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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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US Unemployment Rate Doubles Causing Forex Market Waves

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US Unemployment Rate Doubles Causing Forex Market Waves
  • Rate has doubled from Previous Weeks Record
  • Record High is worse than Analysts Predicted
  • EUR/USD Slides Again as Oil the Only Positive

US unemployment rate figures just released make for very grim reading. A hammer blow to start Thursday, the figures show that more than 6.6 million Americans filed for unemployment benefit amid the ongoing COVID-19 crisis. These numbers more than doubled the already unprecedented record of 3.3 million jobless claims from the previous week. The market has been somewhat slow to react to this news, but remains poised for the jobs report to be released later today.

New and Unwanted Records Being Set

Last week’s unemployment numbers of 3.3 million were far beyond the previous record high set in 1982. The number was almost 10 times greater than that set almost 40 years previous. The new weekly number from today puts that even further into the shadows. These are unprecedented times of difficulty throughout the US and global economy which show little sign of let up at present. At the time of writing, the Dow Jones was trading 150 points lower on release of the news which sees more than 10 million people in the US now filing unemployment claims in the past two weeks.

Some solace can be found in the fact that the latest $2 trillion stimulus package has made it easier for workers who have been furloughed in the crisis to remain on unemployment benefit, and also expanded the scope of those who could apply for the benefit. The previous high of 695,000 claims in 1982, and the 665,000 during the previous financial crisis of 2009 now seem miniscule by comparison.

Numbers Outpace Expert Prediction as Euro Falls

Analysts had predicted that numbers would should a marked increase. The results though, have gone far beyond even what the most pessimistic of onlookers imagined. This movement looks set to continue with more labor data to come on Friday. This government data release is set to show more huge losses across the board.

The forex market impact is already being felt as the EUR/USD market fell back below the $1.09 mark. The currency pair had worked hard over the previous week to build back up significantly, but on release of more negative data from the US, it has given way to the continually increasing safe-haven role of the greenback.

Oil Rebound Provides Glimmer of Positivity

At the opening bell, the one positive to garner from the start of the day comes from the news that the price war between Russia and Saudi Arabia may be nearing an end. Prices rallied across the oil markets more than 10% on these hopes. Nothing has been ruled out and there hasn’t been any concrete word besides an offering on Wednesday from US President Trump that the two sides would “work it out” in the coming days. This news would appear to have some truth behind it and has bolstered the market from record low levels.

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US Unemployment Rate Doubles Causing Forex Market Waves
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US Unemployment Rate Doubles Causing Forex Market Waves
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Asian Forex Market Strengthens as US Virus Cases Soar

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Asian Forex Market Strengthens as US Virus Cases Soar
  • JPY Posts Steady Gain to Start the Day
  • Other Asian Markets also boosted
  • COVID-19 Cases Increase to Make US Global Leader

Currencies and markets in Asia got Friday trading off to a positive start. Figures coming from Tokyo saw inflation easing to 0.4% for March. This, and the news that US cases of COVID-19 have now surpassed those of China, helped strengthen the JPY which has posted gains of more than 1% on the day against the US Dollar. Both the NZD, and the AUD, often traded as a proxy for the Chinese Yuan also posted increases.

This comes as confidence starts to return to the Chinese market, even though Beijing has now temporarily closed the country to all foreign visitors to prevent the spread of imported virus cases.

USD/JPY Improving From Low Point

Gains from the Japanese Yen against the USD during the Asian trading session on Friday have brought it back from a several week low point. Although the currency still remains under some strong selling pressure, this has been lightened by positive data released from Tokyo, combined with an easing of the USD safe-haven status from what it had been in the previous several days.

The JPY itself is a well-known currency that traders usually move to during times of uncertainty, though this had been rocked in recent weeks with the market turmoil present across Asia and the world. Stimulus hopes though, particularly in Japan, as PM Shinzo Abe prepped a $135 billion package for approval, have managed to thoroughly boost trader confidence. The Nikkei bounced back with a gain of almost 20,000 points Friday to reflect this.

Positive Ripple Felt Across Asia

While Japanese markets posted some of the biggest gains, there were rallies across the region. These extended to Shanghai and Hong Kong both posting positive numbers as the Asian economy looked to regain stability following a torrid period. Analysts are predicting a further push from these markets next week as they look to get ahead of US markets that are currently predicted to open lower after large gains on Wall Street yesterday.

The continuation of this positive trend will likely hinge a lot on news coming from China in the coming days and into next week as it continues to get back to work following the protracted shut down.

US Markets May be Shaken by Increased Case Numbers

With news coming today that the number of US COVID-19 cases has now overtaken that of China, traders wait to see how both the stock, and forex markets will respond. Traders were not deterred by huge unemployment numbers posted yesterday, but experts are predicting a slowdown to end the week with markets projected to open lower.

This comes after a significant rally saw the S&P 500 climb more than 6% yesterday. This could also prompt a further move away from the USD as traders look to other options for safety.

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Asian Forex Market Strengthens as US Virus Cases Soar
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Asian Forex Market Strengthens as US Virus Cases Soar
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Economic Stimulus Helps Boost GBP/USD Forex Market

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Economic Stimulus Helps Boost GBP/USD Forex Market
  • Huge Economic Stimulus Package Approved
  • Confidence Unmoved by Stricter UK Lockdown
  • Prince Charles Coronavirus Diagnosis Could Shake GBP

News that the Senate has agreed upon a huge stimulus package to provide some much needed relief to the US economy was greeted positively at the opening of today’s markets. The GBP/USD continues its rebound, surging to 1.19 on release of the news. This is a good start to a busy day for the pair which could see movement on the release of a host of data. These numbers include inflation, and Retail Price Index numbers from the UK as well as Durable Goods Order data from the US.

Package Approval Met With Huge Market Increases

Maintaining context important, and on that front, global markets have been suffering greatly and at multi-year lows during the present crisis. Still the news of Senate approval for the economic measures proposed, brought positive reaction throughout the markets. The Dow Jones posted its biggest one day gain since 1933 and the Great Depression. It was up 11.4%.

Similar numbers were being posted across the world, with the Nikkei in Japan closing 8% higher on the news. Analysts are taking nothing for granted and warning of further bounces ahead, but it is some of the first positive news in weeks, though the US still faces up to the reality of growing virus case numbers across the nation.

Tightening of Lockdown Does Little to Impact GBP

British PM Boris Johnson on Monday moved to further tighten lockdown restrictions in the UK. This is a move that many feel is coming well over time, but still required nonetheless. He instructed the closure of all non-essential businesses, and provided increased powers to police to disperse gatherings among a range of other measures.

This news surprisingly did little to move Sterling from what was already a precarious position. Much of this may have been due to the fact that the market had already “bought the rumor”, and was in position expecting the inevitable news. Still, much of the increasing GBP market today stems from improved trader confidence in the US to move away from the safe haven USD slightly. This is a position which could still certainly change given that the US still seems a long way from flattening the COVID-19 curve.

Prince Charles Virus Diagnosis Could Rock Market

With the markets virtually ignoring much of the data released in recent days and weeks, instead moving largely on sentiment around the COVID-19 spread, news just released could prompt a further weakening in the GBP. Heir to the throne in the UK, Prince Charles, has just been diagnosed with coronavirus. He is said to be displaying only light symptoms, though it is certain to ignite concern for other members of the Royal Family, including the Queen.

It remains to be seen how the GBP forex market will react to this news, but it is certainly another factor which could work to further disrupt the market confidence.

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Economic Stimulus Helps Boost GBP/USD Forex Market
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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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Economic Stimulus Helps Boost GBP/USD Forex Market
- #1 Broker in UK
- Singapore Welcome
- Australia Welcome
- 12,000 + Global Markets
- Established in 1983
- Authorized & Regulated by the FCA

Click Here to Visit City Index
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Forex BrokersReview

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

Click Here to Visit Forex.com

- #1 Broker in UK
- Singapore Welcome
- Australia Welcome
- 12,000 + Global Markets
- Established in 1983
- Authorized & Regulated by the FCA

Click Here to Visit City Index