12. What Is Margin?

 

Now that we have understood the concept of LEVERAGE in forex, let's talk about MARGIN. Since the trader is allowed to use more capital than the amount he or she deposited, the broker requires an amount of funds to cover any potential losses. This amount is what we call MARGIN. 

See it as a good faith deposit, represented as a percentage. It is the amount you need to have in your account in order to keep a position open. Let's look at this example:

 

A trader deposits $20,000 in an account in with LEVERAGE of 1:25. The broker set the MARGIN at 4%. 

What does this mean? If the trader buys 2 LOTS of EURUSD (Euro to U.S Dollar) at 1.2000,

you can calculate the MARGIN like this.

He must have $9,600 in his account in order to keep his open position. Simple right? Stay with me in the next blog. God Bless you ^_^