What is the margin? this discussion is a continuation of the previous discussion about margin trading 101.
Actually the definition of margin has different meanings.
In general, the is the difference between one field and the surrounding fields.
Like print paper, this is the difference between the whole paper area and the paper area that will be used for print media (print area).
In Microsoft Office, we also find the term margin when setting up pages (page setup).
That is the definition of margin in general, but because we are talking about forex, this has the meaning of small funds but has the same opportunity to use an actual price that higher.
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When you start to open a new position, you do not have to spend all the balance to make the transaction, but you only need to give a collateral to the broker the amount portion specified by the broker.
The amount of capital held by this broker is collateral that your transaction is active until you close the transaction.
If you want to buy $ 100,000 in USD/JPY pairs, you don’t need to pay 100,000 $ but you only need to use a portion, like $ 3,000, it will depend on your broker policy.
The margin is a portion of your funds set aside by a broker that is a guarantee of your account balance to ensure that you can cover potential losses from the trade.
Margin requirement forex
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This is collateral needed to open a position according to lot size.
The full explanation: this is the amount of money you must deposit the broker to open a trading position.
The amount of depends on the size of the contract and the leverage you choose.
If you choose 1: 100 leverage, your collateral fund is 1% of the contract value.
And for 1: 200 leverage the collateral fund is 0.5% of the contract value.
In forex trading, the contract value for 1 lot is USD 100,000.
How to calculating margin if you trade on the currency pair XXX / USD (EUR / USD, GBP / USD, AUD / USD, NZD / USD) is:
Margin = (USD 100,000) x (number of lots or volume) x (margin percentage) x current market price.
For example: You trade with 1: 200 leverage, you buy 0.2 lots of EUR / USD at the price of 1.1500, then the required margin = (USD 100,000) x 0.2 x 0.5% x 1.1500 = USD 115.00.
Funds of USD 115.00 will be held as long as your position is still open (not closed).
Required margin mean in trading
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Margin requirements expressed the amount in percent of the number of funds that need to be deposited, then the margin required is the number of funds deposited.
When you open a new entry, the broker will take a number of required margins that will be locked until the transaction you have completed, by closed the position, or if possible get stop out account.
Equation words Margin Required is Margin Deposit, Entry Margin, or Initial Margin.
To make it easier to understand, now we look at EUR/USD.
To buy or sell 100,000 EUR/USD without leverage will require traders need to put up $ 100,000, this is a full contract.
Whereas if you use a 2% MR, buying EUR /USD only requires 2000 $ from the broker’s funds and will be held to open and maintain a $ 100,000 EUR / USD position.
Example with an open buy of USD/JPY
If your capital is $ 1,000 in your account then you want to take a USD/JPY buy position by opening 1 mini lot position (10,000 units).
How much do you need to open this position?
In the pair USD / JPY which is the base currency is USD, the value of this mini lot is 10,000 dollars, or the position’s Notional Value is $ 10,000.
If the MR is 4%, the margin for opening this position is 400 $ with assuming your trading account is in USD.
Example of a GBP/USD buy position
If your capital is $ 1,000 and will buy the GBP/USD pair at 1.30000 with 1 mini lot position (10,000 units).
How much to open this position?
We can see that the pair GBP/USD as the base currency is GBP.
Whereas you want to buy a number of 1 mini lot or 10,000 units, then you will buy 10,000 pounds.
Which means the national value is 13,000 $, if you use a 5% MR, the margin needed to buy 1 mini lot is 650 $
Example Open EUR/AUD long positions
If you have a capital of 1000 $ and want to open EUR / AUD buy positions with a size of 1 mini lot position (10,000 units).
How much to open this position?
If your trading account is in USD, you need to see what the price of EUR/USD is, for example, the EUR / USD pair is trading at 1.15000
We know that the EUR/AUD pair which is the base currency is Euro, hence the EUR mini lot is 10,000 euros, which means the Notional Value of the position is $ 11,500.
If the MR is 3%, the Required Margin will be $ 345.
How to calculate the required margin for forex?
In trading, the amount of margin needed to open a position is a percentage of the position size.
The way to calculate the required margin is to adjust to the base currency pair of the traded.
If the base currency is different from the currency of your trading account, the Required Margin needs to be converted to your account denomination.
Here is the formula for calculating the Margin Required
The formula for the base currency is the same as your account currency
Margin required = Notional Value x Margin Requirement
The formula in the base currency is different from your account currency
Margin required = Notional Value x Margin Requirement x Exchange Rate Between Base Currency and Account Currency
Large capital is not a necessity when you will open a new trading position, but you must have enough margin to open that position.
This is to ensure you can still trade.
In forex trading, the ability to place an order is not based on the amount of your capital but rather the adequacy of the margin to trade.
And most importantly, forex trading is not just being able to open trading positions, but reading the market trend is a way to get profit.
From the explanation above, we can take the essence of this topic.
- Margin Requirements (MR) are the amount of margin needed to open a position expressed as a percentage (%) of the full position size of the Notional Value for the position you wish to open.
- Required Margin is the amount of money that is set aside and “locked” by the broker when you open a new position.
What is the margin used in trading?
What is used margin?
To understand this, what needs to be known is about the margin required, this we have learned before.
Every time we open a new entry, we will always use the required margin, which is the funds locked by the broker as collateral to open new transactions.
The locked funds are called used margin, and if you add a new transaction, the required margin will be added to the used margin.
Used margin is a fund that cannot make a new position because it is locked by the broker until the transaction is completed.
The difference between the required and the used margin is that the required margin is the number of funds needed to open a new transaction.
While the used margin is the funds that have been used and locked by the broker which can’t be used to open a new position, so this is called the used.
Example: you open two positions on each pair USD / JPY and USD / CHF
You have a capital of $ 1,000 in your account and open two positions.
- Buy USD/JPY with 1 mini lot (10,000 units) position.
- Buy USD/CHF by opening 1 mini lot (10,000 units).
MR for USD/JPY is 4%, and USD/CHF is 3%
The margin required to open the position is.
USD/JPY margin requirement is 4%. and your trading account in USD
With the formula Required Margin = Notional Value x Margin Requirement
Hence we get $ 400 = $ 10,000 x 0.04.
Required Margin USD/JPY will be $ 400.
While for USD/CHF the margin requirement is 3%.
With your trading account using USD, then using the formula.
Required Margin = Notional Value x Margin Requirement.
Hence we will get $ 300 = $ 10,000 x 0.03
The Margin Required to open a pair of USD / CHF will be $ 300.
If the two required margins are added up it will be $ 400 (USD / JPY) + $ 300 (USD / CHF)= 700 $ wich Used margin = Amount of Margin from all open positions.
The conclusion is Used Margin is the total amount of margin currently used to maintain all open positions.
What is equity trading?
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What is equity mean? equity or there are also those who call it account equity is stating the current value of your trading account.
This equity value will always change along with fluctuations in price changes at every tick change in your open position.
This causes the equity value will change at any time.
If your unrealized profit value increases, then your equity value will also increase.
And vice versa, if your unrealized loss increases.
Your equity value will decrease according to the value of the unrealized loss
Equity is a value that always changes because you still have an open position, so what if you don’t have an open position?
If you do not have an open position then your equity is equal to the balance value.
Simply put balance = equity.
Keep note your balance=equity if no open position in your account.
For example, you have made a deposit of 1000 $ then your current equity is also 1000 $, because you have not opened a position though.
How to calculate equity if there open trades
The way to calculate equity when you have an open position is with a sum up your balance value with the current floating profit or loss amount.
Equity value = Account Balance + Floating Profits (or Losses)
Now we will take an example so that it is easier to understand.
You have a deposit of 1000 $, then your balance is 1000 $.
Then you open Sell the GBP / USD pair based on your own analysis or follow the recommendations of other traders.
But the price is then against your position and causes a floating loss of 50 $.
You can calculate with the formula above to calculate equity value, and you will get 1000 $ -50 $ = 950 $
Well, this $ 950 is your equity, and conditions may still change as long as your position is open.
Another example when you get a floating profit, you have a balance of 1000 $.
Then with your own analysis or following the recommendations of other traders so decide to open GBP / USD.
Then you find that currently floating profit is 100 $, then by using the formula above.
You will get your Equity value 1000 $ + 100 $ = 1100 $.
Well, this 1100 $ is your equity value, and this condition may still change as long as your position is open.
So equity is can be said a temporary account value at the current time.
Thus Equity looks like a floating balance, and it will become a real balance if all of your positions are closed and none of the positions are open.
Difference between balance and equity in forex
When reading the explanation above, maybe you are still confused, what is the difference between equity and balance?
Okay, we will give an easier explanation for you to understand.
If you have no open position, then the balance is equal to equity.
But the case is different if you have an open position, herein lies the difference between equity and balance.
Point the difference is
- Balances reflect all cash from closed positions.
- Equity reflects the real-time calculation of your profit/loss.
Thus the conclusion is that if you have an open position then your balance value does not reflect the realtime value of your account.
But the equity value is what is the current realtime value of your account.
So there can be certain case where your equity value is greater than your balance value.
This happens if you get a floating profit.
And also the possibility of your equity value is smaller than your balance value.
This happens when you face floating loss.
For example, you have the balance amount of 1000 $ and you open a buy position in the pair GBP / USD and face a floating loss of 600 $.
Then you will see your balance value remains 1000 $ and your equity is 400 $.
The conclusion that we can summarize from the above explanation is.
- Equity is the balance value sum up with floating profit or loss.
- Equity reflects the condition of the account value in realtime.
What is a free margin in forex?
Next, we will continue to learn more
What Is that free margin?
If we interpret free margin is, free means not bound, and the margin is a certain amount of equity of funds.
Free margin value is determined from the difference between Equity and Used Margin.
Free Margin reflects the Equity in a trader’s account that is not bound by a margin.
Or in other words, this free margin is the same as usable margin, meaning that it can be used to open new positions.
Free Margin has two things related to it.
- Amount of funds available to open new positions.
- The amount can still change and will probably be the reason you get a margin call or stop out account.
Other sentences that have the same meaning as free margins are
Usable Maintenance Margins, Usable Margins, Available Margins, and Available to Trade.
How to calculate free margin in forex?
How to calculate free margin is very simple, we can do calculations with formulas.
Free Margin/usable margin = Equity - Used Margin
If you have an open position and you face floating profit.
Then your equity increases and so does the value of the free margin will also increase.
And you can open a new position using it.
And vice versa, if your position faces floating loss.
Then your equity will decrease as well as your free margin value.
So your chance of making new transactions is also reduced.
To giving easier understanding we will try to take an example.
Example how to calculate free margin
Let say if you have a balance of 1000 $ and you don’t have an open position.
So what is the available free margin?
The first step is to determine equity.
Because here there is no open position then balance = equity.
And we know the amount of equity is now 1000 $.
The second step is to calculate a free margin.
Using the formula above, Free Margin = Equity – Used Margin.
Then we get the value of $ 1,000 = $ 1,000 – $ 0.
In conditions where there are no open positions.
The amount of balance = equity = free margin, in the example above, is 1000 $.
Another example when you open a buy position is USD / JPY.
Where your initial capital or balance is 1000 $.
The first step is to determine the required margin amount to open the USD / JPY buy position.
For example, you will open 1 mini lot or 10,000 units, and the margin requirement is 4%.
Because the USD/JPY pair that is the base currency is USD according to your account type.
Then for 10,000 units, it is 10,000 USD.
Again we use the formula Required Margin = Notional Value x Margin Requirement.
We get the required margin value of $ 400 = $ 10,000 x .04.
The second step is to calculate the used margin.
Where for the used margins in this example because there is no other position open.
The used margins is the same as the required margin and here is 400 $.
The next third step is to calculate equity.
For example, if after opening a new position then you find the price moves according to the position and you read floating profit and loss is zero.
This means you have reached a break-even after the spread is covered.
Then the equity calculation is.
By using the formula to calculate equity, we get
Equity = Account Balance + Floating Profits / Losses
$ 1,000 = $ 1,000 + $ 0.
From this step we have obtained information for equity of 1000 $, also a balance of 1000 $ and used margin of 400 $.
The fourth step to calculate free margins
is to use a formula Free Margin = Equity – Used Margin.
$600 = $1,000 – $400.
From the example above
we get the amount of free margins on a floating profit/loss condition of zero with a value of 600 $.
With this amount, you can still open new positions.
But you also have to pay attention to the strength of your level so that it doesn’t quickly narrow due to price fluctuations.
The conclusion for an important point about free margins is.
Free margin is the number of margins that are not locked due to opening a position, and this can be to open a new position provided that the amount of margins is still sufficient to open a new position.
In the above lesson, we have discussed some important points related to margins trading.
Among them are the requirements, required, used and equity, as well as free margins.
There is still another discussion this, namely margins level, margins call level, and stop out level.
However, because this article is quite long and might be rather boring, we will study the next section on other pages.