Margin: What is it and why do you need to understand it

Margin is not an expense, but an “Estimated Funds”

When you enter a trading position, the broker will hold a certain amount of money from your account as trading collateral (margin). This is not a fee; it is a “variable fund” that mitigates risk. For example, if you want to control a $100,000 position, the broker may require you to have a margin of at least $1,000, which means you are controlling 100 times the amount you actually use.

The margin will be “locked” in the account as long as the position remains open. When you close the trade, the funds will be returned, and you can use them for your next trade.

Basic Margin Calculation Method

What determines your margin has three main points: the currency pair price, the lot size you trade, and the margin ratio set by the broker.

Basic formula: Margin = Contract value × Margin ratio (%)

Imagine you open leverage at 200:1, which means the margin ratio is 0.5%. If you trade a mini lot (worth $10,000), you don’t need to use the full $10,000. Just $50 ($10,000 × 0.5%) is enough.

What is Maintenance Margin (Maintenance Funds)?

Maintenance margin is another important concept that margin traders need to know. This is the minimum amount you must keep in your account to maintain your position. If your funds fall below this level, the broker has the right to close your position immediately without prior approval.

Calculation formula: Maintenance Margin = Current contract value × Maintenance margin ratio (%)

Generally, the maintenance margin ratio is often 50% of the initial margin ratio. For example, if you deposit an initial margin of $1,000, your maintenance margin will be at least $500 .

When Funds Are Insufficient: Margin Call

If your trade starts to incur losses, your initial margin deposit may no longer be enough. For example, if the initial margin is $1,000 but after a loss, your balance drops to $400 , you are $100 short of funds to reach the maintenance margin level.

In this situation, the broker will call or send a message to notify you (called a “Margin Call”) to ask you to deposit additional funds. If you do not deposit the money, the system will forcibly close your position to prevent further losses.

The Relationship Between Margin and Leverage

Margin and leverage work closely together. When the margin is low, your leverage is higher. This amplifies both profit opportunities and the risk of losses. Simply put, high leverage = low margin = higher risk.

Summary

• Initial Margin is the collateral you need to pay to open a position. It is not an expense but a locked-in amount.
• Maintenance Margin is the minimum level of funds you must maintain to keep your position open.
• Both must be understood because incorrect settings can lead to margin calls and forced position closures.

Understand margin well = understand risk thoroughly = manage your trades more wisely.