In this enormous market of foreign currency exchange, more and more people are getting attracted due to its huge profitable feature. In fact, forex is one such business where one can earn huge profit by speculating the currency values. But, problem for beginners lies in understanding certain terminologies used in this market.
One such question often asked is, “What is margin requirement in forex?”
Before knowing its requirement in forex trading, have a clear understanding of what margin is.
To define simply, margin is that portion allocated as margin deposit which is kept aside from your account equity. However this is no other fee or account charge. In fact, you trade forex with the help of borrowed capitals. When you say you are trading on margin, that denotes you just have to deposit a specific percentage of the total amount required during trading.
How much margin has been used and how much is left can be monitored with the help of your trading system.
What is margin requirement in forex trading?
The idea is to open positions of $100,000 worth with $50 or $1000 only from your trading account. If carried out strategically, this procedure will prove to be a very efficient, quick and cheap method of starting a trading account while making small investment initially.
For opening a position in forex trading market, you first have to purchase a small amount of money. This amount is termed as lot where 1 lot denotes 100,000.
Now an investor has to maintain the least amount of margin requirement to avoid any kind of liquidation of the currency pair. There cannot be any profit with no margin forex trading. In fact, your account in that case would be closed.
It goes like 1 mini lot = 10,000 units. It is usually denoted as 1:50 ratio but this can be chosen as per the requirement of the trader. If your predictions with this mini lot come true, you can again sell your pairs.
Few terms you must know:
- Original or Initial margin:
While opening an account, the amount of money that is deposited by an investor is termed as initial margin. This right amount usually expressed as the contract value’s percentage settles the preliminary agreement between futures brokers and investor.
- Variation margin:
This is the additional amount that is paid for the next margin to keep up with in case any loss occurs. A forex broker is one who requests that concerned trader for a variation margin.
- Maintenance margin:
Now, this value is maintained or kept by the investor himself in the transaction process. Coming to the margin’s lowest level, it is usually kept at a standard of 75% to 80% of initial margin.
This is the basic idea on what is margin requirements forex. Hopefully, it would make your learning and trading in the forex market easier.
One last point to add –
Margin Call – This is another essential term you must not miss out on. Investors get a margin call only when their funds go below the initial margin level and hence you need to make fund additions. In case you avoid these calls and don’t make necessary changes, a brokerage firm will close your position.
So, that’s what is margin requirement in forex. Enrolling yourself for a forex education course will further enhance your knowledge of this financial market.