We analyze one of the most important sections of money management in the forex.
Today we will analyze such a thing as forex margin. In this article, you will find answers to questions such as: What is the forex margin? What is the forex margin level? Why do I need a forex margin calculator? How to calculate the forex margin size? And of course, we’ll talk in detail about why it is generally necessary to take into account the forex margin.
In almost every article I put a great emphasis on the goals that we pursue when coming to the stock exchange. The main goal is to make a profit. Since transactions are carried out on world exchanges for various purposes, from the most common ones, to profit from speculation to complex strategies to protect business and capital by hedging, it would not be entirely fair to call the financial result of all types of operations the word profit. In the financial world, cash is called margin. But depending on the purpose of using the margin, it changes its name to variation margin, free margin, hedged margin, locked margin, and many other derivatives. But the essence of this does not change much, all these derivatives essentially mean simply the amount of money. If you answer the question of what is forex margin in simple words, we get a very short definition – this is the difference between the transaction opening price and the current price. It can be said that we did not take into account many factors in our definition, such as commissions or various premiums, but the forex market is good because all these parameters are already embedded in the actual margin. So it’s not worth inventing anything, your margin is your profit or loss, depending on the trading result.
In addition to margin, margin trading is a very important issue. Each of us is faced with this process on the exchange. However, a more familiar definition is, of course, leverage. So, margin trading and leverage tradings are one and the same thing. Margin trading is a way to increase the funds involved in the transaction several times at the expense of your broker. In simple words, leverage or margin trading is a short-term lending service provided by your broker while you are in the transaction. Of course, this service is not provided for free. A broker is not a charitable foundation and its main task, like yours, is to make a profit. The broker will charge you a fee for providing you leverage. The size of the commission depends on the amount of loan that you take.
Another very important concept in margin trading is margin collateral. On the stock exchange, a pledge is called a guarantee of a transaction. What is it? A pledge is an amount on a client’s trading account that is necessary to complete a transaction on a trading instrument of interest. In other words, this is a guarantee to your broker that you have funds covering your obligations. When do you have obligations? They arise at the time the transaction is opened. The broker provides you with leverage for your transaction, and you must guarantee him that you have funds that, in which case, will prevent his losses. For this reason, on the stock exchange, this parameter is called a guarantee deposit, or simply a guarantee. Of course, we do not need to guarantee anything in writing or verbally, the broker already sees whether you have an amount in the account sufficient for a pledge or not. If there is no such amount, the broker simply will not allow you to open a transaction according to the desired parameters, and you will have to reduce the amount of leverage used until the required collateral becomes less than or equal to the number of funds in your broker account.
Above, we considered the option with margin lending for your transaction, and there an inverse relationship. The higher the leverage used, the higher the collateral requirements. But there is an option in which an increase in leverage will lower collateral requirements. This is possible when working with the leverage of your trading account. Yes, in addition to the leverage of your transaction, there is also the leverage of your account. And the second just serves as a method of reducing collateral requirements. If brokers did not provide this opportunity, the number of forex traders would be reduced hundreds of times. Because it is precisely the size of this leverage that provides the opportunity to trade with scanty deposits, which are much less than generally accepted exchange standards. Indeed, according to the rules of exchange trading, You can make a transaction on the exchange only if you have enough security on your brokerage account to complete the transaction with a standard exchange volume of 1 lot. I’ll tell you a secret: there is no volume of less than 1 lot. It would seem like this? After all, we are all used to fractional lots offered by our brokers, such as, for example, 0.1 lot or 0.01 lot. But this is precisely the principle of margin trading in action. If brokers did not provide leverage to their clients, there would be no opportunity to trade on the exchange for everyone. this is precisely the principle of margin trading in action. If brokers did not provide leverage to their clients, there would be no opportunity to trade everyone on the exchange. this is precisely the principle of margin trading in action. If brokers did not provide leverage to their clients, there would be no opportunity to trade on the exchange for everyone. The figure above shows how the leverage of your account affects collateral requirements or collateral. The figure shows the required minimum margin for trading on currency pairs with a fixed standard exchange lot, with a volume of 1 lot. As we know, in 1 lot the volume of 100,000 units of the base currency or goods is enclosed. Consequently, our collateral will be equal to 100,000 when making a transaction in the amount of 1 lot without applying leverage. A shoulderless position is more often depicted as 1: 1. Further, we see that as soon as we increase the used leverage on our account, the amount of collateral decreases by several times. We increased the leverage by 10 times, it is now 1:10, which means that the required deposit has decreased by 10 times and has become equal to 10,000 units of currency. At the maximum possible leverage of the score equal to 1: 1000