In forex trading, margin balance and account balance are two important concepts that traders need to understand in order to manage their trades effectively. While both terms refer to the amount of money a trader has in their trading account, they have different meanings and implications.
The account balance, also known as the cash balance, is the total amount of money that a trader has in their forex trading account. This includes their original deposit, plus any profits they have made from successful trades, and minus any losses they have incurred from unsuccessful trades.
The account balance is important because it determines the amount of money a trader has available to trade with. A trader cannot open a new trade with a value greater than their account balance, as this would put their account at risk of going into negative territory. In addition, the account balance can be withdrawn at any time, as it represents the actual cash that the trader has in their account.
The margin balance, also known as the used margin, is the amount of money that a trader has tied up in their open trades. It is the amount of money that is required to keep those trades open, as forex trading is done on margin. Margin trading involves borrowing money from a broker to open a larger position than the trader’s actual account balance would allow.
The margin balance is calculated by subtracting the free margin from the account balance. Free margin is the amount of money that is available to open new trades, after taking into account the margin required for the existing open trades.
Margin balance is important because it determines the amount of money that a trader can use to open new trades. If a trader’s margin balance is low, they may not be able to open new trades, or may only be able to open small positions. If a trader’s margin balance falls below a certain level, known as the margin call level, their positions may be automatically closed out by the broker, in order to prevent the account from going into negative territory.
A margin call occurs when a trader’s margin balance falls below the required minimum level, as set by the broker. This means that the trader no longer has enough margin to keep their open trades open. At this point, the broker will usually send a margin call notice to the trader, asking them to deposit more funds into their account to bring their margin balance back up to the required level.
If the trader fails to do so, the broker may automatically close out some or all of the trader’s open positions, in order to prevent the account from going into negative territory. This can result in significant losses for the trader, and is therefore an important risk to be aware of when trading forex on margin.
In conclusion, both margin balance and account balance are important concepts in forex trading. While the account balance represents the actual cash a trader has in their account, the margin balance is the amount of money tied up in open trades. It is important for traders to understand the difference between the two, as well as the potential risks associated with trading on margin. By managing their margin balance and account balance effectively, traders can minimize their risk and increase their chances of success in the forex market.