Margin

Margin refers to the amount of money required to open and maintain a leveraged position in the forex market. Leverage allows traders to control a large amount of money in the market with a smaller amount of capital. When trading on margin, a trader must deposit a percentage of the total value of the trade as collateral with their broker. This collateral is known as the margin.

A trader can use margin to trade a larger position than they would be able to with the funds they have available in their account. For example, let’s say a trader wants to trade $100,000 worth of currency, but they only have $10,000 in their account. If the margin requirement is 2%, the trader would need to deposit $2,000 as collateral (2% of $100,000). This would allow the trader to control $100,000 worth of currency with only $10,000 of their own money.

However, it is important to note that trading on margin also increases the risk of losses, as the potential losses can be greater than the amount of margin deposited. Therefore, traders should be very careful when using margin and make sure they have a solid trading strategy in place to manage the risk.

For example, a trader wants to trade $100,000 worth of EUR/USD and the margin requirement is 2%. The trader has $10,000 in their account and want to use leverage, so they deposit $2,000 as collateral. If the EUR/USD goes up 1% the trader will make $1,000 and If the EUR/USD goes down 1% the trader will lose $1,000. If the EUR/USD goes down more than 2%, the trade will be closed automatically by the broker because the trader does not have enough margin to sustain the loss.