Basic Beans

What is Margin?


Jul.17.2013

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So what about the term "margin"? Excellent question.

Let's go back to the earlier example:

For example, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1. You're now controlling $100,000 with $1,000.

The $1,000 deposit is "margin" you had to give in order to use leverage.

Margin is the amount of money needed as a "good faith deposit" to open a position with your broker. It is used by your broker to maintain your position.

What happens if there is a humongous loss in your account?

Now you know that trading forex carries a high level of risk. Now what? What if you lose your lucky charm and the whole forex market move in a way to screw you? How would you deal with the shock of opening your account and noticing your balance has burned into zero?

Don’t worry. Most forex brokers have a system called “margin call” that will give you an alert if your margin (or borrowed money) decreased past a certain point.

No matter how much you like people to call you up, a margin call is one thing that you want to avoid. If you get one, there is only one thing you need to do immediately: Go back to demo trading.

All traders fear the dreaded margin call (Remember the movie Margin Call?) While trading on margin can be a profitable investment strategy, it is important that you take the time to understand the risks.

Make sure you fully understand how your margin account works, and be sure to read the margin agreement between you and your broker. Always ask any questions if there is anything unclear to you in the agreement.

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