Security deposit or Margin is the required amount to secure trade through a forex broker. It is a reserved portion of a trader’s equity account deposited to the broker as a guarantee of fulfillment of futures contract.
Essentially, margin or security deposit is the amount required to place a leveraged trade. It is also a tool used for risk management. Margin is usually expressed in percentage of the trade size or notional value of the trade.
Types of Margin
- Margin Requirement – a percentage of the deposit on the trader’s account required to open a position.
- Equity – the balance in the trading account after the addition of current profits and the subtraction of current losses from the cash balance.
- Account Balance – also known as trading bankroll, this is the total amount of money a trader has in his or her trading account.
- Free Margin – the account’s equity after the subtraction of used margin
- Used Margin – the amount of money a broker sets aside to keep the investor’s current positions open.
- Usable Margin – the available amount in an investor’s account to open new positions
- Margin Call – when an investor’s equity falls below his or her used margin, this is executed to inform the investor that the money in his or her account cannot cover possible losses. If margin call occurs, the broker will close all open positions at the current market price.
Calculating Margin and Leverage
Margin and Leverage come hand in hand in forex trading. The more margin the broker requires, the less leverage the traders can use. Usually, the required margin of the broker from his or her client is dependent on the leverage offered by the trading platform the broker uses.
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