Margin in forex trading

What is margin in trading?

Margin in trading is the deposit required to open and maintain a position. When trading on margin, you will get full market exposure by putting up just a fraction of a trade’s full value. The amount of margin required will usually be given as a percentage.

There are two types of margin to consider when you’re trading: initial margin and maintenance margin. The initial margin is the deposit required to open the position, often called the deposit margin or just the deposit. Maintenance margin is the money that must be available in your account to fund the present value of the position and cover any running losses.

How does trading on margin work?

Trading on margin works by enabling you to open a position while only committing a fraction of the total cost upfront. The margin is determined by your trading provider’s margin system, and the amount of capital required will depend on the asset being traded. Those with higher volatility or larger positions may require a bigger deposit.

Margin requirements reflect your leverage. For example, if the margin requirement is 5%, the leverage is 20:1, and if the margin requirement is 10%, the leverage is 10:1.

Once you have opened your position, you might need to add more money if your trade starts to incur a loss and your initial margin is no longer enough to keep the position open. If this happens, your provider will place you on margin call, and you’ll be required to top up the funds in your account – this is the additional capital known as maintenance margin.

If you’re ready to start trading on margin, open a live trading account today.

Example of buying on margin

Let’s say EUR/USD is trading at $1.1128, with a buy price of 1.11284 and a sell price of 1.11276. You think that the euro is set to gain value against the dollar, so you decide to buy a single lot (equivalent to 100,000 units of the base currency) to the value of €100,000 ($111,248). However, you don’t want to put down the full amount of the trade. By deciding to trade on margin, you’d only need a fraction of this cost up front to get exposure to the full value of the trade.

With tastyfx, EUR/USD has a margin factor of 2%, so you only have to commit €2000 ($2224.96) as margin. In this example, your leverage would be 50:1.

Pros and cons of margin in trading

Pros of margin in trading

Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify your positions over a wider array of markets.

Cons of margin in trading

Although margin can magnify profits, it can also amplify losses if the market moves against you. This is because your loss is calculated from the full value of the position, not your deposit, and it is possible to lose more than your initial deposit on a trade. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy.

What to bear in mind before trading on margin

• Trading on margin means you only have to put down a deposit to open a position
• The amount of margin you are required to put down depends on the asset being traded, as well as the amount of total capital you have available in your account
• Because margin increases your exposure, you have more buying power, but this could magnify both your profits and your losses
• If your margin deposit has fallen below the minimum requirement, your trading broker may notify you and you will have to fund your account immediately
• If you don’t fund your account with a maintenance margin, your positions will be closed, and you will be responsible for the loss
• Always make sure you understand the margin requirements before entering a trade

What margin rates are offered by tastyfx?

tastyfx offers tiered margin rates, which means we apply different margin requirements at different levels of exposure. Our margin rates start from 2% on pairs like EUR/USD and USD/CAD– you can see each market’s charges and costs in our platform.

How to start trading on margin

To start trading on margin, follow these steps:

1. Create a tastyfx trading account or log in to your existing account
2. Search the asset you want to trade and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket and confirm the trade