The Margin Calculator
The Margin Calculator is an indispensable tool for any trader participating in the forex market. The Margin calculator calculates the margin threshold that must be maintained in the trader’s account to guarantee open positions. Knowing how to accurately calculate various margins can help to properly manage your trades and determine the position size and the leverage level that you should not exceed.
Identifying and Calculating with the Margin Calculator
In the trading world, “margin” can refer to the amount of equity contributed by an investor as a percentage of the current market value of securities held in a margin account or the portion of the interest rate on an adjustable-rate mortgage added to the adjustment-index rate.
• Trading on Margin
Margin trading or “trading on margin” is the using borrowed funds from brokers to trade financial assets usually in collaterals such as stocks.
If the price of assets rises, trading on margin allow investors to use leverage to increase their gains. But, if the prices of these assets fall, the loss in value is much greater than the regular trading of assets. This tends to amplify gains and/or losses.
Investing borrowers can borrow up to 50% of the total cost of any purchase as the initial margin requirement as per Federal regulations. Afterwards, it would require maintenance margin requirements of at least 25%, though it may depend on the brokerage firm.
This form of investing is highly risky and investors are advised to familiarize themselves with the risks before undertaking it.
• Forex Margin
In the forex market, currency exchange margin can be thought of as an insurance deposit required to keep open positions. Technically, it’s a portion of account equity that is allocated as a margin deposit.
A margin requirement is the leverage offered by a broker to account for market volatility or forex rates.
For example, a 2% margin requirement is the equal to offering a 50:1 leverage, which allows an investor to trade with $10,000 in the market by setting aside only $200 as a security deposit.
In the forex market, traders tend to trade with leverages of 50:1, 100:1, or 200:1 depending on broker regulations.
• Margin Call
If market movement results in losses for the trader and he has an insufficient amount of margin, a margin call would ensue. This means that there is no more money in the account to withstand the loss in value of equities.
Here, the investor must either sell positions or deposit funds to meet the minimum maintenance required. Failure to do so would result with the broker liquidating the investor’s positions in order to stop the account from turning into a negative balance.
Margin Call is calculated by determining the difference between the current equity balance in an account and how much equity you need to maintain.
For example, if you have 30% margin maintenance, you must maintain $3,000 cash in your brokerage account.