume or How Much of the Instrument You Want to Trade Can Increase Required Margin

Another option you will have to consider when thinking about required margin is the volume or amount of the instrument you would like to trade. So it goes that the more volume you would like to trade, the more margin you will be required to put down.

For example, let’s look at an example of you comparing the margin requirement between a 1,000 EURUSD trade to a 100,000 EURUSD one.

Excluding other leverage factors (that we will discuss below), your margin requirement for trading 1,000 units of EURUSD would be (1,000 * 1.185 USD) = 1,185 USD. Whereas, your margin requirement for trading 100,000 units of EURUSD would be (100,000 * 1.185 USD) = 1,185,000 USD.

From this example, you can easily see how your volume amount alone will impact the amount of margin you will be required to commit to a trade.

The Leverage You Select For Your Account Will Affect Your Required Margin

Another factor that impacts your trade’s required margin is the leverage you select for your account.

If you select for your account to be at a higher leverage such as 400:1, you will only need to put forward 1/400 (or 0.25%) of the trade’s total value for margin so that you can open that trade.

Alternatively, if your leverage was 1:1, this means you would need to put forward the full amount of what you are trading.

In another example, if you choose your account to be a lower leverage such as 25:1, you will need to put forward 4.0% (or 1/25) of the trade’s total value in order for you to open the trade.

Let’s take a look at concrete examples to better understand this concept:

For instance, you selected 400:1 leverage on your account and you try placing a 1.0 standard lot (100,000 units of the base currency)(insert link) of EURUSD on your USD trading account. You can calculate how much margin you will need to put forward (from your account) in order for you to successfully open the trade. This can be done by using the following formula:

[ VOLUME (UNITS) X CURRENT PRICE ] / LEVERAGE = MARGIN REQUIRED

In the example above, this would be as follows:

( 100,000 EUR x 1.185 EURUSD ) / 400 = 118,500 / 400 = 296.25 USD MARGIN REQUIRED 

Let us also consider if you had set your account leverage at a lower level, for example 25:1.

( 100,000 EUR x 1.185 EURUSD ) /  25 = 118,500 / 25 = 4,740 USD MARGIN REQUIRED 

Lastly, let’s consider if you set your account leverage to the base level of 1:1 which also reflects the actual price of the trade.

In the example above, this would be as follows:

( 100,000 EUR x 1.185 EURUSD ) /  1 = 118,500 / 1 = 118,500 USD MARGIN REQUIRED 

As you can see from the example, simply setting your account to different leverage levels will have a big impact on your margin requirements for opening trades. Ultimately, the leverage you select to use is entirely your choice.

When you trade on an account, you need to know how to calculate the amount of margin that will be required for each of your trades as well as how much equity (or money) you have left for opening new trades (also called free margin).

Why Is It Important to Understand Your Margin Requirements?

By understanding your margin requirements as well as how to calculate them, you can ensure that the account will remain sufficiently funded and you will be able to better manage your trading risk (with whatever leverage you set) to avoid a margin call or stop-out. All of the above holds true whether you are trading cryptocurrencies, stock, metals, etc.

Now that you know what is margin, in other articles we explain many other factors that tie in with margin. We definitely recommend you take a look at those articles to further solidify your general understanding about trading.

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