What is Forex Trading Margin, and Why is it Important
Nowadays, forex trading is one of the trending trading methods; with Forex Trading, people are able to trade different pairs of currencies in order to gain profit.
To be able to trade with foreign currencies, traders need to open an account on a Forex trading platform. Numerous platforms are available, which can make choosing which one to trade on difficult; however, there are ways to check whether a Forex Trading Broker is reliable and trusted. One way is by looking at the trading margin offered by the broker.
Forex trading margin is not an amount that needs to be paid to the broker. Instead, it is a deposit (minimum deposit) frozen in the trader’s account, allowing the Forex trader to maintain high positions when trading foreign currency pairs. Thus, the main goal of using a Forex trading margin account is to allow traders to earn more profits compared to the regular account.
By having a margin account, traders can trade currencies with leverage, which will increase their profits from the trade in the long run. For instance, when one trades using IC Markets, they have a leverage of 1:500; in other words, for each $1 from their cash, traders will be eligible to use $500 – which is a borrowed sum. So, If you’re interested you may do your research to learn more about IC Markets minimum deposit.
Thus, with a minimum deposit in Forex trading, one will be able to start to trade with leverage and ensure higher profits from the transactions.
Benefits of using Forex Trading Margin
To have a margin account and be able to start Forex trading, paying a marginal sum is necessary. The margin is a way of ensuring Forex Brokers that the trader is not a scam and is willing to trade legally by following the terms and conditions.
However, on the other hand, the margin amount gives traders the boost needed to increase their profits from the trade. Thus, with a higher margin, investors will be guaranteed a higher position when trading Forex.
Nevertheless, it is important to keep in mind that the margin (minimum deposit) is not a fixed amount that one deposit when opening a Forex trading account. The margin’s value fluctuates with the currency fluctuations; thus, it is essential to keep oneself updated regarding fluctuations in Forex trading.
How to Accurately Read and Understand Forex Margin
The value of the margin depends on the amount that an investor is willing to trade. Imagine a Forex Broker offers a 1% margin for a trade – this means that for the amount that an investor is willing to trade, 1% of it is going to be deposited.
For instance, when one decides to trade $200,000 – they need to deposit $2,000 into their Forex account. The rest of the amount is provided by the broker.
Nevertheless, the margin percentages depend on each Forex broker and their terms. But each broker needs to have a minimum and maximum value – that is, traders will be given the option of choosing a value to trade from within the provided range.
Calculating Forex Trading Margin
Since Forex brokers provide a range for their margins, educating oneself on how to calculate the margin to get the highest profit is important.
The margin amount is the collateral that one puts aside when bidding. Some prefer to bid at higher margins; however, depositing too much can harm the process. To know which value is the most applicable for an account, one needs to calculate and figure it out.
To make the calculations easier, suppose a trader has an account with U.S. Dollars as the main currency. However, when trading Forex, the highest profit they will make will come from trading with the Pound Sterling (GBP) and Euro (EUR). So, when the trader decides to take the position of 10,000, they purchase 10,000 GBP against the equivalent of EUR.
In other words, the trader is paying 10,000 EUR to purchase 10,000 GBP. However, the flaw in this statement is that, in reality, the trader is purchasing with USD and not EUR.
So, to understand how much one needs to pay with their deposited currency – in the above case USD, one can use the following equation to arrive at an accurate margin value:
Margin Requirement = ([Base Currency] / [Account Currency] * Units) / Leverage
Where:
Base Currency = GBP
Account Currency = USD
Units = 10,000
Conclusion
To conclude, Forex trading required traders to be consistent with their calculations and educated on calculating and analyzing the fluctuations of foreign currencies. Without the right knowledge and calculations, a trader will not be able to profit from their Forex trade.
Thus, ensure to calculate the margin based on the range the broker offers and trade with the most appropriate amount.