Are you a beginner thinking of investing in forex business? If yes, then I must ask you an obvious question which every novice trader is asked: “do you know the definition of margin in forex?” Well, as a beginner, you may not be aware of this, but you have to gather adequate information about it before taking your first step in the trading business. You must be wondering why I am saying all these things to you. The answer is simple, as a beginner, I also faced the same question about margin in forex.
So, here I am presenting some possible answers and questions related to the margin in forex. Let’s have a look at them –
What is margin and leverage in forex?
Margin refers to a certain amount of deposit that a trader must make to hold his trading position in the market. This is a new concept about which many traders may not be aware of, and they often confuse it with a fee for opening up an account. It is not a part of transaction cost. Rather it is a portion of your account equity which is kept aside and thereby used to allocate as margin deposit.
On the other hand, leverage is opposite or by-product of margin. This tool allows a trader to control his big trade size. Traders mostly used this to maximize their return on investment. However, it is not immune from risk. The trader may face significant loss while using this leverage tool. Therefore, one should know accurately how to control leverage before using this tool in the trading business.
What is free margin in forex?
Free margin implies the amount which will not be involved in opening up any trade and thereby can be used to take positions. This is not all about free margin. Free margin also denotes the difference between margin and equity. The more you make money from your open position, the greater will be the equity, and you will get more free margin.
What is margin call?
A margin call is regarded as the greatest nightmare for any trader operating in the forex market. This mainly happens when your broker let you inform that the margin level of your account is started to fall below the minimum required level signifying that your open position is going against you.
To avoid a margin call, you need to prepare yourself for a highly volatile market situation where you can face such a fall. Moreover, traders are also recommended to monitor their accounts from time to time so that they can avoid such a liquidate situation.
How can you prevent the liquidation of your present trading position?
Here, you will come to know about some useful techniques that you can use to protect your position from liquidation. Let’s check out –
In such a situation, you can start trading with smaller size trade like mini or micro and keep the fund in your account above the minimum margin requirement.
If you have an open position trade, reduce the size of the position to improve margin excess
Manage your accounts effectively with the proper use of stop order.
Hope I am able to answer all your question about margin in forex. If you have any other questions that you would like to ask me, feel free to write in the below comment section. I will be delighted to answer your queries. Thank you!