Margin in Forex – FX Guide

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Many Kenyan traders are unfamiliar with the concept of margin and misunderstand how it works. Margin in Forex can be a useful risk management tool since it is the minimum amount of money needed to place a leveraged trade.

Margins are closely related to margin calls, a practice that traders go to great lengths to avoid. Forex traders must understand what margin is before placing a trade since it could be extremely costly if they don’t.

A very interesting aspect of Forex trading is that Kenyan traders can trade in more currencies than their principal investments would normally allow. This is the result of something known as “trading margins.” What are these margins, and why should you care about them? Let’s discuss!

Please find out how margin works in forex trading, how to calculate it, and how to manage your risk effectively.

What is the Forex margin?

As collateral for a trade, a forex trader puts up a margin, a good faith deposit. Put another way, it is the minimum amount that a trader needs in their account to open a position. Forex trades are typically reported as a percentage of the notional value (trade size). Essentially, the broker “borrows” the difference between the deposit and the trade’s full value.

Margin in Forex trading refers to the amount of leverage a trader has in the market. The Forex market has a trading margin ranging from 10:1 to 50:1. In Forex trading, a trader’s $1 principal investment will allow them to trade from $10 to $50 worth of currency.

Forex margin calculator

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With a forex margin calculator, you can easily calculate how much margin is needed on a trade. In addition, traders no longer have to calculate forex margin since forex margin calculators manually and automatic margin statements at most brokers.

An investor can calculate forex margin with a calculator by simply entering the currency pair, the trade currency, the number of units the trade is worth, and the leverage.

Calculate the amount of margin required with the forex margin calculator. For example, suppose a forex broker has a margin requirement of 3.3% for EUR/USD, and a trader wants to open a 100,000 unit position. 1.1500 is the current rate for the currency pair, and USD is the trader’s account currency.

By entering these details into a forex margin calculator, a margin amount of $3,795 will be calculated. Therefore, $3,795 is required to place the trade.

It can be useful to use forex margin calculators to calculate the margin needed when opening new positions. Kenyan traders can also determine the optimal position size and leverage level using these tools. Maintaining the right position size can help traders avoid margin calls.

It would be helpful to learn more about technical analysis and risk management before you start speculating on the foreign exchange market to better analyse price action and protect yourself from sudden market movements.

Margin call in Forex

The margin level on the account falls when a Kenyan trader has negative positions. Traders whose margin levels drop below 100% can no longer cover their margin requirements unless they have enough money in their account. In other words, the equity of the trader falls below the used margin.

As a result, the broker will usually call the trader to top off his equity, receiving a margin call. A trader with a trading account would receive an email or push notification once the value of their account reached this level.

The trader’s open positions may be liquidated during these circumstances if they do not fund their account. Therefore, to avoid margin calls, traders should avoid them at all costs. Margin calls can be avoided by monitoring margin levels regularly, using stop-loss orders to manage losses on each trade, and maintaining a sufficient fund balance.

Various investment options and products are available with margin trading in Kenya. Forex, stocks, indices, commodities, and bonds are among the asset classes traded.

Forex margins are the same as Stock margins.

In general, margins for both Forex and stocks are about the same. However, below are some differences between the two:

Margin interest is a loan underlying a trading margin. Thus, when you trade Forex, the broker adds a substantial amount of money for every investor’s dollar.

Forex brokers, however, do not charge interest on the money they put into your account. On the other hand, stockbrokers are usually expected to charge interest in exchange for lending you money.

A trader can generally find a 10:1 margin in the Forex market; in the stock market, margins are usually 2:1. Thus, margin gives traders more leverage on the Forex market than on the stock market.

Forex traders are not typically vulnerable to margin calls. Unfortunately, stock market investors of Kenya cannot expect the same. Margin calls occur when trades move against the trader. Brokers will require investors to add cash to their deposits at this point.

Forex trading margins: why should you care?

You can use margins to your advantage or your detriment. Therefore, forex trading requires understanding both the risks and the advantages of margins. The advantages and risks of margins are as follows:

Leverage is a great advantage for Kenyan Forex traders – think about it. Forex traders can take advantage of currency movements up to $10,000 with a principal investment of $200 and a leverage ratio of 50:1. Traders who can realise gains in the market have a huge advantage over others.

High margins, however, can also make you vulnerable. When trades don’t turn out well for you, the amount you lose will be augmented by the margin.

The connection between margin and leverage

Leverage is a concept that must be understood before moving forward. Margin and leverage go hand in hand since the greater the margin requirement, the fewer leverage traders can use. Because of this, the trader can borrow less from the broker since he will have to fund more of the trade with his own money.

Due to the potential risk of large profits and losses with leverage, traders must use leverage responsibly. The leverage between brokers can vary, as can the leverage among jurisdictions – depending on the regulatory regime. Below you can see typical margin requirements and corresponding leverage:

  • 50% (2:1)
  • 33% (30:1)
  • 00% (50:1)
  • 5% (200:1)

Understanding forex margin requirements

In forex trading, Kenyan brokers set margin requirements and are determined by an individual’s willingness to assume risk (default risk) while adhering to regulatory requirements.

As an example, below is what the forex margin requirement for GBP/USD would look like when we look at “Deposit Factor”:

Traders typically see margin as a fee they have to pay. There is no transaction cost involved in margin deposits; a portion of the account equity is set aside and allocated as the margin deposit.

To hold an open position with forex margin, you must remember that the margin required will be determined primarily by the size of the trade. Thus, traders will move to the next tier as the trade size increases, increasing the margin requirements (in monetary terms).

When volatility is high or economic data is likely to contribute to more volatility than usual, margin requirements may need to be temporarily increased.

In the first two tiers, margin requirements remain at 3.33%, but they increase to 4% and 15% in the next two tiers.

To avoid margin calls, traders must ensure their trading accounts are sufficiently funded after understanding margin requirements. The forex margin level can be used to monitor the status of a trader’s account:

Forex margin level is equal to (equity/margin used) x 100

Imagine a trader who has deposited $10000 in his account and currently has $8000 used as margin. In this scenario, the forex margin level would be 125, and it would be above 100. Brokers generally prohibit you from opening new trades if the forex margin level dips below 100. You may also be subject to margin calls.

Traders should be aware of their brokers’ margin close-out rules to avoid liquidating their positions. If an account is placed on margin call, it must be funded immediately not to liquidate current open positions. To return the account equity to a level that is acceptable to the broker, they do this.

Forex margin terms

Equity: The difference between the cash and account balances after subtracting current profits from current losses.

Margin requirement: The deposit required to leverage a trade.

Used margin: The portion of account equity set aside to maintain existing trades.

Free margin: The amount of equity remaining after subtracting the margin used.

Margin call: They occur when the equity in the trader’s account drops below a certain level set by the broker, triggering the liquidation of open positions as a means to restore the equity to the desired level.

Forex margin level: This represents the amount of equity that has been used to fund the account once you divide it by the used margin and multiply it by 100.

Leverage: By funding part of a trade and borrowing the remainder from the broker, Forex traders can increase their market exposure beyond their initial investment. Traders need to understand that leverage can lead to large profits and large losses.

What is the free margin in Forex?

The free margins in a trader’s account are those equity amounts not tethered to current open positions. This can also be viewed as the number of cash traders have in their accounts that they can use to fund new positions.

Managing risks of margin trading

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If the margin required per position is not automatically included on the deal ticket, traders must understand how the margin is calculated on a margin account. In addition, understand that margin and leverage affect each other and that an increase in margin requirements reduces the amount of leverage available to traders.

If you wish to avoid trading during such volatile periods, use an economic calendar to track important news releases.

Having a large free margin amount on your account is considered prudent. Trading in this way allows traders to avoid margin calls and ensures that their accounts are adequately funded so they can enter high probability positions as soon as they appear.

Getting cash out of your margin account

Stock brokerage margin accounts allow you to borrow money to cover a portion of stock investment costs. Margin accounts can be funded in several ways. The first thing you can do is sell all of your investments and withdraw the entire account balance. In addition, you can get cash from your account, backed by your current investments, by using your margin loan availability.

Are margins a good idea for beginners?

If you are a beginner, you should consider buying dividend stocks from large companies that pay a good dividend and have a relatively stable price. In addition, investors sometimes buy income stocks with dividend yields that exceed margin interest rates, which means that the stock pays back the margin loan.

Margin investing: Is it worthwhile?

The profit potential is greater in margin trading than in traditional trading, but risks are also higher. Losses are magnified when stocks are purchased on margin. A margin call may also be issued by the broker, which requires you to liquidate your stock position or additional front capital to keep your investment

Bottom line

Forex margin is an important concept to understand when you are trading leveraged. The margin is simply the amount of money a Kenyan trader must provide before placing a trade and maintaining the position. Margins are not transaction costs but a security deposit the broker holds throughout an open forex trade.

As leverage makes it possible to take larger positions, forex trading on margin is a popular strategy. However, you must also understand that margin trading can also result in losses being magnified.

To use leverage properly in the foreign exchange market, Kenyan traders must understand how margin works. Margin levels, maintenance margins, and margin calls are all concepts that are worth understanding.

For Kenyan traders, it is important to be aware that if they fall below the minimum margin level required, their forex positions may be liquidated.

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