What is margin?

As we discussed in the previous chapter, when trading forex, you only need to put down a small amount of capital, also known as the margin, to open a new position.

In simple terms, it is a portion of your funds that your forex broker sets aside to ensure that you can cover the potential loss of the trade.

For example, if you want to buy $100,000 worth of USD/JPY, you don’t need to invest the full amount, you only need to deposit a portion (depending on your forex broker and leverage).

forex margin

This portion is ‘locked up’ by your broker for the duration of the specific trade.

Once the trade is closed, the margin is released back into your account and you can now use it again… to open new trades.

What is Margin Requirement?

Margin is usually expressed as a percentage of the full amount of the position. 

For example, most forex brokers say they require 0.25%, 0.5%, 1%, 2%, 10% or 25% margin.

This percentage is known as the Margin Requirement.

Here are some examples of margin requirements for different currency pairs:

margin vs leverage

What is Required Margin?

When margin is expressed as a specific amount of your account’s currency, this amount is called Required Margin.

Each and every position you open when trading Forex will have its own Required Margin amount that will need to be locked up.

For example, to buy or sell a 100,000 of GBP/USD without leverage would require the trader to put up the full value of the position, $100,000. But with a Margin Requirement of 5%, only $5,000 (the Required Margin) of the trader’s funds would be required to open and maintain that $100,000 GBP/USD trade.

How to calculate Required Margin?

If the base currency is the same as your account’s currency:

Required Margin = Notional Value x Margin Requirement

If the base currency differs from your account’s currency:

Required Margin = Notional Value x Margin Requirement x Exchange Rate Between Base Currency and Account Currency.

Example #1: Open a long GBP/USD position

Let’s say you’ve deposited $1,000 in your account and want to go long (buy) GBP/USD at 1.3100 and you want to open 1 mini lot (10,000 units) position.

How much margin will you need to open this position?

Since GBP is the base currency, this mini lot is 10,000 pounds, which means the position’s Notional Value is $13,100.

Assuming your trading account is funded in USD and the Margin Requirement is 5%, the Required Margin will be $655.

Example #2: Open a long EUR/USD position

Let’s say you’ve deposited $1,000 in your account and want to go long (buy) EUR/USD and want to open 1 mini lot (10,000 units) position.

How much margin will you need to open this position?

Since EUR is the base currency, this mini lot is 10,000 dollars, which means the position’s Notional Value is $11,900.

Assuming your trading account is denominated in USD, since the Margin Requirement is 2%, the Required Margin will be $238.

And that’s all there is to know about margin… for now anyway!