Margin trading is a widely used technique in the forex market to increase trading leverage and access to larger positions than would be possible with the trader’s own capital. Margin trading allows traders to borrow funds from their broker to open and maintain larger positions, and this borrowed amount is referred to as used margin.
Used margin is the portion of a trader’s account balance that is used to open and maintain open positions. It represents the amount of money that a trader has borrowed from their broker to trade with. The amount of used margin required to open a position depends on the size of the position, the leverage ratio, and the currency pair being traded.
For example, if a trader wants to open a 1 lot position (equivalent to 100,000 units) in EUR/USD at a leverage ratio of 100:1, the required margin would be $1,000. This means that the trader would need to have at least $1,000 in their account to open this position. If the trader has $2,000 in their account, then $1,000 would be used as margin, and the remaining $1,000 would be available as free margin.
Used margin is a critical concept in forex trading because it directly affects a trader’s ability to open and maintain positions. If a trader’s used margin reaches a certain level, known as the margin call level, the broker may issue a margin call and require the trader to deposit more funds to maintain their existing positions or close them out.
The margin call level is typically set at around 50% of the used margin, meaning that if a trader’s used margin reaches 50% of their account balance, they will receive a margin call. At this point, the trader will need to either deposit additional funds into their account or close out some of their positions to reduce their used margin.
It’s important to note that used margin is not the same as equity. Equity represents the current value of a trader’s account, including open positions and any profits or losses. Used margin, on the other hand, represents the amount of capital that has been borrowed from the broker to open and maintain positions.
In summary, used margin is the amount of borrowed capital that a trader has used to open and maintain positions in the forex market. It’s an essential concept to understand because it directly affects a trader’s ability to trade and maintain positions. Traders should always be mindful of their used margin levels and have a solid understanding of margin requirements and margin call levels to avoid any unexpected margin calls or forced position closures.
