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What is Margin in Forex?

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What is Margin in Forex?

When you first get involved in forex trading, there will be a variety of terms that you could come across. One of these terms is “margin”. Far from being intimidating, the margin is simply the amount of money you must contribute to open a new trade (position).

Forex trading typically involves dealing in large amounts of currency in terms of “lots”. 1 standard USD lot, for example, is $100,000. You do not need to put down the whole amount from your own capital, this is where the margin comes into play. Here we will go into more detail about exactly what the margin is, how margin trading within forex works, and some things you should look out for.

 

Do Forex Brokers Profit from the Margin?

This is a common misconception among some new forex traders. The margin is not a fee of any sort, and the top forex brokers in the industry do not make any kind of profit from the margin in that respect.

All the margin with any forex broker does is to ensure that a certain amount of your own funds are set aside to help cover the cost of any losses you may make on a position you have opened. This margin is effectively the key to enjoying the leverage in forex that your broker provides.

Analyzing the situation on a deeper level, while the forex broker does not directly profit from the margin, they do indirectly benefit from providing you this opportunity to engage in margin trading. This is something we can take a look at in the following section with the provision of some simple to follow examples.

 

How a Broker Benefits from the Margin

Although not directly profiting from the margin, brokers are able to derive some indirect benefits. The first of these is that simply put, the margin makes it easier for you as a trader to get involved in the forex market. While there are still risks involved of course, the more a broker can encourage you to trade by making it as easy as possible, the more you are likely to engage.

The second key reason that sees brokers garner indirect benefit from the margin is the fact that when you are trading more, and with larger amounts, they can gain additional commissions and perhaps profit from markups on the forex spread and that of other markets beyond forex too which they likely provide trading in.

In summary then, the main benefit for a broker when it comes to the margin in forex is that you will trade more in terms of both frequency and volume.

 

Knowing and Understanding the Margin Level of Your Broker

As mentioned, the margin is the amount of your available funds that will be held against your open trades. As you open more positions, this amount continues to increase. These funds that are then essentially locked-in by the broker to secure your position are known as your used margin, while the funds still available can be referred to as available margin, or available equity.

We can then use both of these numbers together in the following formula to calculate your current margin level:

Equity/Used Margin x 100 = Margin Level.

As a forex trader, it becomes very important to know this number id you are engaging in margin trading. This is since most top forex brokers will require your margin level to be at least 100% or more in order to avoid a margin call situation. Therefore, you should ensure to keep an eye on this as you are opening new positions.

 

Example:

If you deposit $1,000 in a forex trading account and continue to open 1 position, a typical broker may require $50 in margin (This can be as low as $33 with CySEC regulated brokers, and even as low as $2 with some others). Following the calculation above:

Equity ($1,000)/Used Margin ($50) x 100 = 2000% (Margin Level)

In this case, then you are still well within a healthy margin level, open just a few more small trades though, and this number can change quickly.

 

What is a Margin Call?

The first important point to note here is that many top forex brokers have what they often refer to as “negative balance protection”. This means that before you even get to the situation of having a margin call, your positions may be automatically closed by the broker.

A margin call happens when your margin level drops below 100%. What this essentially means is that you no longer have enough funds in your account to cover the margin requirements on your open positions.

In this case, you will typically be presented with a couple of options, you could close some of your open positions, or you could deposit more funds to your account. In either case, this is probably a situation that you would prefer to avoid through careful risk management.

 

The Pros and Cons of Margin Trading

Margin trading can open great possibilities for you as a forex trader to engage in markets to a much higher level than you could with just your own funds. It also means that you can work well to diversify your portfolio with a number of investments in various markets. Beyond this, margin trading means you can always be in a position to make a move in the forex market if you spot an opportunity.

It is well worth remembering though, that as the largest trading market in the world by volume, the forex market can move incredibly fast. Measured in pips, these movements may seem small, and insignificant. If you are engaged in margin trading though, you should remember that your position is very much amplified. This means that even small movements in the asset price, cold mean big changes in your position.

The very best advice you can heed is to take the opportunity that a margin presents, but remain mindful and have a strong risk management strategy in place.

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Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.

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Trump Plays Down Virus Fear in Effort to Steady Forex Market

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Trump Plays Down Virus Fear in Effort to Steady Forex Market
  • Trump Confident that US is Prepared to Handle Coronavirus
  • VP Pence to Lead Outbreak Response Operation
  • Markets Retreat in the Wake of Presidential Address

US President Donald Trump projected an image of strong confidence today as he addressed the nation on the ongoing coronavirus epidemic. The outbreak has been reaching around the world causing panic in many regions and with it, a rollercoaster time for global financial and forex markets. The address came today as the 60th US case was confirmed as the first infection to occur from within the United States itself.

Positive Words and Outlook from the President

“We are very, very ready for this”, was the line indicative of the Presidents tone and mood today as he tried to give the markets a much needed boost. Although the USD remains strong as a safe-haven currency for many, almost all other markets outside the forex market have been embattled in recent days.

Treasury yields are hitting new, previously unseen record lows and the stock and indices markets are on a continual downward trend. In a statement that was surely an effort to reverse the sliding economic situation, President Trump also remarked that work was well underway on a vaccine and it was “rapidly developing”. This statement was later challenged by the Director of the National Institute of Allergy and Infectious Diseases who said that such a vaccine may take at least 12-18 months to develop.

Pence Out Front in Virus Fight

Appointed by Trump to coordinate the US government response to the issue, VP Mike Pence also tried his best to strike a positive note. Both men seem confident and rebuffed the suggestion that spread of the virus in the States was inevitable. Meanwhile in New York, 27 people tested negative for the virus.

All of this did not stop Microsoft today from announcing that they would not meet their revenue projections for the quarter. They are the second huge company to make such an announcement in recent weeks with Apple also falling short of the mark. Microsoft shares fell more than 1% in response to the announcement. This is similar to the resulting fallout from the Apple announcement as two members of the trillion dollar club also continue to feel the pressure of the current climate.

Market Fails to Respond to Vote of Confidence

Despite the efforts of the US leadership, their positive response has so far today, failed to garner a turnaround from the market. Asian markets were down again today in what has been a week of consecutive falls both there and around the world.

At the time of writing the EUR/USD was still clinging on to what has become its benchmark for the week at 1.09 while gold prices also remained steady. In forex markets closer to home though, the USD/CAD hit a high point at 1.33 amid the continuing fall in oil prices with global demand suffering as supply chains and production remain greatly disrupted.

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EUR/USD Making a Recovery in the Daily Forex Market

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EUR/USD Making a Recovery in the Daily Forex Market
  • EUR/USD Price Continues to Improve on Market Open
  • Traders Cashing in on Gold Gains
  • Coronavirus Still Impacting Market Sentiment

 

The EUR/USD forex market has continued to improve slowly but surely over the last few trading sessions. As the European session opened today it still managed to cling onto the gains of the previous few days. This comes despite the worsening situation in Italy where the coronavirus outbreak is playing havoc with one of the largest economies in the EU. This latest news threatens to plunge the country back into a recession from which they only recently emerged.

US Dollar to Continue as Beneficiary

As markets in Europe await the release of German GDP data and consumer confidence data from the US later in the day, the Dollar stands in a unique position. With Europe and most of Asia consumed with health concern, the currency looks set to continue in its safe haven role. This has come to look even more certain with the rollercoaster that European traders endured through Monday trading.

Even though the American stock market has been in a turbulent mood, particularly yesterday, it is the currency that will continue to hold up as a safe option for traders looking to weather out the storm. The CB consumer confidence data to come today to come today will also go a long way to steadying the ship on Wall Street if it comes out more positive than expected.

Gold Prices Start to Consolidate

The USD was not the only market to see a boost from the ongoing situation. Gold has always been perhaps the number one safe-haven in times of market uncertainty. This was proven again in recent days with the price taking off to new highs. This has begun to consolidate today as traders have decided on taking some profits. This has seen the price retreat marginally from the seven year high reached on Monday.

The commodity still remains around the $1650 mark, though barring any catastrophic news from Europe in particular today, many analysts feel this is likely to see another slight decline to the nearby resistance levels. This too will depend a lot on the morning data from the US market as well as the final German GDP numbers to come.

Looking Ahead

In the current market and general economic climate, it seems that the only certain thing, is more uncertainty. Much will rely again on geopolitical factors more than economic data in what is a relative sparse week on the economic calendar. This could be a positive in the sense the forex market will have some space to contend with whatever news comes without much additional worry from economic data.

Besides data releases from German, Australia, and Canada to come throughout the week, a particular focal point given the current Eurozone issues may be Wednesdays address from the President of the ECB, Christine Lagarde.

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Asian Economy and Forex Market Crippled by Virus Spread

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Asian Economy and Forex Market Crippled by Virus Spread
  • Japanese Yen in critical struggle
  • South Korean exports also slump
  • USD safe haven the preference for most

As the week began, many had thought and hoped that the ongoing battled waged in China against the Coronavirus was beginning to settle down. Markets continued to operate with no major downturn as Beijing appeared to be controlling the situation well. The economic situation in China sees no major change, but that of its neighbors in the Asia Pacific region has been turned upside down as we near the weekend. Two deaths in Japan and a surge in cases from neighboring Korea have suddenly thrown the region into a very difficult economic position.

Japanese Yen and Economy Fighting a Battle

Typically a renowned safe haven in times of trouble, the Japanese Yen has endured its worst 4-day run in more than 2 years. The currency which is usually notoriously stable, has shed more than 2% in this short period. Prior to a slight rebound in today’s market trading, a sense of panic could be felt among traders. This fall is of course related to the current situation and compounded by how the virus has hit both trade and tourism.

Fears of a recession are high, with even David Bloom the head of FX at HSBC commenting that “New Coronavirus cases in Korea and Japan have given people cold feet regarding Japan and the Yen as a safe haven”. This certainly appears at least for the moment, to be true.

South Korea another Victim

The most notable spike in virus cases within recent days has come from South Korea. Cases there have almost doubled in just a 24 hour period. This, alongside comments from the director general of the WHO about how cases could see a further sharp increase have seen Korean markets down almost 1.5% overnight.

Traders and the wider public will certainly hope that the director generals words do not ring true, although the country have already noted a severe drop off in exports to China for February thanks to the disruption of supply chains. South Korea can play a key linking role in the region and so, it is no surprise to see the market react in such a way with the surge.

USD the Choice for Many in an Uncertain Market

With confidence low in the JPY ability to act as a safe haven at the moment, the USD has gained some strength in this regard. The currency has continued to trade steadily in a positive manner throughout the crisis as traders put their faith in the greenback.

This trend is expected to continue at least until the virus fears begin to subside. Quite when that will be though, and what damage will have been done to the world’s economy by that time, few can estimate.

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- Over 80 Currencies
- Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA
- Member of the National Futures Association (NFA# 0339826)

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