Margin in Forex — Definition, Example, and How It Works
Margin in Forex — Definition, Example, and How It Works
Clear explanation • Example • Leverage connection • Risk warning
Definition
In forex trading, margin is the amount of money you must deposit with your broker to open and maintain a leveraged position. It is not a cost but a security deposit.
How Margin Works
Margin allows you to control a large trade size with a relatively small deposit. The broker sets the required margin based on the leverage offered.
Example
If your broker offers 100:1 leverage and you want to trade 1 standard lot (100,000 units),
the required margin = 100,000 ÷ 100 = $1,000.
Margin and Leverage
- Higher leverage = lower margin requirement.
- Lower leverage = higher margin requirement.
- Both increase potential profits and losses.
Margin Level
Margin level = (Equity ÷ Used Margin) × 100%. A margin level below a broker’s threshold may trigger a margin call or automatic position closure.
Risks of Margin Trading
- Amplifies both profits and losses.
- Can result in rapid account depletion if trades go against you.
- Requires strict risk management and stop-loss use.
Quick FAQ
Q: Is margin a loan?
A: Effectively yes — it’s borrowed capital from your broker for trading.
Q: Do I pay interest on margin?
A: Not for intraday trades, but holding positions overnight may involve swap fees.
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