Margin is the amount required by a broker from a trader as a requirement to open a position. It is not a fee or cost paid by the trader; rather, it is part of the account balance that is temporarily reserved for the duration of the position and returned to the Equity once the position is closed.

How Does Margin Work?

Through Leverage, a trader does not need to pay the full value of a position, but only a small portion of it. This portion is the margin. The higher the leverage available on the financial instrument, the lower the margin requirement needed to open the same position.

For example, with leverage of 1:100, the trader needs to provide only 1% of the total position value as margin, while the remaining value is covered through leverage.

Types of Margin in a Trading Account

Margin appears in a trader’s account in several interconnected forms:

• Required Margin: The amount needed to open a new position. It is determined according to the position size, financial instrument, and leverage used.
• Used Margin: The total amount currently reserved as a requirement for all open positions.
• Free Margin: The unused portion of Equity that can be relied on to open new positions or absorb market fluctuations.
• Margin Level: The percentage ratio between Equity and Used Margin. It is the indicator that determines how close the account is to a Margin Call.

Why Is Understanding Margin Important?

Understanding how margin works helps traders determine the appropriate position size for their account and avoid using a large portion of their Equity in a single position. This reduces the possibility of reaching a Margin Call or having positions closed automatically through a Stop Out if the market moves against the trade.

Illustrative Example

If a trader wants to open a position with a total value of $10,000 on an instrument with leverage of 1:100, the margin required to open the position will be:

10,000 ÷ 100 = $100

This means that the trader needs only $100 from their account balance as collateral to open a position worth $10,000, while leverage covers the remaining value.