Understanding margin is fundamental for anyone trading currencies. At its simplest, margin is the portion of your trading account that a broker sets aside as collateral when you open a leveraged position. It isn’t a cost or fee you pay to the broker; it’s money that remains in your account but is reserved to cover the risk of the trade. Because margin lets you control a larger position than your deposit alone would allow, it is tightly linked to leverage and to the risks of trading.
How margin works and why it matters
When you open a forex trade, you trade a notional amount that is often much larger than the funds you hold. Brokers provide access to that larger exposure by requiring a margin deposit. For example, if a broker requires 1% margin to trade a standard lot (100,000 units), you need $1,000 in your account to open that $100,000 position. The broker “locks” that $1,000 as used margin while the position is open; the rest of your account balance remains available for other trades or to absorb losses.
Margin matters because it determines how many positions you can hold and how much market movement your account can tolerate before you face a margin call or automatic liquidation. It is the mechanism that ensures both you and the broker have a buffer while you trade with borrowed exposure.
Margin and leverage: the relationship
Margin and leverage describe the same idea from different angles. Leverage is usually expressed as a ratio such as 50:1 or 100:1 and tells you how much position size you can control for each unit of your own capital. Margin is typically expressed as a percentage and shows the amount of your own funds required to open that position.
You can think of the relationship like this: Margin = Position size / Leverage. So with 100:1 leverage, a $100,000 position requires 100,000 / 100 = $1,000 margin. Higher leverage reduces the margin needed for a given trade, which increases buying power but also increases the risk that a relatively small price movement will eat through your available equity.
Key account metrics: equity, used margin, free margin and margin level
Equity is your account balance plus or minus any unrealized profit and loss from open trades. Used margin is the sum of all margin amounts reserved by the broker for your open positions. Free margin is the part of your equity that is not currently reserved and is available to open new positions or to absorb adverse moves; it is calculated as Equity − Used Margin.
Margin level is a useful percentage that tells you how healthy your account is: Margin level = (Equity / Used Margin) × 100. Brokers use margin level to decide when to warn you (margin call) or start closing positions (stop-out). A higher margin level gives you more buffer; a low margin level indicates that a margin call or forced closure may be imminent.
Concrete example: opening a EUR/USD standard lot with leverage
Imagine you want to buy one standard lot of EUR/USD. One standard lot equals 100,000 euros. If EUR/USD trades at 1.10, the notional value of the position is 100,000 × 1.10 = $110,000. With 100:1 leverage (equivalently 1% margin), the margin required is $110,000 / 100 = $1,100. If your account balance is $5,000, opening this trade uses $1,100 as used margin and leaves the rest ($3,900 plus any unrealized profit or loss) as free margin.
If the rate moves 100 pips in your favour and each pip is worth $10 for a standard lot, you would gain about $1,000. That profit increases your equity and free margin. Conversely, a 100‑pip adverse move would cost roughly $1,000 and reduce equity, bringing your margin level down and possibly triggering a margin call or stop-out if it falls below your broker’s thresholds.
Margin calls and stop-outs: what to expect
Brokers monitor margin level continuously. If your margin level falls to the broker’s margin call threshold, the broker may alert you to add funds or reduce exposure. If losses keep mounting and margin level hits the stop-out level, the broker may close positions automatically to stop your account from going negative. Procedures and thresholds vary between brokers, so it’s important to know the exact rules that apply to your account.
Keep in mind that during fast, illiquid market moves — such as big economic releases or market opens after a weekend — prices can gap and the automatic closures may not execute at the price you expect. That’s why margin risk management matters.
How to calculate margin for a trade
You can compute required margin with a simple formula: Margin required = Notional position size / Leverage. For currency pairs where the account currency differs from the pair’s quote currency, the required margin may need to be converted into your account currency at the current exchange rate. Many platforms and brokers provide a margin calculator that does this conversion and shows the required margin for a chosen lot size and leverage.
Practical tips for using margin safely
Use margin deliberately rather than maximising it by default. Smaller position sizes, lower leverage, and conservative stop-loss placement all reduce the chance of a margin call. Treat margin as part of a wider risk-management framework: decide how much of your capital you are willing to risk per trade, size positions accordingly, and monitor market events that can increase volatility and margin requirements. If you are new to leveraged trading, practise on a demo account first to get comfortable with how margin affects your account.
Risks and caveats
Trading on margin amplifies both gains and losses. Because positions are larger than the capital actually put up, a relatively small adverse move can reduce your equity quickly and may result in losses larger than your initial deposit in extreme cases. Brokers may change margin requirements with little notice in response to market volatility, and different instruments (for example exotic currency pairs or cryptocurrencies) often require higher margin. Slippage and gaps mean that your orders, including stop-losses, may execute at prices different from those you set. Always remember that trading carries risk, and past outcomes do not guarantee future results. This article provides general information and is not personalised trading advice.
Key takeaways
- Margin is collateral set aside to open and maintain leveraged forex positions; it is not a fee but a reserve of your own funds.
- Margin and leverage are linked: higher leverage means lower margin required per trade, but higher risk of rapid equity loss.
- Monitor equity, used margin, free margin and margin level; brokers may issue margin calls or stop-outs when margin levels fall.
- Use conservative position sizing, lower leverage and stop-losses to manage margin risk; trading carries risk and this is not personalised advice.
References
- https://www.dukascopy.com/swiss/english/marketwatch/articles/forex-margin/
- https://www.equiti.com/sc-en/news/trading-ideas/margin-levels-in-forex-trading-what-traders-should-know/
- https://www.schwab.com/learn/story/what-is-leverage-forex-trading-understanding-forex-margin
- https://www.investopedia.com/ask/answers/06/forexmargin.asp
- https://www.forex.com/en-us/trading-guides/what-is-margin-trading/
- https://www.axi.com/int/blog/education/margin-trading