Margin is a performance bond, or good faith deposit, to ensure against trading losses and is the deposit required to open or maintain a position. The margin requirement allows you to hold a position much larger than your actual account value. With more buying power, you can increase your total return on investment with less cash outlay. Trading on margin should be used wisely as it magnifies both your profits and your losses.

Here is a simplified example: If you have $2,000 cash in a margin account that allows 400:1 leverage, you could purchase up to $800,000 worth of currency-because you only have to post 0.25% of the purchase price as collateral. Another way of saying this is that you have $800,000 in buying power.

Margin can be either “excess” or “used”. Used margin is that amount which is being used to maintain an open position, whereas excess margin is the amount available to open new positions.

Managing a Margin Account

Trading on margin can be a profitable investment strategy, but it is important that you take the time to understand the risks.

  • You should make sure you fully understand how your margin account works. Be sure to read the margin agreement between you and the clearing firm. Talk to your account representative if you have any questions.
  • The positions in your account could partially or totally be liquidated should the available margin in your account fall below a predetermined threshold.
  • You may not receive a margin call before your positions are liquidated.
  • You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit your risk.

It is the customer’s responsibility to monitor his/her margin account balance. FCMs have the right to liquidate any or all open positions whenever a trader’s minimum margin requirement is not maintained. This is an important risk management feature designed to strictly limit trading losses in your account.

Margin

The maximum available margin is 0.25% (400:1 leverage), although some FCMs only offer a maximum of 2% (50:1 leverage). Traders always have the option of employing a lower degree of leverage. Keep in mind that the lower the leverage used requires a larger amount of margin capital for the trade.

Margin Require = Contract size / Leverage

The requirements for leverage may vary with account size or market conditions, and may be changed from time to time at the sole discretion of the FCM. Margin requirements may vary from .25% to 2% depending on the leverage set in your account.

Margin Example

You have $5,000 in your account. To calculate the margin required to execute 400,000 currency unit of USD/JPY at 400:1 leverage, simply divide the deal size by the leverage amount e.g. (400,000 / 400 =1,000). You post $1,000 margin for this trade, leaving a $4,000 balance in your account.

The trading platform automatically calculates margin requirements and checks available funds before allowing you to successfully enter a new position. If you do not have adequate funds available to enter a new position, you will not be able to execute the order when attempting to submit the order.

If the unrealized P& L of your net total open position falls below your account balance, your account is margin deficient and all your open positions may be liquidated. To avoid liquidation of your positions, do not use your entire account balance as margin for open positions. Instead, leave enough funds in your account to withstand a market movement against your open positions. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.