To understand forex margins you need first to understand forex leverages so if you haven’t already done so, please click HERE to read up on leverage.
Now, here is the simple definition of a forex Margin – It is a loan, given to you by your forex broker so that you can trade. Let me illustrate this definition.
Supposed, today in the morning, you opened your very first forex brokers account. Supposing that you went ahead and picked a leverage of 100:1 and funded the account with 100USD. This means that with your 100USD, you can trade positions worth 10,000USD (100×100). Now, when you enter your first trade worth 10,000USD what actually happens is your 100USD is used PLUS a 9,900USD “Loan” from your forex broker. Of course a 10,000USD position will make more profits per pip than a 100USD position, but the losses per pip are equally large.
Please note that once you make a loss close to 100USD (Your actual initial investment) to guard his interest your broker will institute something called a ‘margin call’. Basically, this is an order to either add funds to your account or close your position immediately and automatically.
In essence, the key to stress-free trading is knowing how to manage your leverages and margins. At the bottom of your MT4 screen, in the Account tab of the terminal, your broker will always show you your Margin and free Margin for any open position. Keep one eye fixed on these values to avoid Margin Calls.
Have any questions regarding forex Margins? Please forward them to me via the comment section below and I will be more than happy to weigh in with my opinion/suggestions/solutions.
You can also click HERE to open a forex broker account right now and start trading forex immediately.
I wish you happy and prosperous trading.