ou want to trade, therefore open a new position. In order to do that you have to put up a small amount of capital, which is called Margin.
For instance, you want to buy $300,000 worth of USD/CHF.
You won’t put up the full amount, you only need to put up a portion, like $5,000.
The actual amount depends on your forex broker or CFD provider.
Margin is a guarantee that your broker needs in case something happens and you lose the trade.
It can be thought of as a good faith deposit or collateral.
It is important to know that Margin is NOT a fee or a transaction cost. It will be released immediately after you close your position if it is a winning one.
This portion is “used” or “blocked” for the time of your existing open position.
Whenever you square off your position, the Required margin will be credited back to Available margin.
What is the Margin Requirement?
Margin is indicated as a percentage (%) of the “full position size”.
It is also called “Notional Value” of the position you would like to open.
Not all forex brokers require the same amount of margin. It depends on the currency pair and the broker how much will be the margin requirement to open a position.
Margin requirements will be presented on your trading platform as 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.
Every position you open corresponds to its own Required Margin amount that will need to be blocked.
You can notice that Required Margin is the same as Deposit Margin, Entry Margin, or Initial Margin.
Let’s take the typical example of EUR/USD trade.
To buy or sell 500,000 EUR/USD without leverage, you will need to put the full value of the position, which will be half a million euros.
But with a Margin Requirement of 2%, only €10,000 (the “Required Margin“) of the trader’s funds would be required to open and maintain that $500,000 EUR/USD position.
It means that the Margin Requirement is 2%.
How to Calculate Required Margin
The amount of margin (“Required Margin”) needed to hold open a position will be the percentage (“Margin Requirement”) of the position size (“Notional Value”).
The specific amount of Required Margin is ALWAYS calculated according to the BASE currency of the currency pair traded.
Model 1: You open a long GBP/USD position
You have a deposit of $1,000 in your account and want to go long GBP/USD at 1.24000 and want to open 1 mini lot (10,000 units) position.
How much margin will you need to open this position if the Margin Requirement is 5%?
Since GBP is the base currency, this mini lot is 10,000 pounds, which means the position’s Notional Value is $12,400.
Let’s assume your account is denominated in USD since the Margin Requirement is 5%, the Required Margin will be $620.
It is DIFFERENT if the base currency is not the same as your account currency, the Required Margin is then converted to your account denomination.
The formula to calculate the Required Margin if your account is in a different currency than the base one:
The capability to open trades and how many trades you can open is not necessarily based on your account balance ( the cash available in your account). It’s based on the amount of margin you have.
This means that the margin your broker will require might differ from your account balance.