As the world's largest trading marketplace, the forex offers traders and investors countless avenues by which to pursue almost any financial goal. From the execution of carry trade strategies to intraday scalping practices, participants are privy to unparalleled opportunity. The ability to trade on margin is a primary reason why.
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Margin is a good-faith deposit made by an active trader to a brokerage service. It is a critical element of forex trading and gives participants the ability to open positions in excess of capital-on-hand. Margin trading promotes participation, market efficiency and liquidity by offering traders the chance to leverage1 small amounts of risk capital into larger profits.
While the concept of margin is straight forward, staying on top of associated capital requirements can be a challenge. Margin varies on a per trade basis and is dependent upon currency pair, trade size and evolving market conditions. In order to avoid premature position liquidations or surprise deposit requests, active forex traders frequently make use of a margin calculator to quantify financial obligations.
Using The Margin Calculator
Successful forex trading involves many skills, both theoretical and pragmatic. At the very top of the list is money management. Many traders fall short in this department for any number of reasons, but the most common is misuse of financial leverage.
In order to apply leverage wisely, it is always a good idea to stay abreast of used margin. The margin calculator provides traders with a simple way to accomplish this task. All that is needed is a few basic inputs:
- Account Currency: The denomination of the trading account is required for conversion purposes.
- Currency Pair: Majors, minors, crosses and exotics are available for selection.
- Conversion Price: In order to deem the value of an open position, it's necessary to price the targeted currency pair.
- Margin Ratio: Margin ratio is a comparison of the segregated account balance to the value of an open position. As this ratio grows, required margin decreases. Forex brokerage services offer a broad spectrum of margin ratio options, from 1:1 to 400:1.
- Trade Size: The single most important factor impacting applied leverage is trade size. From micro to standard lots, the greater the trade size, the greater the margin used.
Working with the margin calculator is routine courtesy of the intuitive user interface. For instance, assume that an account denominated in British pounds is holding one standard lot of the EUR/GBP (0.8786) at 200:1 leverage. Used margin is calculated as follows:
|Conversion Price (EUR/GBP)||0.8786|
|Margin Used (GBP)||£439.30|
Perhaps the best part of using the margin calculator is its advanced functionality. No matter the forex pair or size, it quickly and easily defines the capital needed for facilitating the trade.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…