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What is used margin in forex?

Forex trading is a popular investment option that offers opportunities to make profits by buying and selling currency pairs. However, it also involves risks, and traders need to understand various concepts to make informed decisions. One such concept is the used margin. In this article, we will discuss what is used margin in forex and how it works.

What is Margin?

Margin is the amount of money that traders need to deposit with their broker to open a position in the forex market. It acts as collateral for the broker, who uses it to cover any potential losses that may occur if the trade goes against the trader. Margin is expressed in percentage terms, and the amount required depends on the leverage ratio chosen by the trader. Leverage is a tool that enables traders to control larger positions with a small amount of money.

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For example, if a trader wants to buy $100,000 worth of EUR/USD with a leverage of 1:100, they would need to deposit $1,000 as margin with their broker. The remaining $99,000 is borrowed from the broker, and the trader can control the position as if they had deposited the full amount.

What is Used Margin?

Used margin is the amount of money that is currently being used to maintain an open position in the forex market. In other words, it is the actual funds that the broker has set aside from the trader’s account as collateral to keep the position open. As the price of the currency pair moves, the value of the position changes, and the used margin also changes accordingly.

For example, if a trader buys $100,000 worth of EUR/USD with a leverage of 1:100, they would need to deposit $1,000 as margin, and the remaining $99,000 would be borrowed from the broker. If the price of EUR/USD goes up by 1%, the value of the position would increase by $1,000, and the used margin would remain at $1,000. However, if the price of EUR/USD goes down by 1%, the value of the position would decrease by $1,000, and the used margin would still remain at $1,000. This is because the broker needs to maintain the position, and the used margin cannot be withdrawn by the trader.

What is Margin Call?

Margin call is a situation where the broker asks the trader to deposit more funds to maintain their open positions. This occurs when the value of the position goes against the trader, and the used margin exceeds the available margin. Available margin is the amount of money that is left in the trader’s account after the used margin has been deducted.

For example, if a trader has $10,000 in their account and has opened a position with a used margin of $5,000, the available margin would be $5,000. If the value of the position goes down by 50%, the used margin would increase to $7,500, and the available margin would decrease to $2,500. If the broker has set a margin call level of 50%, they would ask the trader to deposit more funds to maintain the position, as the available margin is insufficient to cover the used margin.

What is Stop Out Level?

Stop out level is a situation where the broker automatically closes the trader’s open positions if the used margin exceeds the available margin. This occurs when the value of the position goes against the trader, and they are unable to deposit more funds to maintain the position. The stop out level is set by the broker and varies depending on the account type and the leverage ratio chosen by the trader.

For example, if the broker has set a stop out level of 20%, and the trader has opened a position with a used margin of $5,000 and an available margin of $1,000, the broker would automatically close the position when the used margin reaches $4,000. This is to prevent the trader from incurring further losses and to protect the broker from potential losses.

Conclusion

Used margin is an important concept in forex trading, and traders need to understand it to manage their positions effectively. It is the amount of money that is currently being used to maintain an open position in the forex market. Margin call and stop out levels are tools used by brokers to manage the risk of their clients and protect themselves from potential losses. Traders should always monitor their open positions and ensure that they have sufficient funds to cover the used margin to avoid margin calls and stop out levels.

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