What is margin, and why is it needed? What will happen to the deposit if a large margin is used relative to the deposit amount?
History testifies that millions of speculators part with all their money in the early days, and even hours of trading because they completely neglect money management. Some do not know what the word is. Others ignore it, because “huge volumes are huge revenues.” Many people do not think that funds can not only be increased but also lost.
Moreover, novice speculators often trade at full capacity. They say that they are lucky. Maybe it is so. A person deprived of trading experience does not have fear, and this can help him to make easy profits at the beginning of his career. But it’s impossible to stay a beginner for a long time. The trader will be forced to open more and more new deals.
Margin is the amount of money that is insurance coverage for a transaction opened with the use of borrowed money from a broker.
The money needed for the pledge is not debited, but “hangs” on the speculator’s account during the initiation of the transaction. Suppose you have $ 500 in your account, and you initiate a transaction that requires a deposit of $ 100. After the transaction is initiated, the account balance will be the same $ 500, but of which $ 100 will not be available for initiating other transactions. “Frozen” money becomes available only after exiting this transaction. If the speculative transaction is unsuccessful, then the margin goes to the broker as a guarantee of the safety of the issued money.
There is a free margin that demonstrates the difference between the value of the collateral and the size of the depot. If due to losses, the free margin figures drop too low values, then the broker closes open positions himself.
The maximum amount of losses should be no more than 5% of the deposit. How to calculate it?
After entering the deal, it is displayed in the terminal, as you see in the figure below. What is the difference between Free Margin and Margin? Let’s get acquainted with the formula with which you can calculate the amount of collateral before entering the transaction.
- 464.16 – margin, that is, a guarantee. The pledge is withheld from the account as long as there is a working transaction.
- Balance – untouched money that can function at that moment. Its value changes up – down, looking at the profit or loss, your transaction moves.
- Free margin – the amount by which we have the right to initiate transactions. It will be higher than the balance if work positions are on the positive side, and less when losses (as in the picture above)
- Means – the amount of the deposit, including margin and balance. This will be the deposit if we exit the transaction.
- Margin level – the ratio of money on the account to the margin in%. The higher this value, the less danger. It is advisable to use the margin level to identify whether we adhere to risk – control or not.
With a perfect deal, it is very easy to find out the margin – you just need to look at MT, where everything is visible. It would be more advisable to find out the margin value before initiating an order. We will need the formula:
Margin = (Value (in lots)) * (100,000) * (Exchange rate to US currency) / (Leverage)
Thus, for a true understanding, it is necessary to calculate the margin for a certain position. Suppose we speculate on the Euro “American” (rate – 1.2000), initiating a deal in half the lot. Leverage – 1: 100. How to calculate correctly?
0.5 lots * per one hundred thousand (the value of the 1st lot, in currency). Counting: fifty thousand euros. Than fifty thousand euros * for the current exchange rate against the US dollar: 1.2. We get sixty thousand American dollars. Do not forget that it is advisable for us to convert to the currency in which we have an account. These are usually dollars. If you have an account in European currency, then you need to multiply by the exchange rate against the euro. If the euro is on the 1st place of the quotation, we leave it as it is.
Then that number must be divided by the value of leverage. In this case, a hundred. 60,000 / 100 = 600 US dollars. 600 dollars is your margin, it will be deducted from the account for the initiated position as collateral.
A deal opened with a large lot carries great potential risks and profits.