What is margin trading?

In forex trading, we know the terms about margin trading often discussed in the forex community forum.

But did you know margin trading definition?

This is one of the advantages of forex trading where we can trade with margin.

Trading on margin provides the opportunity for us to be able to trade with small funds in our trading account.

And can control much larger funds for trading on the real market.

The margin on trading on the Forex market is measured in units of value.

The word “unit” refers to the value of a transaction,

For example, $ 100,000 which with a margin trading system can be transacted with smaller funds, for example, 0.5% of its original value, or about $ 500.

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Offering leverage up to 1: 500 gives you the opportunity to get a faster profit, using a lower margin..

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## Margin trading how it works?

To understand how this margin works you also need to understand about used margins, free margins, margin levels, margin calls and or stop-outs.

If you don’t understand the term, maybe you will see your trading account will be closed automatically by the broker because of a **margin call**.

Look at the example image above which is a metric from MetaTrader 4, all the data are related to each other.

One change will cause another change.

Before entering the market then you should know the relationship between one another.

If one metric falls below the value it will cause something bad to happen.

Therefore you must have a strong understanding of how your account works and what is something bad?

We continue this.

**These metrics consist of Balance, Used Margin, Free Margin, Unrealized P / L Equity, Margin Level.**

In each metric measuring something, for example, balance is the amount of money in your account, if you don’t have balance then there isn’t enough margin to open a new position.

Not all trading platforms show the same metrics, for example in MetaTrader 4 there is no used margin, but you see it with margin.

Below is an example of another trading platform, which has a different label but is broadly the same.

The picture above shows several labels with different names but has the same function, so it also depends on your trading platform.

### What is the balance?

What does balance mean?

When you will start trading forex or CFD, you must register with the broker and then make a deposit to your trading account.

This trading account must be topped up by using **money that affords to lose**, meaning you are spending on risky assets, not to use money to spend in the near future.

Balance is the capital you use in trading, basically, it is the amount of cash in your trading account.

So to say that **balance = cash**, if you deposit 1000 $ then the amount of cash or balance in your trading account is 1000 $.

When you place a trading order, your balance value does not change, until your transaction is closed.

The balance will change because of three things.

- You added a deposit to your trading account.
- When you close the position.
- When you open a position overnight and accept or pay a swap fee or also called a rollover fee.

**Maybe you’re asking if it’s a swap fee or a rollover fee?**

Well, we will also review this.

The picture above shows that if you place an order for more than one day then there will be a fee swap or rollover fee.

However, this does not mean that the swap fee will only be charged if it has been open for more than 24 hours, but the broker will usually calculate this swap fee if it is your order opened at overnight.

So if you open the order before midnight the broker will calculate this swap fee.

If you get negative swap hence will decrease your balance according to the value of the swap and if you have a positive swap then your balance will increase accordingly.

On the MetaTrader 4 platform, there you can find the swap menu by clicking the trade menu.

But now there are some broker already offer free swap account, this offer especially for Muslim trader if your broker offers free to swap and you choose it.

Hence although you open to order a week or month, it will never charged swap fee.

### Unrealized profit and loss/floating profit and loss

Furthermore, we will not discuss further swaps, but we will learn about floating profit and loss or unrealized profit and loss.

On the trading platform, you will see something that states floating profit and loss, which means profit and loss have not been realized.

In trading, there are two important things that determine the outcome of your trade called profit and loss, which then some people abbreviate it to be unrealized P / L.

This Unrealized P / L refers to your active trade after you open a new position.

The transaction will be active and you will see the floating profit or loss if you use MetaTrader 4.

The value of profit and loss will always change along with changes that occur in the price of the currency pair you are trading.

With the floating condition, it might be possible after you see the floating profit then the price turns against your position and finally you might see a floating loss if it has passed your ask price.

To calculate the value of profit and loss you can use the following formula.

Floating Profit/Loss = Position Size x (Current Price - Entry Price)

For example, you open 10,000 units of the EUR / USD pair at 1.13000, and you see the current price at 1.11000.

By using the formula above you will get.

Floating P / L = 10,000 x (1.11000 – 1.13000)

-200 = 10,000 x (- 0.0200)

Your position is down 200 pips whereas if you use a mini account contract.

Then the value of 1 pip is 1 $ then you see floating profit/loss when it is minus 200 $.

Maybe you will let your position still open in the hope that prices will return to the initial target.

As long as you have not closed the position, the floating profit and loss will always take place.

### Realized Profit and loss

Realized profit comes when you closed an order that you did.

Conversely realized loss comes when you closed an order that you did.

This means that the transaction that you have is completed.

In this condition that causes your balance to increase or decrease in accordance with the profit or loss you get.

If you close a transaction with profit, then your balance increases.

Conversely, if you close a transaction with a loss, your balance will be decreased.

To calculate this profit and loss you can use the same formula in unrealized profit and loss.

Floating Profit/Loss = Position Size x (Current Price - Entry Price)

**Realized loss example**, you open 10,000 units of the EUR / USD pair at 1.13000, and you see the current price at 1.11000.

By using the formula above you will get.

Floating P / L = 10,000 x (1.11000 – 1.13000)

-200 = 10,000 x (- 0.0200)

Your position is down 200 pips and if you choose a mini account the value of 1 pip is 1 $ then in this condition you get a loss of 200 $.

If your initial balance is 1000 $ after deducting 200 $ then your balance will be 800 $.

**Realized Profit example,** you open 10,000 units of the EUR / USD pair at 1.13000, and you see the current price at 1.15000.

By using the formula above you will get.

Floating P / L = 10,000 x (1.15000 – 1.13000)

200 = 10,000 x ( 0.0200)

Your position is up to 200 pips and if you choose a mini account the value of 1 pip is 1 $ then in this condition you get a profit of 200 $.

If your initial balance is 1000 $ after added 200 $ then your balance will be 1200 $.

### Profit /loss Isn’t Real Until It’s Realized

Profit and loss have not become realized if your transaction has not been completed.

So you have to know what unrealized profit and loss are and realized profit and loss because this is indeed a basic lesson in forex trading.

- Realized profit is the gain that has been converted and added to your balance.
- Realized loss is losses that have been converted and added to your balance.

If you want to get realized profit the way is not as simple as opening a position and leaving without exiting, because the decisive point is the exit point.

Unrealized profit and loss are theoretical profits and losses that can still change at any time.

If in the dictionary of love, unrealized profit and loss is like you are dating someone.

But not yet bound in a legal marriage, chances are you your girlfriend is married to someone else might occur.

So if you have active transactions that have not yet been closed.

Chances are the current profit will turn into a loss at a later time.

**While realized profit and loss will not be affected by price changes because your transaction is closed.**

When you have completed a transaction and the profit is added to your account, it is money that you can withdraw to your local bank.

## How to calculate margin in forex?

Although many traders say about margin, not a few of them do not really know what margin trading is and how to calculate it.

So that sometimes happens, a trader they make a transaction and see the warning money is not enough.

This is because the remaining free margin is no longer sufficient to open the position size, so what they do is try to reduce the position size.

But this will be a different story if they understand how to calculate the margin.

The event will be avoided and they can determine the right position size in accordance with their remaining margin.

Then how to calculate the margin? we will mention the margin formula below.

What you need to understand is that the amount of **margin needed to open a trading position can always be different.**

That is because current prices also play a role in margin calculation.

So if you want to know exactly how to calculate margins to open a position, you can use this formula.

(Current price x transaction value) / leverage

Example of how to calculate margins.

Let’s say you use 1: 200 leverage and want to buy 1 lot of EUR / USD at 1.1245. Then the amount of margin needed to open that position is:

(1.1245 x 100,000) / 200 = $ 562.25

## The relation between margin and leverage

Wheat about the leverage we have discussed in another article, you can read again to understand more.

If you use 1: 100 leverage for example, then you can open a transaction with the size 100 times greater than the actual funds.

For example, a $ 500 fund can be used to open a transaction of 1 lot or as much as $ 100,000, because it has previously been supported with a leverage of 1: 200 (200 x 500 = 100,000).

The amount of margin depends on the amount of leverage you use.

**The greater the leverage, the smaller the margin you pay as collateral for the transaction.**

To clarify your understanding, here is a list of leverage and margin comparisons:

- Leverage 1: 1 required margin of 100% of the transaction value.
- 2: 1 leverage margin required 50% of the transaction value.
- Leverage 10: 1 required margin of 10% for the transaction value.
- 50: 1 leverage requires a margin of 2% of the transaction value.
- 100: 1 leverage requires a margin of 1% of the transaction value.
- 200: 1 leverage requires a margin of 0.5% of the transaction value.
- 400: 1 requires a margin of 0.25% of the transaction value.
- 800: 1 leverage requires a margin of 0.125% of the transaction value.

## Margin Size Does Not Matter

Read also Position size calculator forex

\High leverage can indeed make smaller margins.

However, that does not mean a small margin can be used as a reason to enlarge the size of the transaction so that the profits can be more and more.

This assumption is not wrong, but it is not entirely true either.

Because you also have to take into account the risk factors.

Sample case.

Traders A and B both have $ 5,000 in funds.

Trader A chooses 1: 200 leverage, while B uses 1: 500.

When trader A wants to open a buy position, he feels that 1 lot is enough because the required margin is already $ 500, or 10% of his total balance.

Meanwhile, trader B feels that 1 lot is too small, because with a leverage of 1: 500, the margin he needs to prepare is only $ 200.

He finally took 2.5 lots so his margin was worth $ 500.

Although the margin of trader A and B is the same, the amount of profit or loss they produce will be different.

Why is that because the size of the transaction that determines profit and loss in forex is no margin trading.

So by enlarging the trading lot because it feels its leverage can support a larger transaction size, trader B not only enlarges the profit opportunity but also increases the risk of loss.

If the value per pip of 1 standard lot is $ 10, then the value for 2.5 lots is $ 25.

But In the scenario of a price drop of 100 pips, then the loss of trader A is only worth $ 1000 (100 x $ 10), while trader B suffers a loss of $ 2500 (100 x $ 25).

## Summary

In this article, we have studied several points related to margin trading.

- About margin trading and learn how it works
- Then we have also learned about what is a balance, which means cash is in a trading account.
- And also we have learned how to calculate margins on forex.

There are still some points that we have not yet learned but we will discuss in the next article, about what is margin.

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