Margin and leverage go hand in hand in trading.
Margin is the amount of money you will need to invest up front to place your trade. Leverage is what your broker will give you to make the trade.
Read the beginners guide to leverage here.
The amount of margin you will be required to use in each trade will vary on a few important factors and we look at those in this post.
What is Margin?
If you are trading with a broker that has set you up with 500: 1 leverage, that means for every $500 you trade, the broker will require you to use $1 as margin.
The bigger the trade size, the bigger the amount of margin to open the trade will be.
An important note is that different brokers use different leverage amounts.
You can also often set different leverage amounts for your trading account with your broker. The smaller your leverage, the more margin you will be required to have up front.
Another important note is that not all markets have the same margin requirements. You may be required to have more margin on an indices CFD trade compared to a Forex trade. You need to check with your broker and their margin requirements.
Your broker will not keep your margin. The margin acts as a security when the trade is in play. When the trade is closed you will have the margin returned to your account. However, whilst the trade is on and the margin is being used, these funds cannot be used to open any other trades.
How to Calculate Your Margin Requirement?
Once you know what your account leverage is set to, working out your margin requirement is very straightforward.
If you have an account with leverage of 100:1 you know you need to have as a minimum $1 for every $100.
Even easier than manually working it out is using a margin calculator like the one here that will tell you exactly how much margin you will need.
Two notes; it is important you know how much margin will be required for each trade because if you don’t have enough in your account your trade will be rejected.
The other important factor is if you use a large chunk of your margin you run the risk of getting a margin call.
What are Margin Calls?
Margin calls can be a frightening experience. However; in nearly all cases they can be avoided.
A margin call can happen when your account balance gets too low to the point where you are not meeting your brokers margin requirements.
This can happen when you enter a trade with enough margin, but then the trade goes against you and your account loses money.
When you get a margin call you will either have the option of putting more money into your account or the trade will be closed by your broker.
Margin goes hand in hand with leverage.
The amount of margin you will be required to use each trade will depend on a couple of things;
- The leverage you have set with your broker (this can often be changed).
- Different assets or Forex pairs often have different margin requirements that you need to be aware of.