What is margin in forex?
When trading forex, you are only required to put up a small amount of capital to open and maintain a new position.
This capital is known as the margin.
For example, if you want to buy $100,000 worth of USD/JPY, you don’t need to put up the full amount, you only need to put up a portion, like $3,000. The actual amount depends on your forex broker or CFD provider.
Margin can be thought of as a good faith deposit or collateral that’s needed to open a position and keep it open.
It is a “good faith” assurance that you can afford to hold the trade until it is closed.
Margin is NOT a fee or a transaction cost.
Margin is simply a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade.
This portion is “used” or “locked up” for the duration of the specific trade.
Once the trade is closed, the margin is “freed” or “released” back into your account and can now be “usable” again… to open new trades.
What is Margin Requirement?
Margin is expressed as a percentage (%) of the “full position size”, also known as the “Notional Value” of the position you wish to open.
Depending on the currency pair and forex broker, the amount of margin required to open a position VARIES.
You may see margin requirements such as 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.
This percentage (%) is known as the Margin Requirement.
Here are some examples of margin requirements for several currency pairs:
|Currency Pair||Margin Requirement|