The margin term is very closely related to another forex term: “leverage trading“.
As we always say: “Don’t start trading forex, unless you fully understand the meaning behind these terms!”
How Margin Works :
If you want to trade with amount of $100,000 in fact you do not need to have this full amount in your trading account, but only a fraction of that amount (depending on the leverage that you choose). The remaining amount is then immediately borrowed by the broker. The percentage of the amount that you need to keep blocked in your trading account is the margin.
Real Example:
If one of our recommended forex brokers XM.COM allows trading with leverage up to 1:500 and you decide for your next trade to use maximum 1:500 (you can choose also less than 1:500 of course, it is up to you) , that means that with your $1,000 you can open a contract which is up to 500 times bigger than the amount you put at stake. The security deposit can not be less than 0,2% (1:500 ), which means $1,000.
So 0,2% is then the margin in this case. As you see on the example, the higher the leverage you use, the lower the margin percentage of course.
Margin Call
What happens if you do not have enough capital on your trading account to maintain a mandatory margin ?
In the event that the amount on your merchant account has fallen below the level of maintaining margin for the thousands of euros you spend, you would be immediately asked by your broker for EITHER an immediate deposit of additional funds to keep the loosing position running OR closing that position.
In business terminology this is called the Margin Call.
However, you should never get into this situation, so we recommend using business orders such as Stop Loss Order that limit the amount of loss if the market price goes against your open position!