As a new trader, I was lamenting to know about margin requirement forex. But as time passed by, I came to know about the significance of margin requirements in forex. It is an important chapter of forex trading business on which you must acquire knowledge to come out as a successful forex trader.
Here are some details about forex margin requirements. Let’s check out the facts.
What are margin requirements in forex?
Margin requirement signifies the percentage of marginal security that an investor should pay to open a margin account in the trading business. This requirement can broadly be classified into two categories namely – Initial margin requirement and maintenance margin requirement. As per the regulation of Federal Reserve Board, the margin requirement for the stock market is 50% and maintenance requirement is 30%.
An initial requirement mainly refers to the percentage of margin account that an investor requires for opening up a new position. For example, if you have $5,000 in your account, and you would like to purchase a stock that requires 50% of initial margin requirement, it means you are eligible to buy that stock trade.
However, margin requirements in forex are not fixed, and it is subjected to change at any time. If you are still having any doubt regarding marginal account and requirements, here, you will get some details regarding various marginal requirement levels. Let’s have a look at them –
Various marginal requirement levels in forex
Marginal requirements are determined by dividing the dollar value of a particular currency position by the maximum level of leverage allowed for that open trade.
35,000 USD/EUR position at 1.4000
1.4000 (dollar value of 1 Euro) x 35,000 divided by 200 (which is the maximum leverage) = $245
Now, move on to the next example,
What is the marginal requirement of 1,400,000 JPY/USD position?
For 1,400,000, where the marginal requirement stands at 0.5%, the leverage will be 200:1 which ultimately equals to $7000.
Role of margin call in marginal requirement
A margin call is a kind of indicator that notifies traders about their trading if it falls below 100% marginal level. This indication signifies their marginal accounts are likely to automatic liquidation. Traders will only get a margin call if they log into their own trading platform. Therefore, it is always advised to traders to log into their accounts regularly to avoid such notification and prevent their accounts from liquidation. Sometimes, they are also advised to add additional funds to their accounts or close any current open trade.
Customers get these notifications from the moment when the margin level of their accounts falls below 20%. If the trader does not deposit additional amount or close the current open trade, the platform will liquidate his account automatically.
Now you must be wondering how to avoid a margin call. Check out the tips below –
Prepare yourself for volatility
Deposit a considerable amount of cash into your account that protects your position from sudden fall in the value of loan collateral.
Set a personal trigger
Keep your additional sources ready in case you face any such situation when you need to add money for securing your account from liquidation.
Monitor your account on daily basis
It is suggested to both beginner and expert traders to monitor their accounts from time to time. Consider setting up an indicator or alert when the value of your stock declines significantly.
From the above discussion, hope you get adequate information on margin requirement forex, its various levels, and margin calls. If you have any other thought related to this field, please feel free to share with us. We will be happy to hear from you.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.