What Is Margin in Forex Trading?

Margin in forex trading is the portion of funds in a trading account that a broker sets aside as collateral to open and maintain a leveraged position. It is typically expressed as a percentage of the position’s full value; for example, a $20,000 position with a 5% margin requirement would require margin of $1,000. 

Margin is not a fee; the money remains in the trader's account but whilst allocated to an open trade, it cannot be used to open new positions. In this article, we examine how forex margin works, how margin and margin level are calculated, and what happens at margin call and stop out levels.

The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.

How Does Margin Work in Forex Trading?

Trading on margin is when a trader commits a portion of the funds in their account as collateral to open a leveraged position: a position with a larger notional value than the funds used to open it. This collateral is known as the margin. 

When a leveraged position is opened, the broker sets aside the required margin. Although this amount remains in the trader’s account, it cannot be used to open or support other positions whilst it is set aside. 

Any profit or loss is calculated using the full position value rather than just the margin committed. As the market moves, the value of the account changes and, along with it, the funds available to open and support other positions. 

What Determines Forex Margin Requirements?

The margin required depends on the position’s notional value and the relevant margin percentage. These are affected by several factors: 

• Position Size: A position with a larger notional value requires more margin, and vice versa. 
• Instrument: Margin requirements can differ depending on the specific instrument. 
• Leverage: A lower margin percentage corresponds to a higher leverage multiple. 
• Account Terms: Margin requirements can vary according to the broker and account type. 

How to Calculate Margin in Forex

Margin and leverage essentially describe the same relationship from different angles. Margin represents the percentage of the position’s full value that must be committed as collateral, whilst leverage expresses how much market exposure that margin supports. 

With leverage of 1:20, the leverage multiple is 20, meaning that one unit of margin supports a position worth 20 units. A lower margin requirement results in a higher leverage multiple. 

Required margin can be calculated in either of two ways: 

1. Required margin = Full position value × Margin requirement 
2. Required margin = Full position value ÷ Leverage multiple 

For example, let’s say a position worth $20,000 is opened with a 5% margin requirement: 

$20,000 × 0.05 = $1,000 

The same result can be arrived at using the leverage multiple: 

$20,000 ÷ 20 = $1,000 

The broker would therefore allocate $1,000 to support the position. The Admirals Trading Calculator can be used to help calculate required margin on different instruments. 

What Is Margin Level in Forex? 

Margin level in forex measures the relationship between account equity and the margin allocated to open positions. It is expressed as a percentage and helps determine whether an account can support additional positions or if it is approaching a margin call or stop out threshold. 

Balance, Equity, Used Margin and Free Margin

How to Calculate Margin Level

Margin level is calculated using the following formula: 

Margin level (%) = (Equity ÷ Used margin) × 100 

For example, let's say an account has equity of $10,000 and $1,000 has been allocated as margin. With no unrealised profit or loss: 

($10,000 ÷ $1,000) × 100 = 1,000% margin level 

The figures change when the market moves and the position records an unrealised profit or loss. The table below shows what happens after a $2,500 unrealised loss on the position.

This example assumes that used margin remains unchanged.

A margin level of 100% implies that equity and used margin are equal. The consequences of reaching that level depend on the broker in question and their respective margin call and stop out thresholds. 

What Is a Margin Call in Forex?

A margin call occurs when an account’s margin level reaches the margin call threshold set by the broker. It is a warning or account status indicating that equity has fallen to a certain level relative to used margin.  

Depending on the broker, opening new positions may be restricted, but positions are not necessarily closed at this point. Automatic closure only begins if the stop out level is reached, unless the broker uses the same level for both.  

The broker may send a notification warning traders once they reach this level, however, this is not guaranteed. Some brokers describe an account as being “on margin call” regardless of whether direct contact has been made. Furthermore, in fast moving markets, the account may reach its stop out level before any warning can be issued. 

The possibility of reaching a margin call threshold may be reduced by limiting the amount of margin committed and monitoring open positions closely. Stop loss orders may also help limit losses, although they do not guarantee execution at a particular price. 

What Is a Stop Out Level in Forex?

A stop out level is the margin level at which a broker begins closing one or more positions automatically to free up used margin and limit further losses by reducing an account’s exposure.

Where the thresholds are separate, the stop out level is typically lower than the margin call level, although some providers use the same level for both. 

For example, if used margin is $1,000 and the stop out level is 50%, automatic position closure would begin when the account equity falls to $500. 

Closing a position releases its allocated margin and, therefore, can increase the account’s margin level. If the level remains below the stop out threshold, further positions may be closed according to the broker’s procedures.

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