Margin is an important term in the ETF industry, and many traders don’t understand this. Since it is a new concept, beginners want to avoid learning about this. But this is a necessary term, and one may use this knowledge to influence in the market. It is simply the minimum amount of capital, which is required to place leverage. It is regarded as a helpful money management tool.
You may know about the leverage and interested in using it. But it must be remembered that using it can be risky during a highly volatile period. A single slippage can blow a newbie’s trading account. But he can manage its risk by if he knows enough about it. It is closely linked to the concept of the marginal cell. By using this, investors avoid more significant losses. It can be extremely costly if a novice uses it in the wrong way. Because of this, many experienced traders advise newbies learn more about this term before including it in a trade.
What is Forex margin?
It is like a belief that an investor puts as a deposit to start trading. Importantly, it is the least amount that the newbies need in their account to launch a newer position. Usually, it is expressed as the % of trade size (also called the notional value). The fundamental difference between the full value of a deal and the deposit is the “borrowed amount” from a broker. Visit the official site of Saxo and learn more about margin trading account. Thousands of UK traders are using Saxo as their prime broker and they have managed to earn decent amount of money by using the leverage trading account. But make sure you trade with rational logic or else leverage can be disastrous for your career.
Before discussing further, it is essential to realize the theory of leverage as both these terms are closely linked. A bigger margin means that traders have to use less leverage. This happens because they have to deposit more of their capital. This, they borrow less money from their brokers.
Leverage gives you the opportunity to generate a considerable amount of profit, but you could also face a massive loss. Because of this, it is vital to use it in a careful manner. The requirements and their corresponding leverages include –
- When it requirement is 50%, the maximum leverage is 2:1
- When the need is 3.33%, the leverage is 30:1
- When the requirement is 2%, it is 50:1
Have you noticed that? The ratio of leverage increases with the reduction of its requirements.
Understand the margin requirements
Brokers usually set these requirements, and the percentages are based on the degree or level of the challenges, the traders wish to take after sticking to the restrictions. Remember that it is not like the transaction cost. It is a fraction of the trading account capital, which is put aside and distributed as a deposit. While dealing with this, summon into mind that the size of your trade determines the percentage of it required to retain a position. When the size increases, investors shift themselves to the following tier, in which the requirements increase too.
Once you realize the requirements, you should make sure that the account is well funded to bypass the marginal call. An easier way for people to note the status of their accounts is by determining its level. It can be calculated using the following formula –
Forex marginal level (FML) = (investment / used margin) x 100
This is expressed as a percentage. For example, if a beginner deposits around $1,000 in his account and has used $500 used, then the FML will be equal to 200%, which is indeed above the requirement of 100. If this value drops below 100, the broker may prohibit launching another trade, or they may place that beginner on the marginal call.