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Forex Course

28. What Should You Know About Used Margin and Equity

Introduction

In the previous lesson, three terms related to margin was discussed. There is another term called used margin, which comes under the same roof of the margin requirement and required margin. And in the lesson, this term shall be discussed in detail. Apart from that, this lesson shall touch base on the concept of Equity in margin trading.

Before diving directly into the topic, let’s first brush up the previously discussed terms as they form the base for this lesson. To Start off with the Required Margin, it is basically the units of currency that is needed to open a position. Note that this is not the actual amount of the position size but the amount after applying the Margin Requirement to the required margin.

Used Margin

The Used margin is the term that is very similar to the required margin. In fact, the used margin is the required margin. However, there is a thin line difference between the two.

The Used margin is the amount that is blocked by the broker when positions are open on a trader’s account. This definition might seem the same as that of the required margin. The difference is that the required margin talks about one single trade, while the used margin considers the sum of the required margin of all the trades. This is the amount that is ‘used’ by the broker when the trade is open and cannot be utilized for taking new positions. However, once the positions are closed, this used margin is unblocked and returned to the account balance.

Example

Let’s say a trader has $1,000 in his account and wishes to open trades on EUR/USD and USD/CHF.

Let’s assume he is willing to go short 10,000 units on USD/CHF and long 1,000 units on EUR/USD. Let’s keep the margin requirement for USD/CHF and EUR/USD to 2%, respectively. Before going into the calculation of the used margin, the required margin is calculated as follows:

USD/CHF

Required margin = Notional Value x Margin Requirement = $10,000 x 0.02 = $200

EUR/USD

Required margin = Notional Value x Margin requirement = $1,000 x 0.02 = $20

Therefore, when positions on both trades are opened, the used margin turns out to be $220*.

*Used margin = $200 + $20 = $220

Equity

Equity is a variable term that represents the current value of the account balance. Equity constantly changes when traders have their positions running. This proves to be an important term because it determines how many more positions can be taken on this account.

Calculation of Equity

The calculation of Equity is simple. It is the algebraic sum of the account balance and the unrealized P/L. When there are no positions open, the Equity will be the same as the account balance as the unrealized P/L is 0. And when there are any running positions, the Equity will be determined by both account balance and unrealized P/L.

Equity = Account Balance + Floating P/L

From this, it can be inferred that, when trades are running in the positive, the Equity rises, and when they’re in the negative, the Equity drops.

Thus, this completes the lesson on Used Margin and Equity. In the next lesson, some advanced term on margin shall be introduced. Don’t forget to take the below quiz before you move on.

[wp_quiz id=”50341″]
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Forex Course

27. Understanding Margin Amount, Margin Requirement, and Required Margin

Introduction

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.

Margin Amount

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

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

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

Summary

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″]