How to Calculate Margin: Starter’s Guide

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If you are a Forex trader – beginner or pro – you can’t afford to ignore margin and its requirements. Margin is usually equal to a certain small part of the full position and is used to make a deposit to secure a Forex position. The margin required by your broker lets you figure out the maximum leverage available for your trading account. Read this guide thoroughly to learn more on why margin calculations mean so much, and catch this comprehensive Forex margin calculator to process your figures. 

Margin Calculation Importance

As the margin is a deposit you put up to secure a position you open, its size directly depends on the size of the trade you want to make. The rule of thumb is not to put too much on the margin because it can empty your account balance if your position doesn’t prove to be successful in the end. Numerous traders have destroyed their careers due to investing too much of their capital on the margin, so don’t repeat their mistakes. 

Here’s a simple formula to calculate the margin for your Forex trades:

  1. Multiply the size of your trade by the margin percentage;
  2. Subtract the margin figure (or figures used for all the trades) from the remaining equity amount in your account to know the amount of margin left in your account. 

Next, you should also learn how to calculate the required margin in your main currency:

Margin requirement=([{Base currency}÷{Account Currency}]× Units)÷Leverage

Now, let’s try to calculate the margin for a specific case. Imagine that you decided to trade a pair of EUR/USD. Let’s say that the current conversion rate is roughly 1.21. You decide to purchase 5 standard EUR/USD lots (equal to 500,000 units), while the margin for the trade is standard (30x). Having these figures, you can calculate that there must be no less than  $20,295.50 to make the position possible. 

Here’s another example: you decide to open a USD/NZD position and purchase 100,000 units (one standard lot), but the broker’s margin is 20x for you this time. Given that the exchange rate for the pair is roughly 1.9, the calculation will be:

100,000÷20×1.9=9.500 units or roughly 7,000 USD. This is the number of USD required for your purchase. As you can see, the calculation is quite simple, so you can either learn to do it on your own or use a margin calculator to ensure accuracy. 

How Margin Impacts Leverage

Regarding leverage or “margin ratio,” you should remember that a leverage increase can reduce the margin requirement and, at the same time, increase your potential losses. The second can be very harmful to your account balance in case of a loss, so it’s crucial to remember that the margin and leverage are intertwined. The leverage requirement is set by your broker and determines the amount you can purchase at the moment and the total amount you need to keep on your trading account to make the position possible. For example, if the leverage for your position is 30x and requires the margin amount of 30x and is equal to 433 USD, the margin amount for a 50x leverage in the same position will reduce to 260 USD. However, the related potential losses increase by 67%. 

Don’t let the lower margin requirement confuse you by the lower dollar amount needed to open the position. In simple words, the more money you might win, the higher the risk to face multiplied losses. A lower margin is always a sign of a higher risk rate. If you fail to take potential losses into account, you may experience unexpectedly high losses. As for high leverage, it slows down your margin call and multiplier losses as a result. If you agree for high leverages, you will also face the profit potential reduction of your account. Your aim here is to learn the most efficient margin and leverage values to make the proportion of risk and reward adequately. 

Risk & Reward of Trading on Margin

Here are the benefits and disadvantages (aka risks) that you need to consider when you trade on a margin. Let’s start from rewards:

  • Using margin, you can potentially get much higher profits than if you use your spot balance (current account balance);
  • Margin lets you improve your trading account value significantly faster;
  • Quick decision-makers who have enough market experience can leverage their profits by the means of margin trading;
  • Using margin trading professionally, you can put your personal capital toward different investment options. 

Now, let’s take a look at the fearsome risks:

  • Given that margin trading provides you with access to large trading volumes that don’t actually belong to you, you can expose your personal capital to significant losses. 
  • The negative implications of trading on a margin may expose you to terrible stress due to high losses. At the same time, successful trades may lead you to wrong future decisions caused by euphoric sensations. Unfortunately, stress and satisfaction can be equally disruptive for traders. 
  • Some trades may unexpectedly require you to make additional deposits to your spot account to demonstrate that you have enough capital to support your open position. This may require you to sell securities to minimize the margin loan amount, deposit cash, or transfer securities from one account to another. Whatever option you choose, the losses may turn out to be much higher than profits. This “unexpected request” is called margin call and it usually occurs if you trade highly volatile instruments that have a huge daily value swing.

Stay Sharp!

As you can see, margin calculations are extremely important in terms of developing the right Forex trading strategy and opening positions consciously. Always keep the margin calculator open to ensure that your estimates are correct and you won’t lose more than you can afford. Stay tuned for more useful trading guides! 

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