What is Margin in Forex and How to Calculate it?

What is Margin in Forex and How to Calculate it?

Margin is one of the most popular terms used in the forex market. It is a term that reflects the minimum amount of money required to open a position. This amount varies depending on which parity you are trading and the leverage ratio of that transaction.

How to calculate margin?

As it can be understood from its definition, this term, which is very important for the investor, is also referred to as the initial margin. We can understand how many positions can be opened with our capital by looking at the free margin value. We can think of its calculation as risk management. It is a great method to get rid of loss in forex, which is a market dominated by the leverage system. Therefore, it is useful to learn how to calculate it. Its calculation is based on a fairly easy formula. If we try to explain it by getting rid of mathematical terms as much as possible, we can explain it as follows;

MarginParity Price X Quantity

                      Leverage Ratio

As a Distress Button; Margin Call – Stop Out 

If we need to give an example of how to use this formula; Let’s imagine that we will trade with EUR/USD parities:

Let’s consider the instant price of the pair as 1.1252. 1 Lot = 100,000 buys. We will use the leverage ratio at the maximum rate. So our leverage ratio is 1:10. In this situation; The size of the position we will open with 1 lot; will amount to 1.1252 x 100,000 = $112,520. The amount of collateral we need to hold for such a position is; 112,520: 10 = $1,1252. It is the way to calculate it.

Besides knowing your position level with the margin calculation, there are two more terms you need to know. Margin call – stop out is one of the strongest characters of margin levels. 

What is a margin call?

Margin call; when your asset falls below the level determined by the brokerage house, it gives a warning in red. With this warning, the margin call starts and continues until the stop out. 

Well, what is a stop out? This term refers to the automatic closing of your position. In other words, if the positions fall below the rate determined by the brokerage house, stop out comes into play and your positions are automatically terminated from the most damaging to the least. Thus, you will not be in a situation of falling into negative balances. In order not to stop out, you should definitely adjust the trading volume by considering your balance.

SEE ALSO: What is Forex Robot? Why Should You Use Forex Robots?

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Marcus Arat

One thought on “What is Margin in Forex and How to Calculate it?

  1. Hi! I could have sworn I’ve been to this blog before but after looking at some of the articles I realized it’s new to me. Anyways, I’m definitely happy I stumbled upon it and I’ll be bookmarking it and checking back regularly!

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