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WHAT IS MARGIN IN FOREX?

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WHAT IS MARGIN IN FOREX?

Post by Jacq Stone on Mon Oct 03, 2011 9:54 pm

In Forex, margin is the actual physical amount in USD which required for opening a leveraged position of a specific contract size. There are 2 types of margin found in common trading platform: Used Margin and Free Margin. Used Margin is the amount of money used to hold open positions whereby Free Margin is the amount of funds available to place additional positions. The margin indicates both the maximum possible leverage and the minimum amount required to open a position at a certain size. Additionally, the margin also plays a role as the credit limit to what the trader cannot surpass.

Although IKOfx offers its clients to trade with leverage up to 500:1, but margin and leverage are utilized according to individual risk appetite and preference. Please be reminded that IKOfx doesn't recommend trading near the full 500:1 of margin capability, which may produce a large amount of risk and exposure.
CONTRACT SIZES AND LEVERAGE

Contract sizes or better known as lots, is a necessary foundation when understanding the need and benefit for high leverage in the Forex market. Since one standard lot traded in the Forex market is a $100,000 contract, a trader is essentially placing a $100,000 trade in the market without leverage. As a result, most investors would difficult to afford such a transaction.
Example:

The offer of leverage of 500:1 would allow a trader to place the same one lot ($100,000) trade with only the post of $200 in the Used Margin to control a $100,000 position.
MARGIN CALL

In event of the Equity (the value of your account) falls below the Used Margin due to trading losses, you will have to deposit more fund into your account or otherwise the trading platform will automatically close some or all of your trading position at the market price to prevent your account from falling into a negative balance. In order to continue trading after margin call, you have to deposit more fund into the account.
Example:

Trader A with a deposit of $5,000 USD for IKOfx standard account, he had open one standard lot of long position on EURUSD. With the leverage of 500:1, he had used up $200 USD to hold this position with the remaining $4,800 as the Free Margin to open trade with and prevent margin call.

Unfortunately, the EURUSD dropped 500pips after a week due to some government financial crisis in Europe cause his Free Margin to drop beyond zero and triggered the margin level. In this case, the trading platform will automatically close the position to prevent the account from turning into credit. This event is known as margin call.

We just launched a very interesting competition called IKOFX DEMO BLAST; this continuous contest will pick the best 5 trader whom gain profit / highest equity in their demo account will won prize as much as $1000 into their separated live account! So who doesn't like the idea of earning money with $0 capital & 0% risk?... Please feel free to come and visit: [You must be registered and logged in to see this link.]

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Jacq Stone

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