Introduction When it comes to investing, two popular options that often come to mind are…
What Is A Free Margin In Forex Trading
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So you’ve found a trader or even a group of traders that you like. You might follow their strategies and be ready to trade the currency pairs with them. But what about the trading approach? Is there a place for free margin in forex trading? How much money can they risk on one trade? And what is the free margin meaning?
If traders have limited capital in their accounts, they may be at a disadvantage in the financial markets. There are situations when a position requires a more significant investment than you currently have at your disposal. However, even with the same trading strategy, the performance may vary based on the trader’s position size and the number of trades made.
Margin is an important concept to understand in forex trading. Margin gives you the flexibility to risk more and take larger positions in your trades. Free margin is the ability to risk up to a specific amount without increasing your overall exposure. All free margin is based on leverage, and if you exceed the size of the leverage, the free margin in forex is no longer available to you.
What Does Free Margin Mean in Forex?
Free margin in forex is a characteristic of currency trading that offers you the leverage of the order of 1:1. It means you can make a profit or even a loss on your account without depositing more money. Usually, traders use free margin for a trading strategy where they want to avoid slippage or take a big risk to their account.
So if you had $10,000 worth of currency trading margin and had just initiated a trade to buy EUR/USD for $0.90, your maximum possible exposure would be $9,000. Now, consider that in order to make a profit, you must be able to sell at a price of at least $0.95. Your trade will now have a maximum exposure of $9,000 but a maximum potential loss of $9,000 as well.
The main advantage of trading forex with a free margin is that traders can keep their entire trading capital available to trade with. They don’t need to deposit any amount of their own money in order to perform the target buy-and-sell actions. In many cases, forex brokers (both online and traditional) give clients some sort of free margin/no minimum deposit as an incentive to trade with them. And to avail of them, it is necessary to know the margin meaning in forex.
Read More: A Beginners Guide To Forex Trading
What Is Margin Level?
The margin level is considered to be trading using speculative transactions that involve the use of borrowed funds, or when traders enter into transactions that are many times the number of their own funds. The funds are provided to the trader by a brokerage company.
Mortgages denominated in the currency of the deposit, such as USD, make it possible to provide this type of loan. In general, the level of margin in forex trading depends directly on the traded instrument or product.
The margin level in the forex market is one of the most important concepts that a trader needs not only to get acquainted with but also to thoroughly understand. That is, the difference between margin trading and standard forex trading is the use of large amounts of money at the expense of the brokerage company.
What is the principle of the margin level, and what does it give to the trader? Simply put, in margin trading, you use borrowed funds to make a profit, which allows you to increase the volume of trade and, of course, increase your income. The margin in forex trading is the amount of collateral or the amount of money that must be kept on deposit when using brokerage money.
It is important to keep in mind that this type of trading is available in any market, not just forex, and can reach significant volumes. Thanks to MetaTrader and the availability of margin trading on forex, ordinary traders have gained access to currency speculation.
Margin trading is impossible without the concept of the level of margin. Thus, the margin level is the ratio of the trader’s funds to the collateral involved, expressed as a percentage. In other words, the margin level is an indicator of the risks of open transactions. The higher the margin level, the lower the risk of a stop-out situation. In addition, a decreased margin level increases the likelihood of closing a trader’s loss-making orders. The formula to calculate the forex margin level is as follows:
Margin level = (equity / used margin) x 100
Prospects and opportunities for margin in forex trading:
- Trading large lots with the possibility of obtaining large profits without significant initial capital;
- Buying and selling any currency, regardless of the currency in which the deposit is opened.
Do not forget about the risks — the larger the loan amount is, the greater the loss of a failed transaction can be. At the same time, you should take into account the size of the spread — the broker’s commission.
To minimize risks, brokers usually set the maximum allowable minimum margin for forex trading CFDs. So, we have come to the part where we talk about the middle ground and the calculation of interest margins.
What Is a Margin Call in Forex?
A margin call occurs when you owe another margin account that represents a certain amount of your assets. The other account holder can make this request by giving you his/her account name, address, phone number, and the number of assets you owe. A margin call is the last legal step in selling a contract and the exchange of securities.
It is the legal obligation of the broker that runs the margin account to honor such a request and sell your assets at the agreed-upon price. So when the other party makes a margin call, it means you will get the money in due time. The procedure of margin calls and their use has been explained to the best of our knowledge by different sources.
Margin calls come in different varieties. They range from a simple request to a warning sign. A simple request for funds is made when the person wants to sell you your assets at a specific rate. This could either be a trade or a position. In the case of a trade request, you are able to decide on the transaction either on time or upon the outcome of the trade. And there is no time limit for the money.
On the other hand, the other party requests to be placed in the same trade in the future. This can be a confirmation either that you have decided to enter a trade or that you have already entered the trade. In the latter case, the transaction has already taken place, and the cash you are being asked for is already in the other party’s account.
Therefore, a margin call for a position may be a consequence of the trade in the position, or the request can be related to other issues. It may be due to the position falling short of the required amount of assets to meet the requirement of the position. As the position falls short of what is needed to make it complete, it causes a margin call. This is called a “negative” margin call.
Alternatively, the position may have been completed, but the trade has not been settled. Due to this issue, the person who owes you the funds may require your help to settle the trade. This is also known as a “positive” margin call.
This could also be due to the fact that the position you are in is about to expire, and the person who owes you the money may require more time to complete the trade. The procedure for both negative and positive margin calls is the same.
How to Calculate Free Margin?
Assume a broker provides 1:20 leverage for forex trading. This effectively indicates that for every 20 currency units in an open position, a margin of one unit of currency is required.
In other words, if your intended forex position size is $20, the margin is $1. In this case, the margin is equivalent to 1/20, or 5 percent full value.
To put it another way, if you knew that a broker needed a 10 percent margin, you could figure that for every $10 you wanted to trade, you would need to provide $1 in the margin. To put it another way, in this case, we may leverage our trade 1:10.
Before you begin speculating in the exchange market, it would be beneficial to have a better grasp of technical analysis and risk management. This is what margin calculation will provide you with. Thus, you can better analyze price action and safeguard yourself from unexpected market fluctuations.
Assume you have a trading account with a $1,000 balance and a 5 percent CFD margin. You want to open a position that will cost $8,000 to fill. At the time of the trade’s inception, the following is true:
- $1,000 is the account balance.
- The margin is $400 (5 percent of $8,000).
- The free margin is $600.
- The equity is $1,000.
If the value of our stake rises, resulting in a $50 unrealized profit, we may deduce the following:
- $1,000 is the account balance.
- $400 is the margin.
- The equity is $1,050.
- The free margin is $650.
The utilized margin and balance on retail investor accounts remain unchanged, but the forex-free margin and equity both rise to represent the unrealized profit of the open position. It is worth noting that if the value of our stake had declined rather than grown by $50, the free margin in forex and equity would have decreased by the same amount.
Assume you have a $10,000 account balance and open a trade that requires a $1,000 forex margin. If the market swings against you, resulting in a $9,000 unrealized loss, your equity will be $1,000 (i.e. $10,000 – $9,000).
In this case, your equity equals your margin, implying that your forex margin level is 100 percent. This means you will no longer be able to create new positions on your account unless either the market improves and your equity rises again, or you put more funds into your account.
Traders may argue that having too much or too little free margin on forex might be risky. However, that depends on your trading style and expertise. If the margin level is high, your trading-free margin will be higher.
Trading on margin may be a lucrative forex technique if you understand the dangers involved as well as margin requirements. If you wish to use the Forex margin, you must understand how your account works. Read the margin deal between your broker and yourself. And if there is anything you don’t understand, make sure to ask for clarification.