In the previous two lessons, the basic terms in a margin account were discussed. And this lesson shall talk about the concept of Margin in detail. Precisely, this chapter of the course will deal with Margin, Margin Requirement, and Required Margin, as these three terms are very crucial when it comes to handling a margin account.
Margin, Margin Requirement, and Required Margin are closely related to each other. Margin, the used term in margin trading, is the amount one needs to possess to open a position. And Margin Requirement and Required Margin are terms which mean the same but differ in notation. Now, let’s dive right into the topic and understand each one of the terms in detail.
It is the amount that is used up or blocked by the broker to open and maintain a position in the forex. An important point to be noted here is that capital blocked is usually not the same as the lot size traded. Hence, the Margin Amount can be related to deposit or collateral that is payable to be the broker. However, this amount differs based on the number of lots traded.
The margin amount is blocked from the account balance when a trade is opened and is freed to the account balance when the trade is closed.
Margin Requirement describes what percentage of the position size is required to open a position. For example, if the Margin Requirement for a trade is 3%, then 3% of the position size is to be produced by the trader to open the position. So, when brokers mention that Margin in terms of percentage, then they are referring to Margin Requirement.
Required Margin is simply the Margin Requirement expressed in terms of units of currency. For example, if the margin requirement is 1% to take a position worth $10,000, then the Required Margin for the same will be $100.
Calculation of Required Margin
Since Required Margin is closely related to the Margin Requirement, the Required Margin is the product of Margin Requirement and the Notional Value.
Required Margin = Margin Requirement x Notional Value
Let’s sum up all the terms by taking an example. Let’s say a trader has $1,000 in his trading account. This amount can be read as a balance, as well. Let’s say he wishes to go long 10,000 units on EURUSD. Also, let’s assume that 2% of the position size value is required to open a trade.
The Notional value, Margin Requirement, Required Margin can be calculated as follows:
Assuming an account dominated in the USD, the Notional value turns out to be $10,000. Similarly, the Margin Requirement will be 2%, and the Required Margin will be $200*.
*(Required Margin = $10,000 x 2%)
When the trade is placed, $200 is blocked by the broker as “margin.” And once the position is closed, the complete margin amount (deposit) will be added back to your account balance, given that the trader did not make a loss.
This brings us to the end of this lesson. Let’s see if you can get all the below questions right![wp_quiz id=”49837″]