2022-11-29 20:54
What is margin in forex?
What is margin?
Margin is the money or security deposit the broker receives from the trader to open a trade. And it will return to the trader's account after the transaction ends. Every trade opened in the market has a certain amount of margin, which the broker locks until the transaction ends. Note that a margin is not a payment or a transaction fee. It is only a type of security deposit used to open a trade.
For example, a trader has a balance of $1000 and plans to open a 1 lot buy transaction in EURUSD. The security deposit or margin that the Trendo broker receives with 1000 leverage from the trader for this transaction is $100. Note that this margin isn't deducted from the user's balance, which means the user's balance is still $1000. But for the new trades he wants to open, he has $900 of free money, called free margin. It means the user has paid $100 as margin for the EURUSD trade.
What is the required margin?
The required margin is the money set aside and "locked" when opening a trade. It is what we call margin for short.
The required margin depends on two factors for each symbol. The first factor is leverage, and the second is the required margin for each symbol in the broker. The margin factor can differ in brokers in different symbols according to the type of account. So first, we need to know what leverage is.
What is Leverage?
Leverage is explained in detail in the Leverage article, but we will explain it briefly here as well. Leverage is a tool that traders can use to trade much more than their balance. Trading leverage is a type of credit given to the traders by the broker so they can make transactions with a higher volume and several times their balance. When saying that the user's account leverage is 1:1000, it means the user can trade 1000 times his balance. The higher the account leverage, the less margin is required for trading. For example, to buy 1 lot of USDJPY with a $500 leverage, a $200 margin is required. However, a $100 margin is needed with a $1000 leverage. Users with higher leverage can trade with more volume.
What is free margin?
A free margin is a sum that traders can use to trade. The amount of money a broker receives as a security deposit and margin for making a transaction is deducted from the free margin.
For example, a user has a $1000 balance and a $1000 free margin for trading and intends to buy 1 lot of USDJPY in his account with a 1000 leverage. The required margin in Trendo Broker for this transaction is $100, so after the transaction closes, The free margin of this user will be $900, but the balance is $1000.
What is a margin level?
The margin level is the ratio between the remaining balance or equity and the margin, stated as a percentage. For example, the user's account balance is $1000, and he made transactions that used a $30 margin, after a few hours, these transactions are $200 in loss, so the user's account equity is now $800. When dividing the equity by margin, we obtain a (400%) margin level.
Balance
The balance is the money you have in your trading account. The balance does not change with profit and loss during trading, but it does change when you close your trade. For example, your balance is a $1000, and you have a transaction with a $200 profit, but your balance is still $1000. However, when you close your trade with $200 in profit, your balance changes to $1200.
Equity
The profit or loss of your in-progress transaction is obtained by adding the remaining account balance or the account equity. For example, if you have a $1000 balance and your transaction is in progress with a $200 profit, the remaining of your account will be $1200.
What is Margin Call?
A margin call occurs when the loss of transactions in the user's account is higher than a level known as the margin call level. In such cases, the user cannot open any new transactions because he does not have a free margin. The margin call level can differ for different brokers. The margin call level is a certain percentage level that if it is equal to or less than the margin level, the brokers will not allow the user to open a new trade.
For example, the margin call level in a broker is 50%, if the user's trading account loses so much that his margin level falls below 50%, he cannot open any new trades. In this situation, the user is margin called. In Trendo Broker, the user's account is margin called when he does not have a free margin for a new transaction.
Please note that many traders confuse margin call with stop out and think that a margin call means the user's trades will be closed, whereas a margin call is a warning that, due to many losses of the in-progress transactions, users are not allowed to open new trades.
What is stop out?
If the user's transactions have enough loss to activate the stop out level of the user's account, his open trade or trades will be automatically closed by the broker. This prevents the user's balance from becoming negative.
What is the stop out level?
The stop-out level is a certain level that, if the user's transactions' loss exceeds a certain percentage of the balance, the user's stop-out will be activated. And the broker will start closing the trade or trades until the user's total loss is less than the stop out level. In other words, the user's remaining account balance(equity) should not be less than a certain percentage of the balance. Otherwise, the user's stop out will activate. The stop out level can differ for different brokers. This matter is decided according to the brokers' rules that every trader should read. The stop out level in Trendo Broker is 70%.
Suppose a user has a $1000 balance in Trendo and a gold buy transaction is in progress. If the user's transaction loses 70% of the balance ($1000), the stop out will be activated. Or in other words, if the user's loss is $700, Trendo broker will close the transaction due to stop out.
Stop out can also be explained in this way: if the remaining balance of the user's account reaches 30%, the transaction will be closed. In this example, if the equity reaches $300, the trade will automatically close by the broker.