MARGIN REQUIREMENTS

Every trading account across the foreign exchange market uses margin to execute trades. It is important for all traders to comprehend the way in which margin works, and how it can affect your ability to trade as well as the level of risk applied to the portfolio, relative to the quantity of funds in the account at any given time. The leverage applied to the account will determine the amount of margin available to the trader. In addition to general leverage settings for an account, each asset carries a specific leverage level, which supersedes the account leverage. In other words, if an account has a leverage of 300:1, but the asset being traded is Crude oil, which carries a leverage level of 50:1, the trader will automatically be limited to the leverage of the asset (the lowest between the two).

In order to provide a better understanding of Margin levels, and their importance to the success of every portfolio, please read the example below:

Example: A trader operates a portfolio with a balance of $10,000. The leverage on the account is 1:300. If the trader opens a position of 1 lot (100,000 base currency) in either direction, the margin requirements for this trade will be calculated as follows:

Trade #1

BUY 1 Lot USDJPY

Volume = 1 lot = 100,000 Base Currency

Leverage = 1:300

Margin = Volume / Leverage

Margin = $100,000 / 300

Margin = $333.33*

*Since the BASE currency of the currency pair USDJPY is USD, and the portfolio is also in USD, there is no need for a conversion.

Example with currency conversion

Trade #2:

SELL 1 Lot EURUSD at 1.3700

Volume = 1 lot = 100,000 Base Currency

Leverage = 1:300

Margin = Volume / Leverage

Margin = 100,000 EUR / 300

Margin = 333.33 EUR

Margin = (333.33)*(1.3700)

Margin = $456.67

It is important for every trader to understand the functionality of margin requirements in every trade executed within a portfolio. At times, overuse of margin levels can hinder a trader’s ability to act freely across their account. Proper portfolio management requires diligent risk management, in order to avoid placing the entire account at risk of loss.