Lesson 4: What Is Margin in Forex?

No one can trade forex with only a few dollars, right? Your position must have thousands of currency units to enter the market.  

So, the question is, “Can’t I enter the market if I don’t have thousands of dollars?” 

Well, you definitely can—with a margin. Remember, you don’t have to deposit the full amount of your position size. 

Through margin trading, you can participate in the forex market with a smaller amount of capital, also known as margin. 

Lesson Highlights

• To control a leveraged position, a trader must have a margin (capital) that they should lock into their margin account.
• When trading on margin, your broker will ask you to deposit a required margin based on the set margin requirements for the position.

Broker and Margin

Your capital or margin plays a dual purpose for brokers. It lets you control large position sizes with only small capital while protecting your broker's brand in case your position experiences losses. 

Forex trading is expensive. Here, you can’t enter a trade with just ten bucks; your position needs at least 1,000 bucks to enter the forex market.  

But with margin, you only need a deposit or collateral of the total size amount.  

The broker fills in the remaining amount needed to match the position size. You just need to provide the percentage (margin requirement), and your broker will let you open and manage a position. 

Also, margin helps the broker in mitigating your position’s risk. With margin, your broker is ensured to have sufficient funds.  

Imagine this: 

John wants to open an account in EUR/USD (priced at 1.1000) with a standard lot, or 100,000 units. With that, his account must have USD 110,000 to open and control his desired position.  

However, John can only afford to invest at least USD 5,000. Thankfully, his broker offers margin trading with a margin requirement of 2%. 

With this, he only needs to deposit 2% of the position size, which is USD 2,200. After closing his position, he gained 65 pips or USD 650 through his trade—which would not be possible without margin trading. 

Margin Requirement 

So, what is the margin requirement? Is that paperwork you need to pass before entering the forex market? 

Well, not paperwork, but the amount (expressed in percentage) that is required to access the margin position. Like in John’s situation, his broker requires him to deposit 2% (USD 2,000) of his position’s notional value and size (USD 100,000). 

The margin requirement depends on your broker and desired currency pairs. 

It varies by currency pair because volatile pairs tend to have larger price swings. Due to this increased risk, the broker requires a higher deposit to handle risks. 

Here are the common margin requirements for the majors: 

Required Margin

When it comes to the required margin, we’re talking about the specific amount of the margin requirement here.  

Say, you want to open a mini lot in EUR/USD (1.1000) with an account balance of USD 1,000. Without leverage, you’ll need USD 11,000 to open and control this trade. So, you can’t control this trade at all.

However, with margin trading, you can control the same notional value with a small deposit or investment. If your margin requirement is 2%, you only need to put USD 220 (the required margin).

The required margin will be automatically set aside from your account balance.  

Note: The required margin is also known as the deposit margin, entry margin, or initial margin.  

In the next lesson, you’ll learn what is used in trading and how it differs from the required margin.