What it is, how it works, and how to calculate it
When you trade CFDs or forex on leverage, margin is the deposit you set aside to open and maintain your positions. It is not a fee, it is a portion of your account equity held as collateral. Understanding how margin works gives you greater control over your risk and helps you manage your exposure with precision.
Leverage allows you to control a larger position than your account balance would otherwise permit. For every unit of currency you commit as margin, your broker effectively extends your buying power by a set multiple.
For example, with 400:1 leverage on a major forex pair, you can control $400,000 in the market by setting aside just $1,000 as margin. The formula is straightforward:
Your margin is a fraction of the total position
Set aside as collateral to open the trade
Without leverage
$1,000
You control
$1,000
in the market
400:1
leverage
With leverage
$1,000 margin
You control
$400,000
in the market
The relationship between leverage and margin is inverse. Higher leverage means a lower margin requirement, and vice versa.
Leverage = 1 ÷ margin %
400:1 = 1 ÷ 0.25%
Entry margin (use margin) – the deposit required to open a position. You can view this figure per instrument before you place a trade.
Liquidation margin – the minimum equity threshold your account must maintain. This is typically set at 50% of the maintenance margin. If your equity falls below this level, your positions may be closed automatically to prevent further losses.
Initial deposit required to open and keep a position open. Viewable per instrument before placing a trade.
Equity has dropped below maintenance margin but remains above liquidation level. No new positions can be opened until equity recovers.
Forex margin
Forex margin is calculated as a percentage of the notional value of your trade. The notional value is the full size of the position in the counter currency.
Notional =
The full value of the position in counter currency
Margin =
Your margin is a fraction of the total position
CFD margin
CFD margin works similarly, but the notional value calculation includes a multiplier – a factor specific to each instrument that scales the contract to an appropriate size.
Effective leverage measures how much of your total account equity is being used relative to the combined notional value of all your open positions. It is a useful gauge of your overall risk exposure.
Managing margin effectively is central to disciplined trading. A few practical steps can help you maintain a clear picture of your exposure and avoid unwanted liquidations.