Margin Requirements

As you have learned, margin trading lets you enter trades several times your initial deposit. A broker who offers a 1% margin (1:100 leverage) allows you to trade up to 100 times your initial deposit.

The 1% margin is referred to as the margin requirement.

There are serious implications if your account balance drops below the required (or offered) margin (1% in the above example). These implications are dealt with in the next section.

Margin fluctuates throughout a trade, depending on your profit or loss, your account balance, etc. It is crucial, therefore, that you're aware of your actual margin as your trade continues to run. You will not want it to fall below the limit.

Fortunately, you will not have to compute the margin yourself. It is computed automatically and displayed on your trading platform throughout your trade. But it is useful to understand how it is computed.

Here is the formula to compute margin:

Margin = actual account balance / exposure

Actual balance = account balance + open P&L

Exposure = the total value of all open positions (open positions refers to the trades that you have running)

The actual balance and the open P&L must be expressed in the same currency (e.g. USD).

Here is an example:

You have US$10,000 in your account. You bought 500,000 EUR/USD. Therefore you have an open position. Let's assume your open position shows a profit of US$300.

Actual Balance = US$10,000 + US$300 = US$10,300.

Exposure = 500,000 EUR/USD ?500,000 EUR x 1.3600 = US$680,000.

Margin = actual balance / exposure = 10,300 / 680,000 = 0.015147 = 1.51%

This is the actual margin on your account. You should be worried if your margin was this close to the 1% limit. You wouldn't want it to drop below that level.