Forex Margin 101

The primary attraction of forex trading is the opportunity to trade on margin. However, for many forex traders, the term "margin" is often unfamiliar and frequently misunderstood.

Take Bob, for instance. Bob is an expert when it comes to fried chicken and mashed potatoes, but he has no understanding of margin and leverage.

Margin trading allows you to take positions that exceed your account balance. With a small amount of cash, you can engage in much larger trades in the forex market. A slight favorable price movement can lead to substantial profits. Unfortunately, for many novice traders, this is not typically the outcome. More often than not, the price moves against them, just like it did for Bob.

Bob was confident in a trade and decided to go all in. To his shock, he saw his trade automatically closed on his trading platform, resulting in a significant loss. The remaining funds in Bob's account were insufficient to open another trade. Confused, Bob wondered, “What just happened?”

When he reached out to his forex broker, he learned that he had received a "Margin Call" and experienced a "Stop Out." Bob was completely lost and had no idea what his broker was referring to.

This highlights the importance of understanding how margin works. Many new traders lack knowledge about margin, its usage, how to calculate it, and its significance in trading.

Do you know what margin actually is? What about used margin, free margin, margin level, margin calls, or stop outs? As you can see, there is a lot of "margin jargon" in forex trading.

Before selecting a forex broker and starting to trade on margin, it’s crucial to comprehend what all this terminology means. Without this understanding, you might find yourself in a situation similar to Bob's, facing unfortunate events like a margin call or a stop out, without any clue as to why it happened.

If you want to grasp how margin is utilized in forex trading, you must understand how your margin trading account operates. This begins with knowing what the important numbers displayed on your trading platform signify. We will refer to these numbers as your margin account’s “metrics.”

For instance, consider the MetaTrader 4 (MT4) trading platform:

The metrics are interconnected; a change in one affects another. As a trader, you need to be aware of these relationships before entering any live trades. Don’t be like Bob. If certain metrics fall below specific thresholds, negative consequences will follow. Therefore, it’s essential to know what these metrics are and what the potential "bad things" are.

Ensure you have a solid understanding of how your trading account functions and how it utilizes margin. Now, let’s delve into the details.

A margin trading account displays the following metrics:

• Balance
• Used Margin
• Free Margin
• Unrealized P/L
• Equity
• Margin Level

A metric is simply a measurement of “something.” Each of the metrics listed above measures something significant about your account in relation to margin. For example, the “Balance” indicates how much cash you have in your account. If your cash balance is too low, you may not have enough margin to open new trades or maintain existing ones.

Depending on the trading platform, the names of each metric may vary slightly, but the measurements remain consistent. Let’s take another look at the metrics on MetaTrader 4. You might notice that “Used Margin” isn’t explicitly displayed; it’s simply labeled as “Margin.”

Here’s another example of account metrics from a different forex trading platform:

These metrics are the same as those on MetaTrader 4, but with different labels. Don’t worry about the varying labels for now; we will clarify each margin-related metric so you can recognize them regardless of the specific terminology used. Additionally, we will provide alternative names for each metric, and at the end of this Margin Trading 101 course, you will receive a helpful “cheat sheet” for all this margin jargon.

Now, let’s discuss each metric in detail, starting with the simplest one.