When you’re margin trading, you’re basically borrowing money from your broker. For your brokers to know you’re serious, you need to deposit a specific amount of money for each margin position.
That is called a used margin, a portion of your account equity that’s locked in. Essentially, your account should maintain at least all the required margin or used margin to keep all your positions open.
Lesson Highlights
- Used margin is the accumulated required margin from all open positions in a trader’s margin account.
- To calculate the used margin, add up all the required margins of open positions. If there is only one open position, the value of the necessary margin is also the value of the used margin.
- Keeping the used margin above your account equity is essential in avoiding margin calls and stopping out.
Required Margin and Used Margin
As you know from the previous lesson, the broker will ask you for the required margin when you trade on margin. This is the minimum amount you must maintain in your account to keep a specific position.
So, what is used margin?
Well, used margin is technically just the piled up required margin from your different positions. It is the total amount of your account’s required margin.
Essentially, it is called used margin because these are the required margins used in different positions.
This used margin must be “tied up” or “locked up” in your margin account.
It means you can't use these funds to open another position. Despite being in your account balance, you should never use your required margin to withdraw or enter a new position until the positions are closed.
How to Calculate Used Margin
Knowing the status of your used margin when you’re trading on margin is essential for risk management, position sizing, decision-making, and avoiding margin calls.
When you calculate the used margin in your account balance, you simply add up all the required margins from your open positions. Again, the used margin is just the total of the required margins used in the open positions.
Steps On Calculating Used Margin
Still confused about how to calculate your used margin? Here are the detailed steps to do so:
Step 1. List all the open margin positions you have in your account.
Step 2. Get the required margin for each margin position.
Step 3. Add up all the required margin (RM) to get your account’s used margin (UM). To get the value of the used margin, you can use this formula: UM= RM1 + RM2 + ... + RM3
Step 4. If you only have one open margin position, your required margin is also your used margin.
Imagine this scenario:
John has USD 4,000 in his trading account. However, technical traders are anticipating the USD/CHF to experience an upward movement in the market.
With that, John is thinking of entering long USD/CHF at 1.0000 with a size of mini lot (10,000 units). However, he still has two open margin positions, which are;
- Long EUR/USD (standard lot) with a notional value of USD 120,000
- Long USD/JPY (mini lot) with a notional value of USD 10,000
Both of his margin positions have a margin requirement of 2%. So, his required margin for both positions are:
- USD 2,400 for EUR/USD trade
- USD 200 for USD/JPY trade
He checked the broker’s margin requirement for the USD/CHF and found that it’s 4%. So, he needed to lock in USD 400 as his required margin to open a mini lot position of USD/CHF.
So, can John still open a trade for USD/CHF? Absolutely!
He has USD 4,000 on his account balance, but he needs to lock in USD 2,400 and USD 200 to control his open positions. If he wants to add USD 400 to his used margin, his account still has enough funds to support all his open trades.
Importance of Monitoring Used Margin
Monitoring your account’s margin level is essential to managing risk and avoiding getting a margin call from your broker. But how do you do that?
Well, you must closely monitor your used margin and account equity. If you see that there is a significant cushion between your equity and used margin level, you can safely assume that your margin level is still optimal.
However, if the used margin is about to reach your account equity, it’s best to fund your account or close a position to balance out your margin level. If you failed to do so and the used margin level has reached your account equity, you can expect a margin call.
Also, your used margin represents the amount you borrowed from your broker to open positions. Monitoring it is essential for managing risk because it directly affects the leverage level.
Higher levels of leverage magnify both gains and losses, so keeping a close eye on used margin helps you control your risk exposure.
Tips for Managing Used Margin
As mentioned, having an effective margin practice to manage used margin is essential to control risk and optimize your trading performance in the forex market.
Here are the practical tips you must use to manage your account’s used margin:
- Know the risk of leverage.
- Maximize stop-loss orders.
- Actively monitor open positions.
- Implement proper position sizing.
- Maintain sufficient account equity.
Okay, so you’ve learned margin trading and different margin considerations like used margin and required margin.
For the next lesson, you’ll explore account equity and how healthy equity entails effective risk management when trading on margin.
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