What Is Margin in Forex Trading?

Forex trading involves buying and selling currency pairs. Prices of currency are determined by various factors, including economic data, interest rates and geopolitical events; with an aim of purchasing when its prices are affordable then selling when its costs increase to make a profit. To do this successfully you must be able to anticipate where its future price may head – this is where margin and leverage come into play as they allow you to trade using much larger sums than initially invested.

Margin in forex trading refers to the monetary amount set aside on an account in order to control specific position sizes. A trader is required to deposit a minimum amount of capital into their margin account based on a percentage of notional value of open trades, with any difference borrowed from their broker to use leverage when trading. Leveraging poses some risks for brokers who provide this loan; hence why they set margin requirements that must be fulfilled before opening trades.

Bob is new to forex trading and only has limited funds in his account. Regardless, he decides to place a trade in the EUR/USD pair using a margin requirement of 1% which allows him to control a trade size of 100,000 currency units. He sets aside $1,000 of his account balance as margin for this trade and watches as market conditions shift against him as his currency pair drops further; later that same day when logging onto his platform he discovers it has been closed out with significant loss incurred and that his broker informed him he received a margin call demanding additional deposits into his account immediately.

If your account’s margin drops below its minimum level, any trades placed will be closed out automatically by what’s known as a stop out – one of the greatest risks associated with using too much leverage in trading. To prevent this happening, always monitor your margin level regularly to make sure that total equity in your account exceeds or equals total margin requirement.

Reduce your margin requirement by closing some open trades or decreasing leverage in your account, with close stops or tight stop losses as necessary; but be wary not to incur more risk than you can afford to lose.

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