What is a Margin?

Most forex brokers support margin trading. Trading on margin means that you as a trader, can enter into positions larger than your current account balance. The advantage of margin trading is the leverage it provides you with your funds allowing you to generate larger profits than you would ordinarily with only your account balance available. Of course with the upside, there is a downside or risk – you can realize significant losses within the margin capital just as quickly.

Requirements with most online brokers is to have sufficient collateral, or in this case – for you to have a balance in your account that meets the collateral requirement. There is rarely a margin deposit requirement, but the forex broker will limit the size of your trading positions that you can open based on your available balance. A margin call is when you are losing substantial money in an account and the forex broker or platform will automatically close out all your positions. This ensures that you do not lose more money (or collateral in this case) than the amount in your trading account.

Leverage is a term often used to describe trading on margin, and is descriptive of margin trading requirements. Leverage of 50:1 relates to a margin requirement of 2% (1 divided by 50 is 0.02 or 2%). A 2% margin requirement is defined as follows: if you wish to open a new position, then your required to have 2% of the size of that position available within your account as margin. In laymen’s terms: for each dollar of margin available you can make a 50 dollar trade.

What Happens with a Margin Call?

Your forex broker will require you to meet the standard margin to cover losses that may occur within your trading account. You won’t have to worry about losing more than your investment, as the forex software or trading platform your working with will automatically start closing your open positions using the current market rates.

Forex software is very good these days, and in most cases you will be notified prior to getting close to a margin call. You should be notified by an on screen message in plain site. In certain market conditions, when the market is moving very quickly, there may be only a split second notification or there may be no time to notify you before your positions are closed.