What is margin trading?

You have $1,000 in a trading account. You open a EUR/USD trade worth $11,000, and your broker locks away $110 of your money until you close it. That arrangement is margin trading.

Every gain and loss on that trade is counted on the full $11,000. The $110 is a deposit, and it puts no limit on what you can lose.

What does trading on margin mean?

Margin trading means holding a position whose full value is larger than the money you put down for it. That full value is the notional value, the face amount of the trade.

The money set aside is the margin. Your broker holds it as collateral, a deposit reserved until you close the trade. When you close, it returns to the money you can use for other trades.

In retail forex you trade a contract with your broker, and no currency is delivered. That is why a $1,000 account can carry an $11,000 position: you only need to cover the margin and any losses.

The numbers in this lesson are illustrative, with round prices and a 1% margin requirement. Your broker's real requirement depends on the instrument, your account type and the rules where the broker is licensed.

How is margin worked out?

The sum has two steps:

1. Notional value = units traded × price, converted into your account currency.
2. Margin = notional value × margin requirement.

A standard lot is 100,000 units of the base currency, so 0.10 lot of EUR/USD is 10,000 euros. At 1.10000, that is 10,000 × 1.10000 = $11,000.

With a 1% requirement, the margin is $11,000 × 0.01 = $110. Your balance stays at $1,000, and $110 of it is marked as in use.

The requirement is often written as leverage. A 1% requirement is 1:100 leverage, 2% is 1:50 and 5% is 1:20. The leverage lesson covers the ratio in detail.

With $1,000 in the account, only the 1% column lets you open the 0.50 lot trade, because $1,100 and $2,750 are more than the balance.

USD/JPY needs no conversion in a dollar account. The base currency is already dollars, so 10,000 units are $10,000 at any yen price. The margin calculator does the sum for other pairs.

Why does margin make gains and losses bigger?

Say EUR/USD rises 50 pips, from 1.10000 to 1.10500. On 0.10 lot a pip is worth $1, so the trade gains $50. Had the price fallen 50 pips instead, you would have lost $50.

The price moved 0.0050 ÷ 1.10000, about 0.45%. Your account moved 5%, because $50 is 5% of $1,000. Against the $110 margin, the same $50 is about 45%.

Your balance swings with the size of the position. The margin requirement only sets how large a position you are allowed to open, so the same 50 pip fall costs $5 on 0.01 lot, $50 on 0.10 lot and $250 on 0.50 lot.

Dividing the notional value by your balance gives your effective leverage. The 0.10 lot trade is $11,000 ÷ $1,000 = 11 times your balance, and the 0.50 lot trade is 55 times.

What happens when a trade goes against you?

Take the larger trade: 0.50 lot of EUR/USD bought at 1.10000, with $1,000 in the account. The used margin, the amount locked by open trades, is $550, and each pip is worth $5. Spread and swap are left out to keep the sums clean.

While the trade is open, your equity is your account balance plus or minus the floating profit or loss. Margin level is equity ÷ used margin × 100.

Your broker checks the margin level continuously. Brokers usually set two thresholds on it, a margin call and a stop out, at levels that vary from broker to broker. This example assumes 100% and 50%.

1. At 90 pips down, 1.09100, the loss is 90 × $5 = $450. Equity is $1,000 minus $450 = $550, and $550 ÷ $550 × 100 = 100%. You reach the margin call level. Your free margin, equity minus used margin, is now zero.
2. At 145 pips down, 1.08550, the loss is 145 × $5 = $725. Equity is $275, and $275 ÷ $550 × 100 = 50%. The stop out level is hit and the broker starts closing positions.

A price fall of 0.0145 ÷ 1.10000, about 1.32%, removed 72.5% of the account. After the stop out the loss is realised and your balance is $275.

In a fast market the closing price can be worse than the trigger, so the real loss can be larger. Some platforms also recalculate margin as the price moves, so exact trigger prices can differ slightly from these round figures.

Is margin trading the same as borrowing?

In a share margin account, a broker lends you cash to buy shares and charges interest on the loan. Retail forex margin is usually set up differently: you hold a contract, and no cash is lent to you to buy currency.

The contract's results are settled against your balance. If you keep it open past the daily rollover, the broker charges or pays swap, which it sets from the interest rates of the two currencies and its own pricing.

Margin and leverage describe one arrangement from two sides. Margin is the money set aside, and leverage is the ratio of the position to that money, so a 1% requirement and 1:100 leverage mean the same thing.

Where does margin trading catch beginners out?

Margin sits in your account, so it is easy to read it as the most you can risk. The example above shows otherwise: the margin was $550 and the loss reached $725.

• Price can gap over a weekend or around a big news release, jumping past your stop out level. The account can even fall below zero, so check your broker's terms on negative balances before you deposit.
• Brokers can raise margin requirements, for example on large positions or before major events. The same trade then ties up more money, and the margin call arrives after a smaller price move.
• Free margin looks like spare cash. Each extra trade opened with it shrinks the distance to the stop out level for every position in the account.