What is the Meaning of Margin & Leverage in Forex Trading?

EnclaveFX Ltd
Sep 03, 2022

What is the margin?

An investor's purchasing power can be increased by engaging in forex margin online forex trading. Only a tiny portion of the money an investor typically needs to invest is required to create a significantly more significant stake. This indicates that you need to pay a part of the position's value, known as the "initial margin," instead of the absolute position's worth.

If you are a retail client, online forex trading on a forex margin can be advantageous but also high-risk, given the possibility of losing your entire investment. Professional clients may be forced to make further deposits to cover their losses if they lose more than their initial investments. Simply put, leverage is the multiple exposures to account equity, whereas forex margin is the amount of money needed to open a position. The required forex margin rate determines the amount of margin. Depending on the level of market volatility and liquidity in the underlying market, this varies for each online forex trading instrument.

The potential percentage changes in a market's price are known as market volatility. Liquidity and volatility are frequently tightly entwined. For instance, the major FX markets—the US dollar, the pound, the euro, and the yen—trade trillion dollars daily and are highly liquid.

Utilization ratio

Each broker has a unique forex leverage ratio and forex margin requirements. Commonly provided ratios are 10:1, 20:1, and 30:1. The transaction size of the position will also affect the forex leverage given. Forex Leverage of 20:1 is equivalent to a 5% minimum forex margin requirement. 10% would be the leverage ratio of 10:1.

Note: Before online forex trading, it's crucial to comprehend the idea of forex margin and forex leverage if you're new to leveraged online forex trading. Additionally, practicing online forex trading with an EnclaveFX Ltd trial account is a good idea in a risk-free setting. You may also benefit from social trading.

Initial forex margin and required margin

The initial margin is the sum put up at the start of a position to open it. Additionally, it's frequently referred to as an "initial deposit." Depending on the asset type, online forex trading instrument, and desired trade size of the position, the starting forex margin requirements will vary for each market.

For instance, Trader "B" executes a £2,000 CFD trade with a 5% initial forex margin rate. This means that Trader B only needs to put up 5% of the entire position value, or £100 in this case.

A margin call is what?

You are not permitted to increase your level of risk when you are under a forex margin call, and your account is at risk of being stopped.

When your equity (balance plus unrealized profit and loss) equals your forex margin need, you are in a forex margin call situation. When your equity reaches the needed margin, you will be forced to close out your most prominent losing position. This is your stop-out level. A trader's account could be stopped if they have open losing positions and insufficient equity to cover such situations. In essence, this means that if the balance fell below the forex margin stop-out threshold, any or all of their open positions would be instantly terminated by the online forex trading platform. The FCA product intervention measures include the 50% margin close-out rule (used per-account basis).

For instance, Trader "C" has six active trades that each require £200 in position forex margin, and the online forex trading account's current close-out percentage level is 50%. The overall position margin requirement would thus be £1,200. Some or all of those deals might be automatically canceled down, potentially at a loss to Trader "C," if the account of Trader "C" fell below 50% of this total margin requirement (in this case, £600).

What should you do if your forex margin call is due?

If a trader receives a margin call, they have two choices. The first step would be to close the position immediately. The alternative would be to deposit more money to raise your equity above the minimum forex margin and cover any extra losses. To release more equity in the account, you can also try to reduce the size of other investments.