What Is Forex Margin?

Forex margin is the agreed reserve amount of money required to be maintained in the account for entering into the particular forex trade on credit basis. 
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Margin reserve or deposit is directly related to the trade size. Forex Margin increase or decrease according to the trading volume. The percentage of marginal deposit is mutually settled between the trader and broker.

How to work with forex margin?

Counting the amount of margin required for maintaining an open trading position is simple. If a broker required maintaining 2% margin deposit it means that a trader needs to deposit $2000 for entering into $100,000 forex trade (1 standard lot).
Margin ratio also is the determinant of the leverage ratio. 2% margin ratio express 50:1 ratio of leverage (50 ÷ 1 = 0.02 or 2%) and 1% margin ratio = 100:1 leverage ratio. That means 1% required to deposit in cash and remaining 99% will be financed by the broker in respect of the trading amount.

Margin Call

Margin call in forex trading represents a situation when the trading loss approaches to the marginal deposit amount or the trading loss cross that marginal reserve amount, the forex broker’s trading software automatically close out the trade. Margin call prevents from losses exceeding trader's deposit.​

Example

A broker required to maintain 2% margin. A trader wants to enter in the EUR/USD order. Further details are as under;

1. Cash available in the account = $2300

1.  EUR / USD trading size = $100,000

1. 2% Margin Deposit = $2000 minimum required to be maintained against the said trade (i.e. sometimes also called used margin)

1. Cash available in the Account = $300 ($2300-$2000) i.e. sometimes also called unused margin.

Let’s suppose that EUR / USD currency pair is starting to fall and at the end of the day total calculated loss is up to $250. In the next trading session if that loss totaled to $300 or in other words the trader has now $2000 available in his account and that $2000 has been reserved for 2% marginal deposit. Once the loss crosses the amount $300 and the balance drop below to $2000 in the account that will generate the margin call.

How to avoid a margin call?

By taking the following measures a trader can protect himself from the margin call.

• A margin call can be avoided by depositing the additional amount in the account. 

• Give attention to the market changing the environment and take timely decisions according to the dynamics of the forex market.

• By obtaining the historical information relating to the underlying trading venture and with the help of analysis before entering into the trade. One can protect himself from this risk alarming situation. 

• The use of unadventurous leverage means less exposure to risk or vulnerabilities. 

• Try to avoid overtrading and overleveraging.

• Adoption of a diversification strategy.